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Allowable and Prohibited Investments for Your Self-Directed IRA


Self-directed IRA and Solo 401(k) plans offer tremendous flexibility and investment choice.  When you have a wide range of options, you can choose to invest in what you know best.  What better way to protect and grow your retirement savings?

The IRS rules do not provide a full list of what you can and cannot invest in with an IRA or 401(k).  Rather, a few specific types of assets are listed as prohibited.  That means anything not on that list is allowed – assuming you follow other IRS rules against self-dealing or dealing with disqualified persons.

Prohibited Investments

The tax code only specifically prohibits two types of investments.  If you use your IRA to invest in these assets, the amount invested is treated as if it was distributed from the IRA.

Life Insurance Contracts

An IRA is specifically prohibited from investing in life insurance contracts.  This includes all types of insurance contracts such as whole life, universal, and term, as well as variable policies of any amount. A 401(k) plan may invest in these types of life insurance.


Collectibles include artwork, rugs, antiques, metals, gems, stamps, alcoholic beverages, and most coins.  Certain types of bullion, as well as US and foreign coins with 99.9% purity may be held by an IRA, but must be held in the physical possession of the IRA custodian.

S Corporation Stock

While not prohibited on the IRA side, there is one other class of investments an IRA cannot participate in.

Because of specific shareholder restrictions imposed on subchapter S corporations, they cannot accept an IRA as a shareholder.

Allowable Investments

So, we know what an IRA cannot invest in.  That means anything else is allowable, so long as other IRS rules are adhered to.

Following are some of the more popular investments made with self-directed retirement plans.

Real Estate

An IRA or Solo 401(k) may invest in real estate in many forms.  Rental property, whether residential, commercial, or industrial is very popular.  Agricultural properties such as farms and timberland can be held in an IRA.  Some investors choose to participate in small private estate partnerships for the acquisition of more expensive properties or even multifamily syndications.  An IRA or 401(k) can also invest in foreign real estate.

Secured & Unsecured Notes

A note is a legal document in which an individual or entity extends credit to another individual or entity in accordance with specified terms. Secured notes are notes that are backed by collateral, such as mortgages or deeds of trust. Unsecured notes are notes extending credit to an individual or business borrower that are not backed by collateral.

Lending to other real estate developers or investors for the purpose of building or flipping homes is quite common.

Many busy investors prefer to invest their IRA or 401(k) into a privately managed note fund and let someone else do the work of finding and evaluating note investments.


Bitcoin, Ethereum and other digital currencies are considered property, and can therefore be held by an IRA.

Investors with a desire to participate in this dynamic and exciting asset class inside the tax-sheltered umbrella of a retirement plan have been using self-directed IRA and Solo 401(k) plans for many years.

Private Funds

While mostly limited to accredited investors, private funds are a great way to achieve diversification and often better than average returns.  Leveraging the expertise of a fund manager to deploy capital into an asset class they understand well can be quite profitable, and is another type of hands off investment that works well for busy professionals.  Common funds include those that focus on lending, commercial real estate, digital assets, and venture capital.


Most private funds have a high cost of entry.  It often takes a minimum of $50K to invest.  Crowdfunded ventures provide an alternative means to invest in private ventures with smaller amounts of capital.  Rather than put $100K into one or two funds, you can spread that amount between a variety of crowdfunded opportunities.

Private Company Stock

While information about public stocks is easily accessible, most privately held companies keep theirs confidential. This prevents many investors from looking into private company stocks as an option, but they can be very desirable non-traditional investments. If you are familiar with the founders or shareholders of a privately held company and can examine the books prior to making a commitment, this type of investment may prove to be a valuable opportunity for your self-directed IRA or Solo 401(k).

Tax Liens & Deeds

Tax liens and deeds are another way to make investments with smaller amounts of IRA capital.

When a property owner does not pay their local property taxes, the county can place a lien against the property.  That lien is then sold to investors at auction, which provides the necessary revenue to the taxing authority.  The investor then has a right to collect penalties and interest on the lien certificate for a certain period of time.  If the tax bill is still not paid, the property can be foreclosed.  In some cases, the lien holder will then get paid by the winning bidder.  In other localities, the lien holder is granted the deed to the property.

With interest rates that commonly range from 9-16% and the potential to acquire a property for the cost of back taxes, this can be a lucrative way to invest for those with the proper knowledge.

Judgments & Structured Settlements

When individuals are awarded judgments or structured settlements by a court or insurance company, the settlements sometimes do not provide the recipient the amount of cash they deem adequate for their immediate financial needs. Self-directed IRA investors can use their plan funds to purchase these judgments and settlements at a discount and agree to receive payments for the term of the judgment or settlement at a fixed rate of return.  The original holder of the judgement gets a lump sum payment up front.

Accounts Receivable Factoring

Factoring is a financial transaction in which a business sells its accounts receivable (i.e., invoices) to a third-party investor for immediate cash. The receivable account is a financial asset associated with the debtor’s liability to pay the money they owe to the seller. As an investor, you can purchase one or more of these receivables from the business at a discount and obtain the right to receive the payments on the debt from the debtor.

Commercial Paper

Commercial papers are unsecured, short-term debt instruments issued by banks and corporations typically in order to meet their immediate financial needs. This can be a good temporary strategy for IRA investors because the debts are usually sold at a discount by established corporations and do not need to be registered with the Securities and Exchange Commission (SEC) as long as they mature within nine months (270 days).

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