The only prohibitions contained in the Internal Revenue Code for IRAs are investments in life insurance contracts and in "collectibles" — defined to include works of art, rugs or antiques, metals or gems (with certain exceptions for gold, silver, platinum or palladium bullion), stamps or coins (with certain exceptions for US-issued coins), alcoholic beverages, or any other tangible personal property specified by the Secretary of the Treasury.

In fact, there are seven different types of accounts which can be self-directed: 1) Roth IRA, 2) Traditional IRA, 3) SEP IRA, 4) SIMPLE IRA, 5) Individual 401(k) including the Roth 401(k), 6) Coverdell Education Savings Account (ESA), and 7) Health Savings Account (HSA). Not only can all of these accounts invest in non-traditional investments, they can even be combined together to purchase a single investment.

Almost anyone can have a self-directed account of some type. Although there are income limits for contributing to a Roth IRA, having a plan at work does not affect your ability to contribute to a Roth IRA, and there is no age limit either. With a Traditional IRA, anyone with earned income who is under age 70½ can contribute — there are no upper income limits. A Traditional IRA can also receive funds from a prior employer's 401(k). Additionally, if you have a High Deductible Health Plan, you can contribute to an HSA regardless of income level — contributions are deductible and qualified distributions are tax free forever.

You can have a self-directed SEP IRA, SIMPLE IRA, or 401(k) plan even if you are self-employed. Beginning in 2002, even self-employed persons became entitled to their own 401(k) plan. With an Individual 401(k), a self-employed person age 50 or older can contribute up to $51,000 annually. The Roth 401(k) option even allows high income earners to contribute after-tax dollars into an account where qualified distributions are tax free forever.

Even small balance accounts can participate in non-traditional investing. Small balance accounts can be co-invested with larger accounts — one hard money loan we funded had 10 different accounts participating, with the smallest being just $1,827. There are at least 4 ways to participate in real estate investment even with a small IRA: wholesaling, purchasing options on real estate, buying property subject to existing financing or with a non-recourse loan, or partnering with other IRA or non-IRA investors.

An IRA can hold title to real estate and other non-traditional investments directly — no LLC is required. In fact, having "checkbook control" of your IRA funds through an LLC can lead to many traps. These setups may actually lead to inadvertent prohibited transactions, which can cause your IRA to be fully distributed to you — sometimes with substantial penalties. There are legitimate uses for an IRA-owned LLC, but you must educate yourself completely before going this route.

Certain transactions are considered "prohibited transactions" with severe consequences. The prohibited transaction rules exist to discourage disqualified persons from dealing with IRA assets in a self-dealing manner. A loan from your IRA, or staying at a vacation home owned by your IRA — even at fair market rates — would be prohibited. The assets of the plan must be invested in a manner that benefits the plan itself, not the IRA owner personally.

When real estate or any other asset is purchased within a self-directed IRA, the money never leaves the IRA. The IRA exchanges cash for the asset — just as a brokerage IRA exchanges cash for shares of stock. The asset must be held in the name of the IRA, all expenses must be paid by the IRA, and all profits belong to the IRA — including rents received and gains from sale.

An IRA can own debt-financed property, either directly or through a non-taxed entity such as an LLC or partnership. Any debt must be non-recourse to the IRA and to any disqualified person. The IRA may have to pay Unrelated Debt Financed Income Tax (UDFIT) on profits from debt-financed property — but leverage can still be an extremely powerful wealth-building tool. One client built her Roth IRA from $3,000 to over $33,000 in less than 4 months using this approach.

A self-directed IRA can own almost anything, including a business. However, due to conflict of interest rules you cannot work for a business owned by your IRA and get paid. If your IRA owns an interest in a business, the IRA may owe Unrelated Business Income Tax (UBIT) on its profits. A solution may be to have the business owned by a C corporation or another taxable entity.

Owning hard real estate offers great tax advantages — but what many people fail to realize is how much active work is required for managing and maintaining property. Even those who own property "hands free" through turnkey investments or outsourced management may find that managing the managers can be work. When a note is re-performing and being repaid by the original borrower, the holder receives payments every month with little-to-no work required. No toilets, tenants, or maintenance. As I often say: "Do you think Wells Fargo has to worry about plumbing issues?" Not when it only holds the paper.

A note portfolio — whether performing or nonperforming — can be managed entirely from a phone and computer without ever leaving the house or office. This enables servicers to manage notes on properties all across the nation. In the rare instances when issues arise, mortgage servicers handle accounting, payment management, and resident issues, while property preservation companies deal with any physical issues with the property. Managing a property portfolio across states is tiresome and inconvenient, even with managers in place. Notes remove that friction entirely.

Note prices in the marketplace are directly correlated with real estate values — but notes offer flexibility in both up and down markets. In an up market, there are fewer foreclosures and fewer delinquent notes, but investors benefit from a quicker exit. In a down market, more delinquent assets become available for less capital, and a longer exit means more time to secure a loan modification. The same capital can acquire a larger quantity of assets in a down market — and as equity returns, those assets only gain in value.

Unlike stocks that offer no real collateral, a performing note is secured by real physical property. A note owner holds a secured lien tied to the property — especially powerful when the property has equity — and has the right to foreclose and recoup some or all of the initial investment. Unlike in an eviction, in a default with equity the note owner can also recover missed payments, late fees, attorney fees, and corporate advances. Even junior liens with no equity can be viable investments because borrowers typically have a vested interest in staying in their home.

This one is my favorite. Nearly all the forms of profitability that property ownership offers can be found with note investing — and then some.

With notes, investors can help borrowers stay in their homes without incurring additional debt. Unlike stocks — essentially a zero-sum game where one party always loses — notes can be advantageous for every party involved. Borrowers benefit by finding a viable solution to stay in or move on from their property. Banks benefit by removing "toxic" assets from their books, gaining greater lending power. And when distressed mortgages become performing ones, note investors help improve the community at large — because a homeowner not paying their mortgage is also not paying their taxes or insurance.