What are the pitfalls of Self-Directed IRAs?

Self-directed IRAs are powerful, but they carry specific risks that catch investors off guard every year. These are the ones that matter most.

Prohibited transactions are the most dangerous. Under IRC Section 4975, any transaction between your IRA and a disqualified person which includes you,
your spouse, parents, children, their spouses, and entities you control disqualifies the entire account in the year it occurs. The full balance is
treated as a taxable distribution. If you’re under 59.5, you also owe a 10% penalty. This can happen from something as simple as staying one night in a
vacation property your IRA owns, having your son mow the lawn and paying him from IRA funds, or selling your own property into the account at any price.

Custodian fees compound over time. Real estate IRA custodian companies typically charge $395 to $595 per year in flat fees, plus per-transaction fees for
purchases, sales, and wire transfers. Some custodians charge a percentage of assets, which gets expensive quickly as your account grows. Fee structure matters
more than most investors appreciate at the start.

Liquidity constraints are real. You can’t sell a rental property overnight. When required minimum distributions begin at age 73, if your IRA holds primarily real
estate, you need either enough cash in the account to satisfy RMDs or a plan to sell property ahead of time. Investors who don’t plan for this get caught.

Non-recourse financing is more restrictive than conventional lending. IRA real estate loans must be non-recourse, meaning the lender can only claim the
property, not your personal assets. These ira loans for real estate require larger down payments (typically 30 to 40%) and carry higher rates than standard
investment property mortgages.

Getting the custodian selection right from the start is the most practical way to reduce these risks. IRA custodians that allow real estate vary significantly
in experience, processing capability, and support quality.