How to Self-Direct Your IRA or 401k in 2025: Invest Beyond Wall Street
You may have heard that self-directed rules prohibit you from making the following investments:
- Real estate
- Promissory notes
- Precious metals
- Cryptocurrency
- Small businesses
- Concert tickets
- Land
However, this is NOT true. You are legally able to invest in all items listed above and more, even if your broker tells you otherwise.
A true self-directed IRA (traditional or Roth) is the same as a retirement fund. Learning how to self-direct an IRA is crucial. YOU control and get to decide what you invest in, NOT your broker.
Why Is My Broker Giving Inaccurate Information about my Self-directed 401k?
Often, I hear from investors, "Why haven't I heard of these self-directed IRAs or self-directed 401(k)s before? And why have I always been told that my retirement portfolio needs to be in mutual funds or stocks?"
The answer is quite simple: The large financial institutions that control most retirement accounts in the U.S. don't make enough money from the self-directed industry or strategy. Instead, they point you in the direction of products that generate sales commissions and excessive fees.
What are the Restrictions and Self-Directed 401k rules?
Surprisingly, the list of what you cannot invest in is short. Retirement plans simply restrict you from investing in the following:
- Collectibles: such as art, stamps, coins, alcoholic beverages or antiques
- Life insurance
- S-corporation stock
- Any investment that constitutes a prohibited transaction
- Any investment not allowed under federal law
This means you have far more control than you ever imagined over your retirement accounts.
Interesting Examples
Everyday, we consult with clients around the country on how to set up their self-directed IRA. Often, we also set up an LLC alongside the self-directed IRA. The investor can then control an LLC owned by their self-directed IRA and start investing and doing business immediately.
Recently, I worked with a client buying and selling mobile homes in their Roth IRA. Their LLC (owned by their Roth) contained limited funds, but they started with enough to purchase several mobile homes. Three years later they have over 8 mobile homes, including several notes from selling mobile home interests. They also increased the equity in their 401k from $40,000 to over $200,000.
Mark Kohler self-directed his own health savings account into a livestock operation in Eastern Idaho. He has also directed his Roth IRA into a crypto-mining operation. In addition, he's kept a rental property in a self-directed account for almost ten years.
How to Avoid Prohibited Transactions in my Self-directed 401K
When self-directing your retirement account, you must be aware of the prohibited transaction rules. Your advisor may tell you to avoid self-directing because of IRS rules. They may tell you you'll be audited, or incur penalties, or you'll lose your retirement account altogether. This is intentionally misleading and incorrect information.
The general rules regarding prohibited transactions are in Internal Revenue Code 4975 and the Employee Retirement Income Security Act (ERISA).
These rules DO NOT restrict what investments you may keep in your account. Instead, they restrict with whom your IRA may transact.
In short, the prohibited transaction rules restrict your retirement account from engaging in a transaction with a disqualified person.
What Counts as a Disqualified Person? Disqualified persons include:
- The account owner
- The account owner's spouse
- The account owner's children
- The account owner's parents
- Certain business partners
For example, your retirement account could not buy a rental property that is owned by your father. The IRA must hold the property strictly for investment. The property may be leased to your cousin, friend, sister, or a random unrelated third party. It CANNOT be leased or used by you, the IRA owner, or the previously mentioned prohibited family members or business partners.
How to Learn More
The best source for comprehensive information is the 2nd edition of The Self-Directed IRA Handbook, written by Mat Sorensen.
In short, don't let anyone tell you that you CAN'T invest your IRA in what you know best. Get the facts, start lowering the costs of management fees, and increase the rate of return in your IRA account.
FAQs
Can Anyone Set Up a Self-Directed 401k?
If you have earned taxable income in the past year, you are eligible to open a self-directed 401k. The three main ways to do so are through contributions, transfers, and profit sharing.
What is the Difference Between Self-Directed and Managed 401k?
Managed portfolios are often more expensive to maintain. They come with management fees and administration fees. You may be encouraged by your account manager to invest in certain areas versus others.
Can I Move My 401k to a Self-Directed 401k?
Yes, you can move funds from your old 401k into a new, self-directed 401k. You may need to do a rollover to avoid any fee transfers.
Certified as a Tax Advisor By: Mark Kohler
Mark J. Kohler, senior partner at KKOS Lawyers and co-founder of Directed IRA, has over 25 years of experience helping entrepreneurs achieve financial freedom. Through YouTube, books, and live trainings, he breaks down complex strategies into simple, actionable steps. His Main Street Certified Tax Advisor Program now equips CPAs and agents to share these insights with clients.
Disclaimer:
The content provided on this blog is for educational and informational purposes only. It is not intended as legal, tax, or financial advice, and should not be relied upon as such. Laws and regulations vary by jurisdiction and may change over time. Readers are strongly encouraged to consult with a qualified professional—such as a licensed attorney, accountant, or tax advisor—for advice tailored to their specific situation.
