A Self-Directed IRA or “SDIRA” is a retirement account (Roth, Traditional, SEP, Inherited IRA, SIMPLE) where the custodian of the account allows the IRA to invest in any investment permitted by law. These investments typically include real estate, promissory notes, precious metals, private company stock, and more.
Why haven’t you heard of SDIRAs before?
The majority of U.S. retirement accounts are administered by large financial institutions, which often don’t find it administratively feasible to hold real estate or non-publicly traded assets in retirement plans. Additionally, most of these institutions are in the business of selling stocks, bonds, and mutual funds.
Custodians like Directed IRA specialize in enabling investors to diversify their IRAs into real estate, private companies, hedge funds, note/trust deed lending, precious metals, and other “alternative” investments. Directed IRA does not sell investments of any kind.
If you have funds in a retirement account that restricts your investment options, you can transfer or rollover those funds into a self-directed IRA. This process involves moving the funds from one custodian to another who allows for alternative investments. There are three methods for transferring or rolling over funds: Trustee-to-Trustee Transfer, Direct Rollover, and 60-Day Rollover.
Read more about transferring or rolling over your existing retirement accounts to Directed IRA.
Situation
Transfer/Rollover
I have a 401(k) account with a former employer.
Yes, you can rollover to a self directed IRA. If it is a Traditional 401(k), it will be a self-directed IRA. If it is a Roth 401(k), it will be a self-directed Roth IRA.
I have a 403(b) account with a former employer
Yes, you can roll-over to a traditional self-directed IRA.
I have a Traditional IRA with a bank or brokerage.
Yes, you can transfer to a self-directed IRA.
I have a Roth IRA with a bank or brokerage.
Yes, you can transfer to a self-directed Roth IRA.
I don’t have any retirement accounts but want to establish a new self-directed IRA.
Yes, Yes, you can establish a new Traditional or Roth self-directed IRA, and can make new contributions according to the contribution limits and rules found in IRS Publication 590.
I have a 401(k) or other company plan with a current employer.
No, in most instances your current employer’s plan will restrict you from rolling funds out of that plan. However, some plans do allow for an in-service withdrawal if you are at retirement age.
All accounts at Directed IRA can be self-directed into any investment type allowed by law. This includes real estate, promissory notes and lending, private funds and offerings, small businesses, startups, venture capital, checkbook IRA/LLC, cryptocurrency, precious metals, stocks, bonds, mutual funds, and more.
While the list of restrictions and prohibited transactions for IRAs is small, it does include collectible items, life insurance, S corporation stock, and investment transactions with parties prohibited to your IRA (e.g., the IRA owner and certain family members). A self-directed IRA cannot transact with the IRA owner or certain family members, as this results in a prohibited transaction.
When self-directing your retirement account, you must be aware of the prohibited transaction rules found in IRC 4975. These rules don’t restrict what your account can invest in, but rather, whom your IRA may transact with. In short, the prohibited transaction rules restrict your retirement account from engaging in a transaction with someone who is a disqualified person to your account.
A disqualified person to a retirement account includes: The account owner, their spouse, children, parents, and certain business partners. So, for example, your retirement account could not buy a rental property that is owned by your father since a purchase of the property would be a transaction with someone who is disqualified to the retirement account (e.g. father). On the other hand, your retirement account could buy a rental property from your cousin, friend, sister, or a random third-party, as these parties are not disqualified persons under the rules.
No, it would violate the prohibited transaction rules if your IRA transacted with you personally (or with a company you own). In addition, your IRA cannot transact with or benefit anyone who is a disqualified person (e.g. IRA owner, spouse, children, parents, spouses of children, etc.)
An IRA/LLC consists of a self-directed IRA account (Roth IRA, Traditional IRA, etc.) where the IRA owns an LLC. A Checkbook IRA/LLC is a popular self-directed strategy offered by Directed IRA and provides several benefits:
Checkbook Control: A Checkbook IRA/LLC allows you to make investment decisions directly, bypassing the need for custodian approval of transactions. You can write checks directly from the LLC’s bank account, enabling swift management of your retirement funds. This structure allows you to act quickly on investment opportunities and provides greater control over managing assets that may require frequent transactions after purchase (e.g., a rental property or a property being rehabbed and flipped).
Privacy & Asset Protection: By utilizing an IRA/LLC, your investments are conducted in the name of the LLC, not your personal name or IRA account name. This offers privacy benefits while the LLC structure provides an additional layer of asset protection, shielding you and your retirement funds from potential liabilities or creditors.
Faster Transactions: With direct access to the LLC’s funds, you can quickly act on time-sensitive opportunities like real estate or private equity investments. Faster transactions help you stay competitive in dynamic markets and optimize returns.
