If Peter Thiel could use a special retirement account to accumulate $5 billion tax free, why can’t you? It’s only natural to wonder after a ProPublica report last month detailing how the venture capitalist turned a humdrum retirement savings vehicle into a shelter for spectacular capital gains.

Thiel used what's called a self-directed Roth Individual Retirement Account, according to the report. A self-directed account is one that can invest in alternative holdings such as startups, real estate or partnerships, unlike a traditional account, which typically holds stocks and bonds. IRAs can be self-directed, as can Roths, where tax is paid upfront so withdrawals are tax-free.

According to ProPublica, Thiel was able to put 1.7 million shares of then-private Paypal into a self-directed Roth IRA in 1999. There are contribution limits for Roth IRAs, but the total value of the Paypal shares was below the $2,000 threshold at the time. Those shares have since exploded in value, along with other investments Thiel has made, but since they're in the Roth, they aren't subject to tax.

It sounds too good to be true — and for most investors, it is. From fees to severe penalties for missteps, a self-directed retirement account is something most savers should steer clear of.  

First, the fees a custodian will charge for holding and administering alternative investments are generally steep. Traditional retirement-account custodians like Fidelity and Schwab have to stay competitive with each other, but with alternatives, there are fewer players and less transparency and competitive fee pressure. And self-directed retirement custodians generally charge fees for administering the alternative, liquidating it, and reporting a value for it, as the IRS requires periodically.

Also, if you have a self-directed IRA and are required to take distributions from it, you'll probably want to keep some cash in the account. It's difficult to liquidate part of a building, and you probably won't want to take funds away from an expanding company. Keep in mind that if you want to convert your self-directed IRA to a self-directed Roth IRA, you'll need to figure out how to calculate the account's value to pay the tax on the conversion.

In addition, custodians of self-directed accounts tend to be pretty hands-off when it comes to telling investors what's acceptable (or not) with respect to activity within the account. Even worse, the Internal Revenue Service rules regarding what's off-limits are complex and sometimes unclear.  

The IRS says investors will face a substantial tax hit if they use assets in self-directed accounts for their own benefit or to help family members. That means, for example, that the investor couldn’t live in a house that’s inside the self-directed account. Since the IRS doesn’t explicitly say that siblings fall under the rule, there could be gray areas to exploit. But that’s a dangerous game.

It’s especially easy to trip over IRS rules, even inadvertently, with real estate assets in a self-directed IRA. If you personally guarantee a mortgage for a real estate investment in your self-directed account, for example, the IRS considers that to be a no-no too, according to Ed Slott, a certified public accountant who specializes in IRAs.

Even something as mundane as personally repairing something at a rental house or apartment held in a self-directed account can get an investor into trouble, said Jeffrey Levine, a CPA and certified financial planner at Buckingham Wealth Partners.

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