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Two siblings each inherited $130,000 from their mother's estate and rolled their shares into separate IRAs the same month. Four years later, the brother's account, invested through a self-directed IRA in two rental properties, has grown considerably from both appreciation and rental income. The sister's account, left in a mix of target-date mutual funds at a large brokerage, has grown too, just at a noticeably slower pace, and she now wishes someone had told her a self-directed option existed before she made her decision.
Neither sibling did anything wrong. The brother happened to have a friend who had already set up a self-directed IRA for real estate investing and walked him through the process. The sister rolled her inheritance into an IRA at the same brokerage where she already held a taxable investment account, simply because it was the path of least resistance.
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Most large brokerages do not offer real estate, private lending, or other alternative assets inside their standard IRA products. Investors are limited to whatever is available on that platform, typically stocks, bonds, mutual funds, and ETFs, unless they specifically seek out a custodian that supports a broader menu.
Her brother's self-directed IRA owns a single-member LLC, and he serves as manager of that LLC, giving him what is known as checkbook control over the account's investments. Both rental properties are titled to the LLC, with all rental income and property expenses flowing through the LLC's bank account and back into the IRA's tax-deferred structure.
That structure let him move quickly when both properties came up for sale, and it has let him continue growing the account through rental income in addition to any appreciation, a combination that a typical target-date fund does not offer.
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It is not too late, and switching does not require selling anything or triggering a taxable event, since a transfer between IRA custodians is not a taxable distribution as long as it is handled as a direct transfer. She can move all or part of her existing IRA balance into a self-directed structure and choose an entirely different mix of alternative assets than her brother did, whether that is real estate, private lending, precious metals, or something else entirely.
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