October 27, 2021

5 Common Self Directed IRA Mistakes To Avoid

Let’s admit it, learning how to plan for retirement is a process. It is not a topic that we are taught in school and so we must conduct our own research to educate ourselves. On top of that, since Self Directed IRAs are so unique, as many common brokerages do not even offer them, it takes time and effort to learn the rules and regulations. It is not uncommon for account holders to make a mistake; however, those mistakes will cost you. Fortunately, we created a list of common missteps that can occur when you have a Self Directed IRA and how to avoid them.  

1. Partaking in a Prohibited Transaction

The most common prohibited transaction is when a Self Directed IRA account holder makes a transaction with a disqualified person. This means that you have conducted a transaction with your personal funds, your spouse, and/or any lineal ascendants or descendants. For example, this can include leasing a property to a relative or personally paying the expenses for your IRA-owned property.  

Other types of prohibited transactions include a personal extension of credit and self-dealing transactions. This can be the lending of money between an IRA and a disqualified person, receiving compensation for managing a property held by an IRA, staying a night in your property held by your IRA, etc.  

If you are involved in a prohibited transaction, there can be hefty consequences. The most extreme penalty is that an IRA owner can be disqualified and the entire account can be distributed. On top of that, if you have a traditional IRA, the total amount distributed from your IRA is taxable. In addition, if you are below age 59 ½, you will have to pay the 10% early withdrawal penalty.  

Learn more about Prohibited Transactions.  

2. Placing Incorrect Titling for a Self Directed Retirement Plan on Investment Documents

When you invest in an alternative asset with your Self Directed IRA, your IRA account is the owner of the investment. In order to save you from lawsuits or other headaches, it is important to have the correct titling for all of your investments.  

Title your investment documentation for your Self Directed IRA as follows:  

"Madison Trust Company, Custodian FBO [Your Name] [Your Madison Trust Company Account Number]


It is important to make sure the titling is done properly when you first make your investment. It is a long process if your documents are titled incorrectly.    

For example, if an IRA owner mistakenly enters a contract in their personal name, the IRA owner needs to seek to unwind the contract in his or her personal name with the seller and should obtain a new contract, properly listing the IRA as the buyer. If the contract cannot be undone in the IRA owner’s personal name, then an addendum to the contract can be added which clarifies that the buyer is the IRA – but this is only a second resort. Then, any earnest money or deposits made by the IRA owner personally should have to be returned to the IRA owner and the IRA should then bear those expenses and contract requirements in a new contract. If you title the investment properly the first time, this will save a lot of time, energy, and money in the long run.  

3. Not Giving Enough Time to Fund Your Self Directed IRA or 401(k)  

Unfortunately, it is not uncommon for investors to wait until the very last minute to fund their accounts before they make an investment. The process of opening, funding, and investing in a Self Directed IRA does not happen overnight.  

Once we have received an acceptable Account Application along with a government-issued ID, the next step is to fund your account. This can be done through contribution, direct or indirect rollover, or transfer from a qualified retirement plan (another IRA or 401(k)).  

  • If you are rolling over funds from another retirement account, you will have to contact your current retirement plan administrator and ask them to send the funds/assets directly to Madison Trust Company.  
  • If you choose to fund your account through transfer, you must fill out a Transfer Authorization Form and submit it to our secure uploads portal. It will then be reviewed and signed by one of our Transfer Specialists and sent to the custodian you wish to transfer funds from. Once the transfer request is sent, we are at the mercy of the other custodian’s processing times and procedures. A few things that may hold up a transfer at another custodian include the settlement of your assets and liquidation of your positions if you are looking to transfer cash, an illegible form, missing ink signature, or missing medallion signature guarantee (if applicable). 

Then, in order to invest in an asset, we must approve that Madison Trust can hold the asset you wish to invest in and approve the paperwork submitted.  

Too many clients become stressed because they are waiting too long to open and fund their accounts. If you wait too long to open and fund your account, you may risk not meeting your closing deadline, having to negotiate a new closing date, or missing out on the investment altogether. Be sure you open and fund your account with plenty of time in advance to avoid any of these mishaps. 

4. Not Fully Understanding the Custodial Relationship with Different Plans

There are a few different types of Self Directed IRAs: Traditional, Roth, SEP, SIMPLE, Inherited Traditional, and Inherited Roth. You have the freedom to choose which account type and which asset you would like to invest in. However, each one of these accounts must be held by a certified IRA custodian.  

Within your IRA you may also choose to have the Custodial model or Checkbook Control.   

  1. The Custodial model is best for investments that have minimal transactions, such as a real estate fund or private stock. If you want to purchase an asset and you have the custodial model, everything must be approved by the Custodian.  
  1. The Checkbook IRA model is best for time-sensitive investments such as real estate rental properties. This is because you will have a designated Checkbook IRA Bank Account, which makes the funds easily accessible so they can be used for things like taking in rental income or paying expenses. But you still must report any purchases to your custodian. 

5. Not Doing Your Due Diligence  

With the freedom to invest in the asset of your choice, comes a lot of responsibility. As an account holder of a Self Directed IRA, you are responsible for conducting proper due diligence on your investments. Self Directed IRA custodians are passive and therefore are not legally allowed to give any investment advice. It is highly recommended to speak to a CPA, financial advisor, or ERISA attorney about any questions or concerns about your account and investments.  

All investments have risks, whether it is stocks or alternative assets. Do not get caught up by some crafty salesman who is only telling you the great things about the investment. Ensure to conduct your own research and know where you have the possibility of losing money on your investment.  


In a Self Directed IRA, you have the freedom to make all the decisions regarding transactions and investments. The more you are educated about the rules and regulations, the better. Being an informed investor is crucial and your retired self will thank you for your diversification strategy later. 

Still have questions about Self-Directed IRAs?

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