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Step 1: Determine if real estate investing is right for your IRA funds

What's your real estate strategy? Self-directed IRAs are for investing in income-producing assets to fund your retirement. It's not an account for fixing and flipping or for holding assets that don't appreciate in value every year, such as land. Nor can IRA funds be used to buy a vacation home.

SDIRAs are not for passive investors. Do you like to be actively involved in managing your retirement assets? And do you have enough expertise and experience to make wise financial decisions? You'll make big financial decisions such as what properties to buy, how long to hold them, what rent to charge, how to manage them, when to sell, etc.

Consider how you'll structure your SDIRA

How will you structure your investment portfolio within the SDIRA? Diversification is key to a portfolio that withstands the ups and downs of various markets. Choose an IRA custodian that allows you to invest in the stock market as well as alternative investments. You don't want to put all your eggs in one asset class, be it stocks or real estate. (More on custodians in just a bit.)

Have you educated yourself enough to move forward with confidence? Once you transfer your funds, you want to be ready to go. You don't want your cash sitting in your retirement account while you look for investments.

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Step 2: Make sure you know what you're getting into

The “self-directed” part of the name stands for just that: You will be self-managing and directing the funds in your SDIRA. You are required to have an IRA custodian. This person or firm holds your funds, do investments on behalf of your IRA based solely on your instructions — and reports to the IRS. Custodians do not give tax or legal advice or recommend any investments. Obviously, this type of IRA places a lot of responsibility on you, the account holder. You must find your own investments and do your own due diligence.

Are you the ideal SDIRA holder?

The ideal self-directed IRA holder is someone who already knows the ins and outs of how a particular type of investment works. And he or she has a sound strategy for using that type of investment to build wealth.

For example, let's say you're a real estate agent. You know the process of buying and selling a property. You also know how to find a property to buy and how to evaluate it to determine if it's a good investment. If so, you are likely well-equipped with the knowledge and expertise to make a wise decision in your SDIRA.

Educate yourself on the ins and outs, advantages and disadvantages, and features and benefits of SDIRAs to make sure you want to transfer your funds to an SDIRA and take on the responsibility of self-managing your retirement assets.

Special rules for SDIRA investing

There are special rules unique to SDIRAs — and the penalty for breaking them is steep. You can't, for example, do any of the rehab work yourself on properties purchased with IRA funds. You can manage the process only at “arm's length.” You and the money in your SDIRA must be separate. You'll be buying properties in the name of your SDIRA, not personally.

Of course, you should always be sure you speak with a CPA or tax professional before making any investment decision.

Step 3: Choose a custodian and set up an account

For SDIRAs to be legit, the IRS requires that a licensed custodian complete all transactions on behalf of the IRA owner.

There are a lot of custodians out there; however, no two are exactly the same. When looking for your custodian, be sure they allow you to make the kinds of investments you have in mind. Just because they call themselves a self-directed IRA custodian doesn't necessarily mean they will allow you to invest as freely as their title suggests.

Do your due diligence. Custodians have strengths and weaknesses. Read online reviews from actual customers. Check to see if there are any BBB complaints. Compare and contrast features to make a wise choice at the get-go. You'll be glad you did to avoid the hassle of moving to a different custodian after your account is set up and you have properties titled in your custodian's name.

Most companies have how-to videos and other learning resources on their website. Check them out and make sure you completely understand what the custodian expects of you and what you can expect from them.

SDIRA custodian fees

Understand and compare fee structures. Custodians typically offer three types of fee structures:

  • Some use an “Asset Fee Model” charging an annual fee that's based on the value of the assets held in your SDIRA.
  • Others charge a “Fee per Asset.” They charge one fee for each asset class held in your IRA. The fee for holding real estate may be different from the fee to hold precious metals or interest in an LLC.
  • Lastly, some charge a “Flat Fee.” There's an annual fee that stays the same regardless of the size or type of assets held in your account. Additionally, there will likely be transaction fees. My custodian charges $10 to write a check. Knowing this, I typically prepay one year's worth of HOA fees on my properties so that I get charged one $10 check fee a year, instead of one each month.

Watch out for unscrupulous and often hidden “research” fees. And make sure you're comparing apples to apples. A fee may seem low until you find out that it's charged quarterly rather than annually. Seek out a clear understanding of all the fees involved and when they are charged. Call around. Ask questions and don't make a quick decision.

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Step 4: Transfer your IRA funds to your SDIRA account and follow the IRS rules

Once your account is set up, your custodian will give you all the information you need to securely and legally transfer your qualified funds from your 401(k) (or whatever qualified account is holding your retirement savings) into your SDIRA. Be sure you understand and follow the directions carefully. For example, you can't have your funds sent to you as a check that you intend to deposit into your SDIRA.

And remember, your IRA — not you — owns the properties in your SDIRA. Your custodian acts as a trustee of the IRA and executes transactions based on your instructions. But you personally never touch the money. You need to have an “arm's length distance” from all assets held in your IRA.

When you invest in real estate using an SDIRA, you will never pay for anything personally. Everything is signed and paid for by the custodian with your approval. The process is very simple: Complete and sign a “direction of investment” form, and the custodian sends funds from your SDIRA to purchase and maintain your properties.

There are strict rules when investing through an SDIRA — and you need to understand them inside and out. You must avoid two things: “prohibited transactions” and “disqualified persons.” The consequence of breaking the rules is disqualification of your entire retirement account as of January 1 of the year the transaction occurred. When the retirement account is thus closed, the IRS will charge hefty penalties and taxes.

Until you get started, consider investing in real estate with these great options:

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Ruth Lyons Freelance Contributor

Ruth Lyon is a freelance contributor for Moneywise.


The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.