The Custodian Is Not the Investment Committee
A self-directed IRA custodian or trustee administers the account, holds title, processes instructions, and reports required information. Acceptance by a custodian generally does not mean the investment has been recommended, verified, valued, or judged suitable. Fraud, valuation, concentration, and illiquidity risks remain with the investor.
Keep Account and Personal Activity Separate
The IRA should generally fund its obligations and receive its proceeds. The owner should not use the property personally, take compensation from the IRA investment, pledge IRA assets for personal obligations, or transact improperly with disqualified persons. Rules are detailed and consequences can be severe, so obtain qualified advice before the account commits.
Plan for Friction
- Cash: the IRA may need liquidity for fees, capital calls, taxes, or required distributions.
- Valuation: private interests may require periodic fair-market-value support.
- Timing: the custodian must review documents and execute funding, which can take longer than a personal wire.
- Tax: debt-financed or operating activity may create unrelated business tax issues.
- Exit: a private interest may be difficult to sell when the account needs cash.
A Concentration Example
If a $400,000 IRA commits $200,000 to one seven-year private real estate investment, half the account begins illiquid. If the remaining assets later decline or required cash needs rise, the investor may have few practical choices. The deal can be attractive and still be too large for the account.
What to Remember
- Custodian acceptance is not investment approval.
- Prohibited transactions and disqualified-person rules require careful review.
- The account needs enough cash for fees, taxes, obligations, and distributions.
- Valuation and illiquidity can create practical problems even when the investment performs.
Questions to Ask
Exactly who is a disqualified person in my situation?
Have qualified counsel identify relevant family, entities, fiduciaries, service providers, and prohibited relationships.
How will the asset be valued?
Confirm annual valuation procedures, documentation, fees, and responsibility for obtaining support.
What happens if the investment requests more capital?
Review the offering terms and whether the IRA will have enough eligible cash without an improper contribution or transaction.
This lesson is for general educational and informational purposes only. It is not investment, legal, tax, accounting, retirement-plan, or financial advice and is not an offer to sell or a solicitation to purchase any security. Examples are simplified and hypothetical. Private real estate investments are speculative, illiquid, and involve substantial risk, including possible loss of principal. Rules and individual circumstances vary. Review definitive offering documents and consult your own qualified advisers.