Personal Finance

Understanding Self-Directed IRAs: A Look at Some Frequently Asked Questions

Expertise: Business Management, Personal Finance
80 Articles Written

Self-directed IRAs may sound intimidating, but if they're properly understood and managed, they offer great freedom. Below are some of the most frequently asked questions we receive about self-directed IRAs. Let's begin with the basics.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

What Is a Self-Directed IRA?

A self-directed IRA account is an IRA that isn’t limited in terms of investment. Funds in these accounts may be invested literally anywhere that is allowed by U.S. law.

The larger institutions that administer most U.S. retirement accounts don't think it's a good idea to hold real estate or non-publicly traded assets in retirement plans. This is the primary reason more people do not take advantage of these incredibly useful accounts.

Can I rollover or transfer my existing retirement account to a self-directed IRA?

This depends strongly on your situation, but here are some common examples:

Your Situation: Transfer/Rollover:
I have a 401k or other company plan with a current employer. Not typically. In most instances, your current employer’s plan will make it impossible until you reach retirement age.
I inherited an IRA and keep the account with a brokerage or bank. Yes, you can transfer to a self-directed inherited 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 have a 403b account with a former employer. Yes, you can rollover to a self-directed IRA.
I have a 401k account with a former employer. Yes, you can rollover to a self-directed IRA or Roth IRA, depending on the type of existing account.

 Related: 7 Achievable Steps to Reach 7-Figure Retirement Savings

Where can I invest a self-directed IRA?

Popular types of investments include:

  • Rental real estate
  • Secured loans to others for real estate (trust deed lending)
  • Private small business stock or LLC interests
  • Precious metals, such as gold or silver
  • Cryptocurrency (Bitcoin, etc.)


However, some types of investments are restricted from inclusion in retirement accounts. Examples include:

  • Collectibles, such as fine art, stamps, coins, alcoholic beverages, or antiques
  • Life insurance
  • S corporation stock
  • Any investment owned by someone in your immediate family

What restrictions are there on using a self-directed IRA?

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 you can invest in but rather with whom the account can participate in transactions.

The prohibited transaction rules restrict your retirement account from transactions with someone who is disqualified. Disqualified persons include: the account owner, spouses, children, parents, and certain business partners.

On the other hand, you can use your retirement account to buy a rental property from your cousin, friend, sister, or a random third-party person.

Can I invest my self-directed IRA in a personal business, company, or deal?

No. If your IRA transacts with you personally or with a company you own, it violates the prohibited transaction rules.

What is a checkbook-control IRA or IRA LLC?

Many self-directed retirement account owners use an IRA LLC, also known as a “checkbook-control IRA,” to hold their retirement assets so that they have fast access. This is a suitable option for owners with real estate investments.

Can I get a loan to buy real estate with my IRA?

Cash from your IRA can be used to buy real estate, as well as a loan or mortgage. To do this, you must obtain a non-recourse loan.

A non-recourse loan is made by the lender against the asset. In the event of default, the sole recourse of the lender is to foreclose and then seize the asset. The lender cannot pursue the IRA or the IRA owner for any deficiency.

Are there any tax traps?

The Unrelated Business Income Tax (UBIT) applies when your IRA receives unrelated business income. Alternatively, any investment income that your IRA receives is exempt from the UBIT tax.
These types of exempt investment income may include:

  1. Real Estate Rental Income: Rent collected from real estate is investment income and is exempt from UBIT.
  2. Interest Income: Interest and points made from money lending is investment income and is exempt from UBIT.
  3. Capital Gain Income: The sale, exchange, or disposition of assets is investment income and is exempt from UBIT.
  4. Dividend Income: Dividend income from a C corp, where the company pays corporate tax, is exempt investment income.
  5. Royalty Income: Royalty income derived from intangible property rights, such as intellectual property, oil and gas, or mineral-leasing activities is investment income and is exempt from UBIT.

So, make sure your IRA receives investment income as opposed to “business income.”


What is unrelated debt-financed income (UDFI)?

If an IRA is used to buy an investment with debt, then the income attributable to the debt is subject to UBIT. This income is referred to as unrelated debt financed income (UDFI), and it triggers a UBIT. One common instance where this is occurs is a when an IRA buys real estate with a non-recourse loan.

