How to Invest in Tax Liens & Deeds with Your Plan
Investing in tax liens and deeds can be a great way to aggressively grow your retirement savings. When done properly, tax-lien investing can produce above-average returns on a consistent basis.
Tax liens & tax deeds also have the advantage of being an asset class with a relatively low barrier to entry, since liens can be acquired for a as little as few hundred or a few thousand dollars. This allows investors to participate with limited capital, or for greater diversification for investors with more funds to work with.
Because tax lien investing is very popular with self-directed IRA and Solo 401(k) plan holders, we wanted to walk through some of the mechanics involved.
Understand the Strategy
When a property owner is delinquent on their property taxes, the taxing authority of the city or county where the property is located has the right to place a lien on the property to collect those taxes.
Different municipalities have different approaches to leveraging this lien authority as a way to remedy the deficiency. They may simply apply the lien with interest and penalties over a certain redemption period, which can range from a few months to several years.
Some localities will auction off the deed to the property as a means to collect tax revenue. In either case, the opportunity exists for investors to purchase the lien or deed rights, which provides the necessary cash flow to the municipality up front. In return, the investor may receive the interest and penalty income on a lien or first right of foreclosure on a deed at auction.
Research your Chosen Market
Because each locality operates differently, it’s important to spend time learning about the process, auction timelines, deposit and payment policies, and redemption methods of a market in which you’re interested in investing.
Some tax authorities hold periodic live auctions. Others may offer liens and/or deeds online, or via the county clerk’s office in an “over the counter” fashion.
One of the keys to success in this space is having a clear understanding of the procedural outline. Without this, you can have your money tied up for longer than desired, or even lose out on potential income if you fail to execute on your required actions in a timely fashion.
Setup Your Checkbook IRA or Solo 401(k) Plan
It typically takes 3-4 weeks to establish and fund a Checkbook IRA LLC or Solo 401(k) plan. If you intend on attending a tax auction, you need to plan ahead and get your plan setup in advance or you won’t be able to participate.
Register with the Auction
Many live auctions require pre-registration. Some may also require a registration fee or deposit. Be sure to understand your requirements and attendant timelines.
The registration must be made in the name of your IRA-owned LLC entity or Solo 401(k) trust, not in your own name. Any fees or deposits must be made with plan funds. The introduction of personal funds could create a self-dealing prohibited transaction with adverse tax consequences.
Prepare for Your Auction
In addition to understanding the mechanics of how a particular auction works, you need to research the lien or deed assets that will be available. Sources you may use to research properties include the following:
County Treasurer
- Will have a list of properties available for auction.
- These lists are usually available a few weeks in advance of an auction for live auction locales. This list is generally your best starting point.
County Assessor
- The tax value of a property will be available from this source if not included on the treasurer’s list.
- Keep in mind that tax value and market value can be different.
Valuation Sites
- Working with a local realtor or a real estate data site such as Zillow can help you to identify an approximate market value for most property types.
County Recorder
- This resource allows you to research any other liens than may impact a property.
- Tax liens will generally wipe out most other forms of liens such as mortgages, but that may not always be the case.
- Be sure to understand the laws as they apply in your target jurisdiction. A property with a lot of other liens may not be worth bidding on.
County Surveyor
- Researching properties visually can be very helpful, and the surveyor’s office can provide plat maps and other aerial views.
- Sometimes there are online tools for this kind of research that are available.
- In many cases, properties may be useless due to lack of road access or other size and location factors.
- If you’re investing locally, you always have the option of driving past a property.
Bid on Liens
The bidding process is another area where each taxing authority has its own process. Be sure to understand the bidding mechanism before attending an auction. Some of the common bidding formats are outlined here:
Price Bidding
- This conventional auction format allows bidders to compete by raising the price they are willing to pay for a lien or deed.
- Opening bids usually start at the amount of taxes, interest, and penalties outstanding at the time of auction.
- In a lien auction, bidding above this amount will secure the rights to the lien but will reduce your overall yield from the investment.
- In a deed environment, the bid amount represents what you are willing to pay if the property is foreclosed, and any amount above the tax and penalty balance reduces your potential equity in the property.
- It would be counterproductive to bid an amount greater than the property is worth in these scenarios.
Interest Rate Bidding
- Some states such as Arizona allow investors to compete by bidding down the rate of interest they’re willing to accept for a lien.
