The Guide
What the rules actually say, where the traps are, and what it looks like to invest retirement money in a private real estate offering. Figures are for tax year 2026 and cite IRS, SEC and FINRA guidance.
There is no such thing as a “self-directed IRA” in the Internal Revenue Code. It is an ordinary individual retirement account — Traditional, Roth, SEP or SIMPLE — held at a custodian whose platform permits assets beyond publicly traded securities. The tax treatment, contribution limits, deduction rules and distribution rules are exactly the same as any other IRA.
What changes is the menu. A mainstream brokerage offers what it has chosen to offer. A self-directed custodian will also hold real estate, private placements, notes, LLC interests and similar assets. The SEC describes the difference plainly: self-directed IRAs “allow investment in a broader – and potentially riskier – portfolio of assets.”
The custodian is not a gatekeeper
Per the SEC's investor alert, custodians and trustees of self-directed IRAs “generally will not evaluate the quality or legitimacy of an investment and its promoters.” They do not research, investigate or recommend investments, do not verify the accuracy of the values on your statement, and do not confirm that disclosures are complete. A custodian accepting an asset says nothing whatsoever about whether it is a good — or real — investment.
Any of these can be self-directed. Which one you use is usually decided by what you already have and whether you have self-employment income.
| Account | 2026 limit | Tax treatment | Typical fit |
|---|---|---|---|
| Traditional IRA | $7,500 (+$1,100 at 50+) | Pre-tax if deductible; growth deferred; distributions taxed as ordinary income | Rollovers from former employer plans |
| Roth IRA | $7,500 (+$1,100 at 50+) | After-tax in; qualified distributions tax-free; no lifetime RMDs | Long-hold assets you expect to appreciate |
| SEP IRA | Lesser of 25% of compensation or $72,000 | Employer contributions, pre-tax | Self-employed and small business owners |
| SIMPLE IRA | $17,000 deferral (+$4,000 at 50+) | Pre-tax with required employer contribution | Small employers with staff |
| Solo 401(k) | $24,500 deferral (+$8,000 at 50+), plus employer share | Pre-tax or Roth | Owner-only businesses; exempt from UDFI on leveraged real property |
If those annual figures look small relative to what you are trying to build, see the next section — the limit governs what you add, not what the account earns.
The catch-up at ages 60–63 is higher again: $11,250 in employer plans and $5,250 in a SIMPLE. The traditional IRA deduction phases out between $81,000 and $91,000 of income for a single filer covered by a workplace plan, and between $129,000 and $149,000 for a married couple filing jointly where the contributing spouse is covered.
Seeing “$7,500” next to a retirement account makes the whole exercise look small. It is worth being precise about what that number governs, because it is the single most misread figure in retirement investing.
The annual limit applies to contributions— money you add from outside. It does not apply to what the assets inside the account earn. Per the IRS, as long as contributions are within the limits, “none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed.” Growth is not a contribution, is not capped, and does not consume next year's contribution room.
This is arithmetic rather than a forecast. Divide the maximum annual contribution by a rate of return and you get the account size at which one year of growth exceeds one year of maximum contributions:
| If the account grew by… | One year's growth passes $7,500 once the account is… |
|---|---|
| 4% | $187,500 |
| 5% | $150,000 |
| 6% | $125,000 |
| 8% | $93,750 |
| 10% | $75,000 |
The rates in that table are arbitrary divisors chosen to make the arithmetic legible. They are not projections, not expected returns, and not attributable to any investment — they are there to show where the crossover falls, nothing more.
That is the structural argument for caring about what a retirement account holds once it reaches a meaningful size. It is an argument about where your attention belongs. It is not a claim that alternatives outperform public markets — sometimes they do not.
The same arithmetic runs in reverse
Every point above applies identically to losses, and a retirement account is a worse place to take one. Losses inside an IRA are not deductible on your personal return. There is no capital-loss offset, no carry-forward, and nothing to write off against other income. Capital lost inside an IRA is simply gone, along with the contribution room that funded it.
Leverage cuts both ways too. Debt that magnifies a gain magnifies a loss, and the financed share of any income is taxable to the account as UDFI in the meantime. Private real estate is illiquid, can be held for years with no ability to exit, and can lose some or all of its principal.
No investment discussed anywhere on this site is guaranteed, projected or expected to produce any particular return.
