The Most Elusive & Dangerous Self-Directed IRA Practice

There’s something that most “successful” Self-Directed IRA investors do that can spin them out of control and get them into trouble.

I say “successful” in quotation marks because I’m talking about the particular kind of Self-Directed IRA success that is sexy enough to be frequently written about.

What is this dirty deed that leads to massive profits and the potential implosion the very same Self-Directed IRA that got those profits?


Bad Entrepreneur!

Yep. Entrepreneurship is so powerful that it seems to be the source of all aggressive wealth creation. So where’s the danger?

Let me explain. Some of the most [initially] profitable Self-Directed IRA stories sounds something like this…

Joe, a Self-Directed IRA investor, knows how to work real estate deals into profits. So he buys and sells real estate in his Self-Directed IRA. Sometimes he involves bank financing. Sometimes he involves private financing and partnering.

But one thing is for sure: Once Joe purchases a property, the work has just begun. He has a system. He only buys properties that meet a certain criteria. After the closing, he usually has repairs and/or remodeling work done.

And his system works. He’ll put $30k or $40k of his Self-Directed IRA money into a deal and get $80k to $100k out, often less than a year or two later.

First, applaud Joe for being a successful entrepreneur.

Did you catch that? Joe is being an entrepreneur rather than an investor. This is because his deals have his active involvement rather than the passive placement of his money.

The Pinless Grenade

Unbeknownst to Joe, he’s no longer in control of his financial outcome. His choice to try to sneak business activity inside his IRA gives the IRS an open invitation to tax the hell out of him.

How much?

Well, the IRS can declare Joe’s IRA deals to be a “trade or business” in which they’ll apply the UBTI tax. Also known as the most aggressive tax schedule in the United States. It ramps up to 35% federal tax after only $10,000 of profit.

Will the IRS make this move? When?

That’s unknown, and Joe is no longer in control of his financial outcome.

Terrible Success

All kinds of strategies fit into this same category. I have a friend who has done over 100 deals inside his Self-Directed IRA, producing a return-on-investment of over 9,000%.

And he’s hiding under a rock. He won’t returns the calls of the newspaper and magazine reporters who want him to share his strategies with the world. He rarely teaches investing seminars, and when he does he only invites people who he has personally met and known for at least 6 months. He essentially lives a life of fear because he knows the day his Self-Directed IRA gets audited is the day he gives up at least $1,200,000 plus late penalties and interest to the IRS.

Enjoyable, Controlled Success

Do you know how to do deals that turn pennies into thousands? Thousands into millions?


Don’t ever consider not pursuing massive profits, and don’t ever lock away your talents and skills to be unused.

Just take a few minutes to educate yourself about the best way to structure your deals to keep you in control.

More info coming in Part Two of this post soon  🙂

Reader Interactions


  1. Good article! Looking forward to part 2.

    So the solution is to confine all the entrepreneurship in a business structure (LLC, corp, etc.) that is totally SEPARATE from being a part or owned by an IRA or solo 401k, make big profits, pay normal taxes, contribute the max allowable to a IRA or solo401k (can one do both??). THEN, OCCASIONALLY make a longer term (1+ yr? 2 yr or more?) “investment” that adhers more to a “buy & hold” strategy rather than a trading/buy&sell type strategy?

    – Greg

  2. Greg,

    Great prediction; you got the general gist of it. I wouldn’t say “confine” business in a business structure. I’d say “place” it. Business structures aren’t confining… virtually all business is done within them. When profits are made, “normal taxes” don’t have to be paid because the Solo 401k allows for large contributions (up to $109,000 per year) that are deducted from taxes. Then I wouldn’t say that investments should be made “occasionally”… they should be made every time new wealth is created and then needs to be invested.

    Investing is the placement of wealth with the expectation of protection and growth. Up until the Wall Street casino brainwashed America, most investing was a matter of either protecting wealth or buying income-producing assets. This whole game of flipping assets isn’t investing at all. That is gambling. It doesn’t matter what the asset is. Just like there are professional poker players who can win over and over, some people (very few) develop a system to flip assets, whether those assets are real property, securities, or anything else. Those people are entrepreneurs, not investors.

    Back to investing…

    If you focused on buying income producing assets that returned 10% and 10% was your goal, then instead of obsessing over when to buy and sell your investments, you would have no reason to sell ever and you’d finally have the opportunity to live and enjoy your life!

    …and yes you can have an IRA & Solo 401k.

  3. If say you put $1000.00 of sweat equity improving a property (under a Self Directed IRA). Can you consider that as part of a yearly contribution to the IRA? Or would it be too hard to capture thus a “prohibited transaction.”

  4. Jack,

    I believe cash is the only acceptable form of contribution. And anything deemed as “excess contributions” is taxed.


  5. jeff,

    I posted this the other day but couldn’t find it. I am a realtor who owns a small percentage of the brokerage firm where I hang my liscence which is an LLC with one employee. I also work with a partner and we have a seperate LLC which we run commisions and exspenses through with no employees. am i a candidate for a solo 401K? Thanks

  6. Jeff,

    I have just begun investigating this topic. However, I do it out of necessity. I with my wife own a business. My father in law as well as an uncle are minority silent investors in our LLC.

    The business needs a critical piece of equipment. Does loaning the business the funds to buy the equipment from a self directed “checkbook” IRA create the dreaded PT?

  7. @Rob – If the employee is either part time (under 1000 hours of work per year) or an independent contractor, then you are okay to do the Solo 401k.

    @Jeff Waters – If the IRA in question is owned by one of you who also owns the LLC, then yes you have the “dreaded prohibited transaction.” If so, move onto Plan B, C, etc. 🙂

    – Jeff

  8. Hello- looking at trying to buy land in Baja, MX w/ my 401K solo plan, but not sure if this is even permissible. I heard that assets out of the IRS jurisdiction are very tricky/expensive to set-up.
    This particular property is held by a US LLC already, I was hoping to transfer the property into my LLC somehow.
    In 2008 you had a blog that I did not see any follow-up on from this same scenario.


  9. I work for a major coorperation and want to get my money out of the 401k. I want to begin self directing it… I currently own a home and a condo… the condo I rent out… Is there a way to take the money (other than borrowing It) from my 401k and direct it into an IRA… I want to keep working for the coorperation but I have not contributed to the 401k for years… I do have two loans against the 401k as well…

  10. So if my IRA owns shares in a business that I run, then that does not count as an investment in the business but if it is invested in a business that someone else runs then it does?


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