Why You Need Your Retirement Plan in Place Before Investing
Taking the leap to establish a self-directed IRA or Solo 401(k) is a big move. While unlocking your retirement plan to enable a broader range of investment choices is appealing, there’s work involved in both moving your plan funds and planning for a different type of investing.
For many investors, this can create a catch-22 scenario: should I find the right investment first, or setup my plan first?
There are many reasons your first step should be setting up your self-directed retirement plan before you start investing. Keep reading to find out why.
Timing, Timing, Timing
It typically takes 3-4 weeks to have a Checkbook IRA or Solo 401(k) setup, funded, and ready to start investing. While it’s possible in some circumstances to shorten this timeframe, expediting the plan may or may not be available depending on several factors.
The state of LLC formation, the type of retirement plan funds are currently in, and even the institution that’s holding the funds can impact the amount of time it will take to setup a plan. To take any action on an investment opportunity, the plan really needs to be in place and funded first.
IRS Rules
We commonly hear from investors who have the following plan:
• Find an opportunity and lock it up personally
• Assign the transaction to their IRA before closing
If you like having your entire retirement plan taxed and writing big checks to the IRS, this is a great strategy.
IRS rules prohibit any direct or indirect transactions or benefit between a retirement plan and a disqualified person. If you personally place a property under contract in your own name or an entity you control, that property can never be acquired by or transferred to your self-directed IRA. To do so would create a self-dealing transaction.
This limitation prevents you from personally providing any kind of deposit or earnest money on a contract, even if the contract itself is made in the name of your self-directed IRA or 401(k) plan. Your provision of capital to the plan would violate IRS rules.
The bottom line is, all investment activities must be conducted through the vehicle of the self-directed IRA. Offers must be written in the name of the plan entity and all funds for deposits, inspection, or purchase must come from the plan.
The Rules Workaround
The world is not always a neat and tidy place where everything goes according to plan — including retirement investments. We get that. Many investors with an interest in real property investments come to us wanting to setup a plan after they’ve already identified a good investment property.
In some cases, there is a workaround that can be applied.
The offer needs to be written in the name of the plan. With a Solo (k) plan, we can know the name immediately. With a checkbook IRA LLC, we can either make a good guess at a unique and acceptable LLC name with the state in question, or even have the LLC filing done in just a day or so.
Any pre-closing costs (like an earnest money deposit, inspections, etc.) may not be paid by you. Your plan will also not be in a position to pay for such expenses for several weeks.
However, the plan can, borrow funds from someone who is not a disqualified person per the IRS rules. This eliminates you or lineal family. The plan may borrow from a sibling, neighbor, or perhaps your real estate agent.
This type of loan will need to be on behalf of the plan, not you personally. The loan can typically then be paid back to the lender at the time of closing on the property.
Charging interest on such a short-term loan of typically under 30 days is not always beneficial. It’s better to just have a set fee of perhaps a few hundred dollars for this transaction (paid by the plan, of course).
The Partial Funding Strategy
For real estate investors, there is another strategy that can make sense and eliminate the need to divest your current portfolio without having a specific investment opportunity lined up.
You can establish a self-directed plan and fund it minimally at first. The amount would vary based on your investment goals, and would need to cover any expect costs in the period prior to closing — like an earnest money deposit, inspections, and appraisals if you’re using a non-recourse loan. This could be as little as $2,000 or as much as $30,000 depending on the price range of the properties you may be evaluating.
Once a contract has been executed, you can then easily move additional funds from a prior IRA or 401(k) plan into your self-directed vehicle. It will still take approximately 2-3 weeks to move additional funds, and may cost between $50 and $100 in processing and wire fees.
The benefit of this approach is that it takes off any pressure to hurry up and find an investment property. If you have a large sum sitting in cash waiting to be invested, that can create a certain impetus to put that money to work. Taking your time to identify the best possible investment property may be the better approach.
Writing Stronger Offers for Real Estate
When it comes to investing in real estate, being able to write an all-cash offer can allow you to seek a discount. This can be especially true if you pair the cash offer with a short closing period.
The certainty that a seller can have of the transaction completing and doing so more quickly can be worth a reduction in price as compared to an offer that is contingent on financing. If your intention is to make an all-cash purchase, there can be advantages to having your IRA or Solo 401(k) setup and fully funded before making offers.
Many Investments Require All Cash Funding
In a standard real estate transaction with a 30-day close, using techniques such as a 3rd party loan or smaller initial funding can work. But for many other types of investments, this is just not an option.
Investing in auctions such as for foreclosed properties or tax liens will require all cash. The same is generally true with private lending and many types of crowdfunded investments.
If your investment goals include participating in these types of assets, you will likely need to plan ahead and move the necessary amount of cash into your self-directed plan first.
Being Prepared Pays Off
There are many reasons to put your self-directed retirement plan in place before finding the right investment. There are cases where this may not be possible, but it’s important to consult with a professional before trying to hack together a plan transaction in a hurry — otherwise you might put your IRA’s tax-sheltered status at risk.
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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.