Three routes, and they are not equally forgiving. Two are administrative. The third has a clock and a once-a-year limit attached to it.
| Method | What happens | Withholding | Frequency |
|---|---|---|---|
| Direct transfer (IRA → IRA) | Trustee-to-trustee. You never touch the money and it is not a reportable distribution. | None | Unlimited |
| Direct rollover (plan → IRA) | Your 401(k) administrator pays the IRA directly. The usual route for an old employer plan. | None | Unlimited |
| 60-day indirect (paid to you) | A cheque comes to you and you redeposit it. Avoid unless you have a specific reason. | 20% mandatory from an employer plan | One IRA-to-IRA per 12 months |
You have 60 days from the date you receive a distribution to get it into another eligible account. Miss the window and it is a taxable distribution, plus a 10% additional tax if you are under 59½.
You may make only one IRA-to-IRA rollover in any 12-month period, and the limit is aggregated across every IRA you own. It does not apply to trustee-to-trustee transfers, Roth conversions, plan-to-IRA rollovers, IRA-to-plan rollovers, or plan-to-plan rollovers. This is precisely why direct transfers are the default recommendation.
The 20% withholding trap
A distribution paid to you from an employer plan is “subject to mandatory withholding of 20%, even if you intend to roll it over later.” On a $100,000 distribution you receive $80,000 — but to complete a full rollover you must deposit $100,000 within 60 days, finding the missing $20,000 from your own pocket. A direct rollover avoids this entirely.
This question comes up constantly, and the answer splits three ways depending on who is doing the borrowing. Two of the three are account-destroying, and the third is how leveraged real estate works inside an IRA every day.
| Scenario | Allowed? | Consequence |
|---|---|---|
| You borrow from your IRA | No | “Borrowing money from it” is an IRS-listed prohibited transaction. The account stops being an IRA on the first day of that year and the whole balance is deemed distributed. |
| You pledge the IRA as collateral | No | “Using it as security for a loan” is also IRS-listed. Pledging the account — even for an unrelated loan — has the same effect. |
| The IRA borrows, non-recourse | Yes | The IRA is the borrower and the asset is the only collateral. No personal guarantee. The financed share of income becomes UDFI. |
Unlike a 401(k), an IRA has no participant-loan provision anywhere in the code. Any arrangement that has you taking money out with the intention of returning it is either a distribution or a prohibited transaction — and a prohibited transaction costs the entire account, not the amount borrowed.
Every figure below is illustrative and arbitrary — chosen to make the mechanics visible, not to suggest any property, price, rent or return.
| Step | Amount | Note |
|---|---|---|
| Cash in the IRA | $100,000 | All of it belongs to the account, not to you. |
| Held back as reserve | –$10,000 | Stays in the IRA for fees, repairs and any 990-T tax. |
| Closing costs | –$5,000 | Paid by the IRA. |
| Available as down payment | $85,000 | |
| Non-recourse loan | +$85,000 | IRA is the borrower. No personal guarantee. |
| Property the IRA can buy | $170,000 | 50% loan-to-value — typical for non-recourse IRA lending. |
The $100,000 did not become $170,000 of wealth. It became $85,000 of equity plus $85,000 of debt the account is responsible for. Leverage enlarges the position in both directions.
Under IRC §514 the financed share is measured by the debt/basis percentage — average acquisition indebtedness over average adjusted basis, about 50% here. If the property nets $12,000 in a year, roughly $6,000 is UBTI: the IRA files Form 990-T under its own EIN, a $1,000 specific deduction applies, and the balance is taxed at trust rates, which compress far faster than individual brackets. The IRA pays it from its own cash.
At sale the percentage is based on the highest acquisition indebtedness in the 12 months before the sale, so a similar share of the gain is UBTI.
The Solo 401(k) exception
If you have self-employment income, this is the one place a genuine loan exists. A Solo 401(k) may permit participant loans if the plan document allows it — many do not.
Where permitted, the IRS limits are the lesser of $50,000 or 50% of the vested balance; repayment within five years unless the loan buys your main home; and level amortised payments at least quarterly. Miss the schedule and the balance becomes a deemed distribution.
Note what that means: rolling a 401(k) into an IRA gives up any loan access that plan offered.
The code does not list permitted investments, it lists forbidden ones. Everything not prohibited is broadly allowable, subject to your custodian's own willingness to hold it.
This is the part of self-directed investing that deserves the most care, and it is also the part people most often get right without difficulty — because the governing idea is simple, even though the statute is not.
Treat the IRA as a separate person that happens to share your surname. It buys its own assets, pays its own bills, collects its own income, and hires its own help. You direct it; you do not transact with it, work for it, or benefit from it personally before retirement.
A working rule of thumb
Before any step, ask: does the asset, the money, or the work touch me, my spouse, my parents or my children? If the honest answer is yes, stop and call your advisers. If it is no, you are almost certainly in ordinary territory.
You, as the account owner and fiduciary. Your spouse. Your ancestors — parents, grandparents. Your lineal descendants — children, grandchildren — and their spouses. Also any entity that you and other disqualified persons control.
