An Individual Retirement Account, more commonly known as an IRA, is a type of savings account that puts your money into stocks, bonds, mutual funds, and other publicly traded securities to earn interest as a way of saving for the future. There are a lot of rules governing what a traditional IRA can invest in. For example, you can’t invest IRA funds in real estate. But then there is the self-directed IRA (SD IRA).

What Is It?

Like a regular IRA, the SD IRA offers tax-deferred earnings*, tax deductions*, and a means to build your retirement nest egg; but what makes it stand out is that a SD IRA allows you to select a wider range of instruments to invest in, including real estate.

Traditional banks and other financial institutions do not offer this type of investment tool; you’ll need to contact a specialized custodian. Caretakers for these accounts don’t do much more than handle the paperwork: it’s totally up to you to seek and research investment opportunities. Hence the “self-directed” part of the name.

What Can I Invest In? What’s Not Allowed?

Eligible investments include apartment buildings, co-ops, condos, building bonds, commercial property, foreclosures, single-family and multi-unit homes, and certain types of land. However, there are a number of rules and restrictions that dictate what is not permitted with a SD IRA. For example, you can’t:

  • Use money from your IRA to pay off the mortgage on your own home
  • Take payment from an income-producing property
  • Use real estate owned by your IRA as collateral for a personal loan
  • Use property owned by your IRA as your vacation home
  • Allow a disqualified person to live in IRA-owned property

You also can’t borrow funds from a SD IRA as you sometimes can with a traditional IRA.

A self-directed IRA is not for everybody. It takes research to find the right institution to hold your SD IRA and to ensure you avoid prohibited transactions. Remember, the institution will not provide any tax or investment advice.

*We are not a tax firm. Consult your financial advisor.