- If the standard rate is 16%, bidders can offer to accept less.
- The difference will accrue to the taxing authority.
Bid Premiums
- Some localities that offer traditional price bidding auctions will implement a bid premium to prevent frivolous overbidding.
- If the bid amount is greater than the property value, a certain percentage of the amount over value must be provided as a premium or deposit to the taxing authority.
- Because this premium is held interest free by the county for the redemption period of the lien or deed, it’s a disincentive for overbidding.
Lottery
- A handful of auctions are run on a lottery basis.
- For each auctioned parcel a lottery number is drawn.
- If the selected participant wants the property, they can generally win the auction with a minimal bid.
- If they decline the parcel, the next lottery number is drawn.
Post-Auction Purchase
- Some places will offer parcels for sale after the auction in some fashion if they aren’t sold live.
- This can take the form of “over the counter” sales at the county clerk’s office or via a normal real estate sales listing offered by the taxing authority after they foreclose on a property.
Pay for Liens
The beauty of a self-directed IRA or 401(k) offering checkbook control is the ability to simply execute contracts and fund transactions immediately without 3rd party intervention. It’s nearly impossible to invest in tax lien auctions using a self-directed IRA custodian, where each investment transaction involves paperwork and processing delays to have the institution transact on behalf of your IRA.
When you hold plan funds in a bank account of your choice, you can act immediately (which is required in this space). You will, however, need to understand in advance what the payment policies of a particular auction are and prepare accordingly.
In some cases, you will make a deposit before the auction, and can do so electronically or with a debit card. Other times, you may need obtain a bevy of cashier’s checks made out from your plan account to the auction trustee. If you use them, fine. If not, you can return them to your plan account.
Another possibility is that if you’re the winning bidder, you have until a set time usually in the afternoon of the auction to produce funds, and can so do via cashier’s check or wire.
In all cases, you just need to ensure that all purchases are made directly from your plan account. The method of payment doesn’t matter. The proper flow of funds is of critical importance.
Wait out the Redemption Period
Most states have a procedure surrounding a redemption period. There is a statutory timeframe in which the property owner has the right to pay their tax and penalty obligations and prevent their property from being foreclosed. Redemption periods can range from a few months to a few years.
Receiving the Profit
If at any time during the redemption period the property owner pays their tax obligation, your investment will mature. Your plan will then receive the return of principal, as well as any interest and penalty income.
If the taxpayer doesn’t redeem, then the lien or deed will move to the foreclosure phase. Depending on how the jurisdiction operates, you may have first right to acquire the property, or have the option to be paid the amount of taxes and penalties owed from the bid amount a property demands when purchased by another party at auction.
All income produced by the investment accrues to the retirement plan, and must be deposited to your plan bank account.
Expense Considerations
If there are any expenses associated with research specific to plan investments, they should be paid with plan funds. The exception would be if you are planning to invest at a particular auction both with your plan and with non-plan funds. In that case, any use of plan funds that facilitates your personal investing could create a self-dealing scenario.
Keep in mind, you’re not an active employee of your IRA LLC or 401(k) trust. As such, you don’t want to be incurring expenses or being reimbursed personally. Your role is to direct the affairs of the plan and deploy the plan capital effectively.
We are often asked if the plan can pay for travel expenses in order to attend an auction. The reality is there is no IRS defined answer, which makes this a grey area of compliance.
It may be acceptable for very limited and infrequent travel expenses associated 100% with plan investments to be paid by the plan. However, any direct or indirect benefit from your plan to yourself can create risk of a prohibited transaction with severe tax implications.
If you were to visit a sibling or sneak in a round of golf while traveling to a tax auction, that could create such a risk. Our conservative opinion is that it’s probably best not to use plan funds for any personal travel expenses.
We would also recommend against using plan funds to pay for any training or courses you may desire to educate yourself on the process of tax lien investing.
A Powerful Way to Diversify Your Retirement Account
Investing in tax liens and tax deeds can be a great way to diversify your tax-sheltered retirement savings and produce good returns. Having a self-directed IRA or 401(k) retirement plan featuring checkbook control is a significant benefit when pursuing this type of investing.
Planning ahead and learning about how tax auctions are handled in various jurisdictions is critical to your success in growing your retirement savings with this type of investing.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