Useful for the awkward family conversations: siblings, aunts, uncles, cousins and friends are generally not disqualified persons.Your brother can rent your IRA's rental property. Your daughter cannot.
The IRS's own examples are borrowing money from the IRA, selling property to it, using it as security for a loan, and buying property for personal or future personal use with IRA funds. Staying in your IRA's rental property, even for a weekend, falls squarely inside that last one.
Beyond the listed examples, other situations are treated as prohibited by most practitioners, though they rest on reading the statute rather than on an IRS example: paying a property expense from your personal account, personally guaranteeing debt the IRA borrows, and performing work on the property yourself — so-called sweat equity, generally analysed as furnishing services to the plan under §4975(c)(1)(C). There is a narrow statutory exception at §4975(d)(2) for services necessary to operate the account where no more than reasonable compensation is paid.
If a prohibited transaction does occur
Where you or your beneficiaries engage in one, the account stops being an IRA as of the first day of that year, and is treated as distributing all of its assets to you at fair market value on that date.
Not the amount involved. Not the property. The entire account becomes a taxable distribution in one year — with a 10% additional tax on top if you are under 59½. The size of the violation does not limit the size of the consequence.
Where the disqualified person is someone other than the account owner, a separate excise tax applies: 15% of the amount involved per year, rising to 100% if not corrected within the taxable period.
There is no “we fixed it before anyone noticed” provision for the account owner. None of this makes self-direction unworkable — it makes the structure worth an hour of a tax attorney's time before you fund the account, not after.
A surprise to most first-time investors: a retirement account can owe tax in the current year. IRAs — Traditional, Roth, SEP and SIMPLE alike — are subject to unrelated business income tax.
Unrelated business taxable income is income from a trade or business regularly carried on that is not related to the account's exempt purpose. Passive rent, interest, dividends and capital gains are generally excluded. An operating business held inside the IRA generally is not.
Under IRC §514, investment income that would otherwise be excluded becomes taxable to the extent it is derived from debt-financed property. If a property is 60% financed, roughly 60% of the income and of the gain on sale is pulled into UBTI. Since most value-add multifamily uses leverage, an IRA investing in such a deal should expect some UDFI — a cost of the structure to be modelled, not discovered.
Filing and paying
Form 990-T is required once the account has $1,000 or more of gross unrelated business income in a year, filed for the IRA under its own taxpayer identification number by the 15th day of the fourth month after its tax year ends.
The tax is paid from the IRA's own assets, not by you personally — paying it from your own pocket would itself be a prohibited transaction. Confirm who prepares the 990-T before you invest.
One planning note: a Solo 401(k) is generally exempt from UDFI on debt-financed real property under §514(c)(9), which is why business owners with eligible plans sometimes prefer that structure for leveraged real estate.
| Custodian-controlled | Checkbook IRA LLC | |
|---|---|---|
| How it works | You direct the custodian in writing; the custodian executes and holds title. | The IRA owns an LLC; you manage the LLC and sign on its bank account. |
| Speed | Days — custodian processing time on each transaction. | Immediate; useful for auctions or fast closes. |
| Cost | Per-transaction and asset-based fees. | Setup and state fees, plus ongoing custodian fee. |
| Oversight | A second set of eyes that may catch an obvious error. | None. Every §4975 judgement call is yours alone. |
| Best for | A small number of passive positions — e.g. one syndication. | Frequent, time-sensitive transactions. |
For a single investment into a sponsored offering, custodian-controlled is usually the simpler and safer choice. Checkbook control adds speed and removes the only friction that might have stopped an expensive mistake. The structure has been the subject of litigation and IRS scrutiny; get specific legal advice before adopting it.
Required minimum distributions begin at age 73. Roth IRAs require no distributions during the owner's lifetime; Traditional, SEP and SIMPLE IRAs do. Under SECURE 2.0 the age is scheduled to rise to 75 in 2033.
Here is the collision. An RMD is calculated on the account's fair market value at the prior year-end and must be satisfied in cash or by distributing assets in kind. A private real estate position may be locked up for five to ten years and cannot simply be sold to raise cash.
Plan the exit before the entry
If you will reach 73 during the expected hold, make sure the account keeps liquid assets to cover distributions. Private assets also require an annual fair-market-value report, which the sponsor or an appraiser must provide and which the custodian will ask for.
The shortfall penalty is 25% of the amount not taken, reduced to 10% if corrected promptly.
The SEC has repeatedly warned that self-directed IRAs are used as a vehicle for fraud, precisely because the custodian's limited role is so often misrepresented. Investors assume someone checked. No one did.
Verify the underlying investment through SEC EDGARwhere a Form D has been filed, and confirm the sponsor's entity in state records.
