What Investors Should Know Before Investing in Self-Directed IRAs

We know: opening Self-Directed IRAs is exciting. Not being limited to stocks and mutual funds? Options like real estate, precious metals, private lending? The possibilities feel endless. But while that freedom is great, there are some responsibilities you’ll want to be aware of as you build this style of retirement. Let’s explore a few rules of thumb and key facts you’ll want to know before you start investing this way.

Understanding the Rules That Shape Self-Directed IRAs

Many investors are surprised to learn that the IRS doesn’t restrict the types of assets you can hold nearly as much as they restrict the way you interact with those assets. Yes, there are certain assets you can’t hold in an IRA. But many of the rules are designed to protect the separation between your personal finances and your retirement money.

That means you can buy a rental property in your Self-Directed IRA, but you can’t live in it. You can’t fix the leaky faucet yourself, either. Every expense related to the investment has to come from the IRA. Additionally, every dollar that property earns has to go back to the IRA.

It might feel strict at first, true. But once you understand the structure, it should become intuitive. You treat the IRA like its own little business. You’re the decision-maker, but not the labor. And because everything flows through the account, the tax protections stay intact. For investors who enjoy planning and thinking through long-term moves, this clarity actually makes the process simpler rather than more complicated.

Another important rule centers on “disqualified persons.” These are people who can’t benefit from the IRA’s assets in any personal way. That usually includes you, your spouse, lineal family members, and their spouses. It also includes entities you control, so you can’t get around these rules by creating a company that owns the IRA, for example. The idea is simple. Keep the account focused on retirement, not personal gain you can use tax-free right now. Understanding this principle early on keeps you from accidentally stepping into a prohibited transaction that incurs all sorts of penalties and fines.

Why Due Diligence Matters with Alternative Assets

A Self-Directed IRA opens the door to investments that require a bit more homework. You’re not relying on a fund manager or a bundled product. You’re choosing specific assets. That means due diligence becomes one of your most valuable habits. Whether you’re looking at a rental property, a private loan, a parcel of land, or even a precious metal investment, you want to understand what you’re buying. Otherwise, it can get risky.

For real estate, that might mean looking at location, rental potential, or repair needs. For private lending, it might involve reviewing the borrower’s experience and the collateral backing the loan. For precious metals, you’ll want to confirm the IRS-approved types and purity levels. The goal isn’t perfection. It’s clarity. The more you understand, the more confident you’ll feel about each investment your IRA makes.

You’ll also want to think ahead about liquidity. Some assets are easy to sell. Some aren’t. And since expenses must be paid from the IRA, having a cushion inside the account helps you stay prepared. That small step alone can make owning alternative assets feel far more manageable.

Finally, documentation is always important. Because Self-Directed IRAs hold unique assets, keeping clean records helps ensure your account stays compliant. Fortunately, working with the right IRA administrator makes this part much easier.

Interested in learning more about Self-Directed IRAs?  Contact us at 866-7500-IRA (472) for a free consultation or download our free guide.