Who Should I Name as my Beneficiary for my Self-Directed IRA?
You have several options for beneficiaries: Your spouse, your children, your grandchildren, a trust, or some combination of these.
For both traditional and self-directed IRAs, a will cannot determine beneficiaries. That’s because each IRA includes a beneficiary designation, set by a form you fill out upon opening the account. This designation supersedes any information in a will. Considering this beneficiary designation form will determine who your IRA funds will care for upon your death, it’s important to take some time and think about how you’ll fill it out. Beyond who inherits your IRA, your beneficiary designation actually has a significant impact on how long the funds in your IRA last.
Uncle Sam requires you to take out a minimum amount of money each year after you reach the age 72. These are called RMDs—Required Minimum Distributions. If you don’t spend all the money in your IRA during your lifetime, its benefits can be extended to other family members or beneficiaries of your choice (such as charities). Most IRA holders share a few goals when choosing IRA beneficiaries:
- Have assets distributed according to the IRA account holder’s wishes
- Minimize the tax impact for IRA beneficiaries
- Avoid the expense and time of probate
When choosing a beneficiary, it’s wise to work with your attorney as well as your tax advisor. You have several options for beneficiaries: Your spouse, your children, your grandchildren, a trust, or some combination of these. Read on to discover the advantages and disadvantages of these different beneficiary options.
Advantages and Disadvantages of Naming Individuals as IRA Beneficiaries
Advantages of Naming Your Spouse as the Beneficiary: If you name your spouse as the beneficiary, he or she can treat it exactly like their own IRA, in what’s called a spousal rollover. This is only true for your spouse—no one else can have such automatic flexibility when inheriting your IRA. Most any non-spousal beneficiary will need to distribute the account in full within a 10-year period.
Note: It’s important to stay current with IRA beneficiary designations. For instance, if you select spousal rollover, but then your spouse dies before you, it’s key to change the IRA to designate your children (or whomever you choose) as the new beneficiaries. You can create a backup plan for this sort of thing by naming contingent beneficiaries, who will receive the IRA assets if your primary beneficiary passes away.
Disadvantage of Naming Your Spouse as the Beneficiary: A spousal rollover with no contingency beneficiary allows your spouse to determine who should benefit from the IRA down the road. So if he or she decides to give money to children from a previous marriage, and exclude your children, you can’t do anything about it.
Naming Minor Children/Grandchildren as IRA Beneficiaries: If you name a minor, such as a child or a grandchild, as the beneficiary of your IRA, you will also need to name a guardian who will manage the IRA funds for the children until they reach adulthood (18 or 21 years of age, according to the state).
Another option is to name multiple beneficiaries, with dollar amounts or percentages set for each.
Advantages and Disadvantages of Setting a Trust as your IRA Beneficiary
Advantage of a Trust Beneficiary: If properly drafted, you can outline your wishes for subsequent beneficiaries in the trust. And because the trust is the beneficiary, your spouse (or whomever your designate as the trustee) must follow the trust’s guidelines for assets included in the trust. So, in the circumstance described earlier, you could prevent a spouse from skipping out on your children by stating which assets should go to your children according to the trust. When setting up the trust, you can also choose to distribute funds to charities without losing tax benefits.
Disadvantage of a Trust Beneficiary: Although living trusts avoid probate court (which is required for wills), there are still costs associated with gathering, assessing, and distributing trust assets. These costs may be especially onerous if you have small accounts. If your accounts are small, talk with an attorney about a custom beneficiary designation, which can create more detailed instructions than a standard beneficiary form.
Advantage of a Trust Beneficiary: A trust can provide the legal structure needed to give money to someone you don’t trust with managing your assets. This person may be a minor, a special needs individual, or a spendthrift.
Disadvantage a Trust Beneficiary: Transferring IRA assets into a trust may cost you more in the long run, particularly because this transference of assets triggers tax removal. (In contrast, if you put the same amount of cash into the trust, you wouldn’t have to pay taxes because cash is considered a post-tax asset.)
Advantage of a Trust Beneficiary: An inherited IRA is not considered a retirement plan and given the same level of protections from events such as bankruptcy. A properly structured trust may mitigate such risks.
These are a few of the big-picture considerations when setting a beneficiary for your IRA, self-directed or traditional. Consider your hopes for the future of your IRA funds, and then speak with an attorney and a tax expert to craft the perfect beneficiary designation for you and your family.
This page has been updated to reflect tax code changes implemented by the 2019 SECURE Act.
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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.