For example, let’s say an IRA is used to buy a rental property for $200,000. In this scenario, $100,000 came from the IRA and $100,000 came from a non-recourse loan. The property is now 50 percent leveraged, meaning that 50 percent of the income is not a result of the IRA investment, but rather it’s a result of the debt invested. Since debt isn’t retirement money, your friends at the IRS will require you to pay tax on 50 percent of the income. So, if there was $10,000 in net rental income on the property, then $5,000 would taxable under UBIT.

Related: The Boring, Plain Vanilla Retirement Strategy with AWESOME RESULTS (No High-Paying Job Needed!)

Should I use an individual 401k instead of a self-directed IRA?

This is where things get interesting, and ultimately, personal.

An individual 401k is a great self-directed account option and can be used instead of an IRA for persons who are self-employed. However, if you aren’t self-employed, the individual 401k may not be the best option for you.

If you are self-employed and you want to maximize your contributions, the individual 401k has much higher maximum-contribution limits: $54,000 annually versus $5,500 annually for an IRA. That’s nearly a 10-fold difference.

And let’s not forget about debt: If you are self-employed and carrying debt, you are much better off choosing an individual 401k over an IRA. Individual 401ks are exempt from UDFI tax on leveraged real estate (mentioned above).


A self-directed IRA is a better option for someone who has already saved for retirement. Some funds can be rolled over and invested in a self-directed IRA.

There are a lot of factors at play when rolling funds into an IRA. Fortunately, you have experts at your fingertips to help determine what type of funding and account considerations your circumstances warrant.

Can’t find the answer to your question here?

Comment below for more information.

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real est...
Read more
    Replied over 2 years ago
    I invested in a syndication deal through my IRA which uses a non-recourse loan (I’m invested in an LLC). I’m assuming that the investment income I get from that will have used all of the deductions allowed, so whatever money I receive in my distribution will be partially taxed. This will be my first investment (and distribution) so it will be interesting to see how it pans out.
    Chris Wooten Rental Property Investor from Atlanta, GA
    Replied about 2 years ago
    I’m not a CPA. If the syndicator is strictly providing you returns based on a preferred share or percentage of buy-in, then the syndicator is holding all of the leverage, and you would not need to concern yourself with UDFI/UBIT.
    Justin Green Real Estate Agent from Portland, Oregon
    Replied over 2 years ago
    I have used this strategy. Self directed IRA with LLC checking account buying cash. I would love to hear about anyone able to pull cash back out to repeat the process vs selling and building the IRA up. How about selling to someone else then back to personal name after 2-3 transfers and property can land in non retirement portfolio? I had a 401k from a previous job I transferred into the self directed IRA.
    Shaun R. from Denham Springs, LA
    Replied over 2 years ago
    Maybe the answer to this is in the article or in these comments and I’m missing it, but does the income you make from the rental property you buy with your SDIRA have to go back into the SDIRA? Or can that income come home to you, whethe it’s taxed or not. So what I want to know is does the rental property I buy with thenSDIRA only go toward padding my retirement account or can I live off that money now?
    Chris Wooten Rental Property Investor from Atlanta, GA
    Replied about 2 years ago
    The income from and SDIRA investment must go back to your SDIRA, otherwise it is considered self-dealing (a PT) Also, for instance, you can’t pay yourself for “property management” on your SDIRA holdings.
    Scott Smith Attorney from Austin, TX
    Replied almost 2 years ago
    Shaun, Chris is correct. I’m hoping to publish an article soon addressing common prohibited transactions. This would be considered “self-dealing”–a big no no with our friends at the Department of Labor who regulate these things. The good news is you can use your income from the IRA to fund future investments and continue growing your portfolio. I hope that helps and apologize for the very late reply!
    JL Hut Investor from Greenville, Michigan
    Replied over 2 years ago
    Great topic!
    Matthew Giannascoli from Philadelphia, PA
    Replied 9 months ago
    Scott, am I reading the above correctly that you are restricted from loaning yourself money to buy a rental property in your individual capacity? Example: I want to buy a property in my individual capacity for 100K and want to put 25K down and finance the remaining 75K via a note from my self-directed IRA. Is this not allowed? If no, can you provide the section of the Code that highlights the restriction? Thanks, Matt