You Have a Self-Directed IRA — Here Are Some Things You Might Not Think About
Self-Directed IRAs (SDIRAs) open the door to investment opportunities far beyond traditional stocks and bonds—think real estate, private lending, startups, and even cryptocurrency. But with that flexibility comes a unique set of responsibilities and potential pitfalls.
If you already have a Self-Directed IRA, here are several important things you may not have considered—but should.
Prohibited Transactions Can Sneak Up on You
One of the most common SDIRA mistakes is engaging in a prohibited transaction without realizing it. You can’t use your IRA to benefit yourself or other disqualified persons (which includes your spouse, parents, children, and entities they control). That means:
- No personal use of IRA-owned real estate.
- No lending money to your own business.
- No buying or selling between your IRA and a disqualified person.
Even a small misstep can disqualify the entire account, resulting in taxes and penalties.
You Can’t Personally Guarantee Anything
Thinking about having your SDIRA invest in a private deal or loan? Be careful. You cannot personally guarantee any obligation of your IRA. This includes:
- Co-signing on a mortgage for IRA-owned property
- Personally guaranteeing a loan made from your IRA
- Backing a note held by your IRA
Doing so turns a tax-advantaged account into a compliance nightmare.
Keep Some Cash in the Account
A common oversight: not keeping enough liquidity in the account. Even passive investments come with costs. You may need funds for:
- Property taxes or insurance
- Unexpected maintenance
- Annual IRA fees
- Syndication capital calls
Since you can’t pay these expenses personally, you must have enough cash in the IRA to cover them—or risk penalties.
Documents Matter—A Lot
You should never invest your retirement funds based on a pitch alone. Before moving forward, make sure you’ve received and reviewed:
- Operating agreements
- Subscription documents
- Promissory notes
- Private Placement Memorandums (PPMs)
If anything you were promised hasn’t been delivered—don’t invest until it has. And read every word carefully or have a professional review it with you.
You’re the Compliance Watchdog
Unlike traditional retirement accounts, with a Self-Directed IRA, you are responsible for staying within IRS guidelines. Your custodian doesn’t approve or vet investments—they simply process your instructions.
If you unknowingly violate IRS rules, your entire IRA could become taxable. When in doubt, consult a CPA or tax attorney who understands SDIRAs.
Do Your Due Diligence
Every SDIRA investor should approach deals with a healthy level of skepticism and scrutiny. Ask:
- Who is behind the investment?
- What is the exit strategy?
- What risks are involved?
- Are the returns realistic?
Your IRA’s future depends on your ability to separate hype from solid opportunity.
Not All Investments Belong in an IRA
Tax-deferred doesn’t always mean tax-advantaged. For example, real estate investments that benefit from depreciation or short-term tax losses may not be as powerful inside an IRA. In fact, you could lose those benefits altogether.
Before investing, talk to a tax professional to ensure your strategy actually works better inside the IRA than it would personally.
Final Thoughts: With Great Flexibility Comes Great Responsibility
A Self-Directed IRA can be a powerful wealth-building tool—when used correctly. But it also requires more knowledge, caution, and hands-on management than a traditional retirement account.
Stay educated, stay compliant, and when in doubt—ask questions. The smartest investors are the ones who know the rules before they make a move.
Need help navigating your SDIRA?
The professionals at uDirect IRA Services are here to support you every step of the way.
📞 Call us at (866) 447-6598 or visit www.uDirectIRA.com to get started. You can reach us by email at info@uDirectIRA.com
