Self-directed investors enjoy the many benefits (such as potential tax deductions) they can receive by using their Traditional IRAs to invest in alternatives to the stock market, such as real estate or private entities. But even an IRA has its limits, and you should know those limits if you want to avoid taxes and penalties.
Traditional IRA owners can’t “borrow” from their own account for their own use; a recent Motley Fool article
Some plans, such as a 401(k), might allow you to borrow from it, but a self-directed IRA does not.
You might also be familiar with the fact that you can buy alternative assets, such as real estate, with your self-directed IRA. The article points out a limitation, though: you can’t buy property for your own use with your self-directed IRA. You are considered a disqualified individual, as are other family members in your direct lineage (mother, father, son, daughter, etc.), and therefore unable to personally use the property.
Don’t fret, while the article focuses on the IRA’s limitations, a self-directed IRA still offers plenty of capabilities for those who want to take control of their own financial future. For example, you can still use your account to purchase a wide variety of investment types; you just have to make sure it’s not one of the few prohibited items or that you don’t enter into a transaction with a disqualified individual.
As an alternative, you might find that the features of the Roth IRA offer you more benefits than the Traditional IRA would (for example, you may withdraw the principle from your Roth IRA at any time without penalty). Set up a free IRA checkup
with one of our Senior Account Executives to review the benefits of each account and decide which option makes more sense for you.