Say the investment is sold and the proceeds land back in the account. This is the step people picture least clearly, and it has one hard rule followed by one real choice.
Every dollar goes back to the account that invested — sale proceeds, return of capital and profit alike. The sponsor pays the custodian, not you. Money that lands in your personal account is at best a distribution you did not plan and at worst a prohibited transaction.
Inside the account, the sale itself is not a taxable event to you. There is no capital gains tax in the year of sale, no Schedule D, nothing on your personal return. The exception is UDFI if the deal used leverage.
The whole balance — original capital plus profit, undiminished by current tax — stays available to deploy into the next investment. This compounds without touching your annual contribution limit.
You request it from the custodian, who needs the cash to be in the account. It is reported on Form 1099-R, and federal withholding applies unless you elect out.
| Traditional / SEP / SIMPLE | Roth | |
|---|---|---|
| Tax on the profit | Ordinary income at your marginal rate | None, if the distribution is qualified |
| Qualified means | n/a | Age 59½ and five years since your first Roth contribution |
| Before 59½ | Taxable, plus 10% additional tax unless an exception applies | Your own contributions come out free; earnings may be taxable |
| Forced out at 73 | Yes — RMDs | No, not in your lifetime |
The trade-off nobody advertises
In a Traditional IRA, a profit that would have been a long-term capital gainin a taxable account does not keep that treatment. Per the IRS, “distributions from a traditional IRA are taxed as ordinary income” — gains inside an IRA are not eligible for capital gains treatment.
What you receive in exchange is deferral — years of compounding with no tax drag between deals — and, in a Roth, the possibility of no tax on the gain at all. Whether that trade favours you depends on your bracket now versus later, the holding period, and the size of the gain. It belongs with your CPA before you choose the account type.
A properly executed direct rollover from a former employer's plan to an IRA is not a taxable event. The danger is the indirect route: money paid to you triggers mandatory 20% withholding and starts a 60-day clock.
While you are still employed, plans often restrict rollovers. Some permit an “in-service distribution”, frequently at age 59½. It is entirely plan-specific — ask your plan administrator for the summary plan description.
You can never borrow against it. There is no IRA loan, and pledging the account as collateral is a prohibited transaction that ends the IRA. That door is closed at any age.
But the money is not frozen. You can take a distribution at any time. Before age 59½ it is generally taxable and carries a 10% additional tax. The IRS lists exceptions including higher education, up to $10,000 for a first home, substantially equal periodic payments, disability, certain medical expenses, and up to $5,000 for a birth or adoption.
A Roth is more flexible than people expect. Your own contributions — not the earnings — can generally be withdrawn tax-free and penalty-free at any age.
The real lock is usually the asset, not the IRS. A private real estate position cannot be sold on demand and may be held for years. For a syndication that illiquidity — not your age — is what makes the money genuinely inaccessible, which is why it should only ever be capital you do not expect to need.
No. Performing services for your IRA's asset — repairs, management, sweat equity — is generally treated as a prohibited transaction. This is one reason passive positions in sponsored offerings are a cleaner fit for retirement money than direct ownership.
Not to open a self-directed IRA. You generally do to participate in most private offerings. For a natural person the SEC's tests are: net worth over $1 million excluding your primary residence; or income over $200,000 individually ($300,000 jointly) in each of the two most recent years with a reasonable expectation of the same this year. Certain professional credentials also qualify.
Custodians charge setup, annual and per-transaction fees, plus an asset-based or per-asset fee for private investments. Add 990-T preparation where UBTI applies. Compare published fee schedules — total annual cost varies widely between custodians for identical assets.
Sources
Contribution and catch-up limits for 2026: IRS Notice 2025-67 and the IRS newsroom announcement. Limits applying to contributions rather than earnings: Publication 590-A. Rollovers, the 60-day rule and 20% withholding: IRS, Rollovers of Retirement Plan and IRA Distributions. Participant loans: IRS, Retirement Topics — Loans (IRC §72(p)). Prohibited transactions: IRC §4975 and IRS, Retirement Topics — Prohibited Transactions. Prohibited investments: IRC §408(a)(3) and §408(m). UBTI, UDFI and Form 990-T: IRC §§511–514, Publication 598 and the Form 990-T instructions. Distributions, ordinary-income treatment and Form 1099-R: Publication 590-B; early-distribution exceptions: Topic no. 557. RMDs: IRS RMD FAQs. Custodian role and fraud risk: SEC Investor Alert, Self-Directed IRAs and the Risk of Fraud. Accredited investor definition: SEC, Accredited Investors. Verified September 2026; confirm current figures before relying on them.
Questions about your own situation?
No pitch, no pressure. Start with a conversation — and bring your CPA.