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What are self-directed retirement lans?

Self-directed retirement plans allow plan owners to invest their retirement savings into alternative asset classes.

The key feature is the ability to invest in alternative assets beyond conventional investments such as mutual funds, stocks and bonds.

Let’s take a look at the three self-directed options that are available to investors.

1. Self-directed custodial IRA

The first option is a self-directed IRA. This is offered by some self-directed custodians and administrators. There’s a bit of a catch in the name of this plan: While the plan is self-directed and allows alternative investments, you will still require custodial approval before investing.

Any IRA type can be self-directed: traditional, Roth, SEP, simple, child’s, inherited, spousal and rollover IRA.

Note: Some brokerage firms such as FidelitySchwabTD Ameritrade and others may market their IRAs as “self-directed.” However, it is very important to understand that these brokerage accounts do not allow alternative investments. Only investments offered by the brokerage are allowed with such accounts. Those options are limited by conventional investment choices, which are stocks, bonds and mutual funds. Therefore, those are not truly self-directed IRAs.


  • Alternative investments: Unlike conventional IRAs, you can choose among alternative investments, including real estate, mortgage notes, tax deeds/liens, precious metals, private equity, private lending and even the traditional stock and bond investments.


  • Custodial consent: It still requires custodial consent. Sometimes that may increase the overall transaction time. You may lose time-sensitive investment opportunities.
  • Transaction fees: Most of the custodians operate on a transaction fee model. They charge for the origination, maintenance and processing of different transactions carried out in the plan. The transaction fee has a negative impact on your overall return on investment (ROI).

2. Checkbook IRA

In the true sense, a checkbook IRA offers the freedom to invest your retirement funds as you want. The checkbook control feature allows account owners to make investments as simply as writing a check. This bypasses the custodian. The checkbook control is obtained by having an IRA invest in a special-purpose, single-member LLC owned by the IRA and managed by the account holder. All subsequent transactions are done on the LLC level without custodian consent.

Be aware, however, that it is fairly easy to trigger a “prohibited transaction.” This could result in your IRA being revoked by the IRS. And that could result in a huge tax liability.


  • Alternative investments: You can achieve true diversification with alternative investments. (Investment options are same as described in the previous section.)
  • Checkbook control: Make investments by writing checks, getting rid of the extra paperwork, delays and custodian involvement.
  • No transaction fees: All investments are made under the LLC. So there isn’t any transaction fee involved. The only cost is the basic fee to maintain your custodial account.


  • LLC cost: Checkbook IRAs require the establishment of an LLC, which means initial cost will be higher. But since there are no transaction fees, it costs less in the long run.
  • Possibility of triggering a “prohibited transaction”: A prohibited transaction can disqualify your entire IRA. And that could lead to a huge tax liability.

3. Self-directed solo 401(k) plan

Self-directed Solo 401(k) plans are designed for owner-only businesses and self-employed professionals. They have gained attention because of their self-directed feature and high contributions limits. All you need is to have some sort of self-employment activity and absence of full-time employees.

You can contribute up to $57,000 per year to your self-directed Solo 401(k) retirement plan.


  • High contribution limit: An annual contribution limit of up to $57,000 per participant for 2019 allows you to grow your account quickly.
  • Great tax shelter: With combined contributions of up to $114,000 for husband and wife, it serves as a significant tax shelter.
  • Checkbook control: Since a custodian is not required for the Solo 401(k) plan, the assets of the plan are held in a trust created for this purpose. As plan trustee, the client has the ability to open a business bank account at the bank of his/her choice and control investments with the convenience of a checkbook.
  • No transaction or LLC fees: No custodian and no LLC mean low cost to maintain your plan.
  • Participant loan: You can borrow up to $50,000 or 50% of the account balance, whichever is lower. This provides financial flexibility.
  • No UBIT on leveraged real estate: Solo 401(k) retirement plans are exempt from tax on real estate acquired using a loan.
  • Roth contributions: Solo 401(k) retirement plans offer a built-in Roth component. This lets you contribute after-tax dollars to your account and invest tax-free.


  • Not for everyone: Solo 401(k) plan requires full-time or part-time self-employment activity or business with earned income.
  • Not appropriate for business owners with full-time employees: You can open a self-directed Solo 401(k) plan only if you do not have any full-time employees (anyone working over 1,000 hours per year).


Self-directed retirement plans offer unique investment opportunities to plan participants. The freedom of making your investment choices allows you to leverage your industry knowledge and invest in assets that you understand.

With that being said, self-directed retirement accounts do require an understanding of financial assets and the investment landscape. Be ready to educate yourself, and always consult an expert when required.

Start your retirement planning today!

Editor's Note: Dmitriy Fomichenko is the founder and president of Sense Financial Services LLC, a boutique financial firm specializing in self-directed retirement accounts with checkbook control. He began his career in financial planning and real estate investing in 2000. He owns multiple investment properties in various states and is a licensed California Real Estate Broker. Over the years, he has instructed hundreds of investment and financial planning seminars and has mentored thousands of investors.

About the Author



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