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Self-Directed IRA rules: What you need to know

Self-Directed IRA rules:  What you need to know

In the United States, you are allowed to save for your retirement in a tax advantaged way through individual retirement accounts (IRAs) and they are an important component of your retirement planning strategy.In a traditional IRA you fund the account with pre-tax dollars and take an income tax deduction right away.However, you will have to pay those deferred taxes upon withdrawal. In a Roth IRA you fund the account with after tax dollars, you do not get to take a deduction, and your withdrawals are tax free.

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U.S. tax codes require an IRA to be a trust or a custodial account created or organized in the United States for the exclusive benefit of an individual or the individual’s beneficiaries. The account must be governed by written instructions and satisfy certain requirements related to contributions, distributions, holdings, and the identity of the trustee or custodian. These requirements and restrictions related to the custodian and an account’s permitted holdings give rise to a special type of IRA: a self-directed IRA (SDIRA).

In all IRAs, owners can choose from a variety of investment options so long as they are allowed by the custodian or trust. The majority of custodians only allow investments in highly liquid easily valued assets such as common stock, bonds, ETFs, mutual funds and certificates of deposit.

Those custodians that allow more control – but still within the tax laws – and more variety in the types of investments held in the IRA set up what is called a Self-Directed IRA. The types of assets held in these accounts is extensive and most often includes real estate, but can also include precious metals, mortgages, art, small business stock, private equity and tax liens.


The primary reason for opening up a Self-Directed IRA is to take advantage of the growth and income potential of those alternative investments. Additionally, you can increase your diversification across asset classes to protect you against a calamity occurring in a single class (think of the stock market during the COVID-19 crisis). There is usually more risk involved in these alternative investments and little advice from custodians. For this reason, it is recommended that you do your research before taking the plunge in Self-Directed IRAs.


There are certain transactions that are prohibited according to the tax laws. In general, a prohibited transaction is any improper use of the IRA by the owner or certain disqualified persons, and include the following people as being disqualified:

  • You, the owner,
  • Your beneficiary,
  • Your family,
  • Any party that has discretionary control in managing your IRA,
  • The custodian,
  • Any party that gives you IRA advice,
  • Any entity in which you own at least a 50% share.

Self-Directed IRA rules:  What you need to know

Prohibited Transactions:

  • You may not borrow money from your IRA.
  • You cannot sell property to your IRA.You can certainly have your Self-Directed IRA buy and sell property but it cannot buy and sell from you the owner or any disqualified person.This is deemed to be self-dealing and is prohibited.
  • Paying unreasonable compensation for plan management.The manager of your IRA account must not charge you an unreasonable fee that they do not charge any other of their clients.
  • You cannot use your IRA as collateral for a loan.
  • You cannot use your IRA to buy property for personal use, or for the use of a disqualified person.

Contribution limits:

The IRS sets limits on the amount one can contribute to their IRA and this applies to both traditional and Roth IRAs (including even self-directed).

In 2020 the maximum allowable contribution to an IRA for those under 50 years of age is $6,000 per year. If you are over 50, then you may contribute up to $7,000 per year. These contributions must come from ‘earned income’ as defined by the IRS and you cannot contribute more than what you earned.

Self-Directed IRA rules:  What you need to know | Contribution limits

Depending on your earned income – if it is too high – you may only contribute to a Traditional IRA (and not a Roth). Single filers whose modified adjusted gross income is greater than $139,000 may not contribute to a Roth IRA, but may to a traditional. If you are married and filing jointly the limit is $206,000.

There are several rules around contribution limits that can be found in great detail on the IRS website here.


If you are able to follow the sometimes complicated rules around disqualified persons and prohibited transactions a self-directed IRA can be very beneficial. Alternative investments allow you to diversify your retirement accounts and potentially turbo charge your returns. However, they are often illiquid and require some expertise to manage properly.

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