Your IRA can buy real estate using its own cash and a loan/mortgage to acquire the property. Whenever you leverage your IRA with debt, however, you must be aware of two things. First, the loan your IRA obtains must be a non-recourse loan. A non-recourse loan is made by the lender against the asset, and in the event of default the sole recourse of the lender is to foreclose and take back the asset. The lender cannot pursue the IRA or the IRA owner for any deficiency. Second, your IRA may be subject to a tax known as unrelated debt financed income tax (UDFI/UBIT).
The tax UBIT applies when your IRA receives “unrelated business income.” However, if your IRA receives investment income, then that income is exempt from UBIT tax. Investment income exempt from UBIT includes the following.
• Real Estate Rental Income (IRC 512(b)(3)) – Rent from real estate is investment income, and is exempt from UBIT
• Interest Income (IRC 512(b)(1)) – Interest and points made from the money lending is investment income, and is exempt from UBIT.
• Capital Gain Income (IRC 512(b)(5)) – The sale, exchange, or disposition of assets is investment income, and is exempt from UBIT
• Dividend Income (IRC 512(b)(1)) – Dividend income from a C-Corp where the company paid corporate tax is investment income, and exempt from UBIT
• Royalty Income (IRC 512(b)(2)) – Royalty income derived from intangible property rights, such as intellectual property, and from oil/gas and mineral leasing activities is investment income, and is exempt from UBIT.
So, make sure your IRA receives investment income as opposed to “business income”
There are two common areas where self-directed IRA investors run into UBIT issues and are outside of the exemptions outlined above. The first occurs when an IRA invests and buys LLC ownership in an operating business (e.g. sells goods or services) that is structured as a pass-thru entity for taxes (e.g. partnership), and does not pay corporate taxes. The income from the LLC flows to its owners and would be ordinary income. If the company has net taxable income, it will flow down to the IRA as ordinary income on the K-1, and this will cause tax to the IRA as this will be business income and it does not fit into one of the investment income exemptions. If your IRA has UBIT income, it must file it’s own tax return using IRS Form 990-T. The second instance occurs when the IRA invests into real estate activities whereby the IRA is deemed to be in the business of real estate as opposed to investing in real estate (e.g. real estate development, construction, significant short-term real estate flips).
If an IRA uses debt to buy an investment, then the income attributable to the debt is subject to UBIT. This income is referred to as “unrelated debt financed income” (UDFI), and it causes UBIT. The most common situation occurs when an IRA buys real estate with a non-recourse loan. For example, let’s say an IRA buys a rental property for $100,000, and that $40,000 came from the IRA and $60,000 came from a non-recourse loan. The property is thus 60% leveraged, and as a result, 60% of the income is not a result of the IRAs investment, but the result of the debt invested. Because of this debt, which is not retirement plan money, the IRS requires tax to be paid on 60% of the income. So, if there is $10K of net rental income on the property then $6K would be UDFI and would be subject to UBIT taxes.
For a more detailed outline of UDFI, please refer to my free one-hour webinar.
A solo 401(k) is a great self-directed account option, and can be used instead of an IRA for persons who are self-employed with no other employees (other than business owners and spouses). If you are not self-employed, then the solo K will not work in your situation.
A solo 401(k) is generally a better option for someone who is self-employed and still trying to maximize contributions, as the solo 401(k) has much higher contribution amounts ($57,000 annually versus $6,000 annually for an IRA). On the other hand, a self-directed IRA is a better option for someone who has already saved for retirement and who has enough funds in their retirement accounts which can be rolled over and invested via a self-directed IRA as the self-directed IRA is easier and cheaper to establish.
Another major consideration in deciding between a solo 401(k) and a self-directed IRA is whether there will be debt on real estate investments. If there is debt and the account owner is self-employed, they are much better off choosing a solo 401(k) over an IRA as solo 401(k)s are exempt from UDFI tax on leveraged real estate.
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Directed IRA is a Tradename of Directed Trust Company. Directed Trust Company performs the duties of a directed custodian, and as such does not provide due diligence to third parties on prospective investments, platforms, sponsors or service providers, and does not sell investments or provide investment, legal, or tax advice. Directed Trust Company is not an FDIC-insured financial institution. Alternative investments are not insured by the FDIC; are not deposits or other obligations of, or guaranteed by Directed Trust Company or any of its divisions; and are subject to investment risks, including possible loss of the principal amount invested. While uninvested funds in certain types of Directed Trust Company accounts may be eligible for FDIC pass-through deposit insurance, certain conditions must be satisfied for such insurance coverage to apply. 2025 Directed Trust Company
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