95% of Us Miss a Tax-Free Retirement Hack—SDIRAs Worth It?

Question

Caught the latest BiggerPockets Money Show episode, "The Tax-Free Retirement Strategy 95% of Americans Don’t Know About" with John Bowens from Equity Trust. He breaks down using  Self-Directed IRAs (SDIRAs) to invest in real estate—like rentals or flips—and keep the profits tax-free. The idea is you roll over your boring 401(k) into an SDIRA and start building wealth without the tax hit.

I’m digging the concept, but I want the real-world scoop from you all. Who’s pulled this off? What deals did you fund—single-family, multi, something else? How’d the numbers stack up after fees and custodian costs? John makes it sound seamless, but I’d love to hear your wins (or war stories). If you haven’t listened yet, the episode’s worth a spin—drops some solid nuggets.

What’s your take—game-changer or just another tool in the kit?

Stephen Nelson · Answer

Hopefully this comment won't get me ejected... But as a tax accountant who sees these things in real life and how they work over long periods, I usually think there'd have been a better way to structure the investment. Sorry.

Investors for sure (and probably some promoters) regularly fail to consider a bunch of issues...

1. Prohibited Transactions and Self-Dealing Risks

This is arguably the biggest trap for unwary investors. The IRS has strict prohibited transaction rules under IRC Section 4975, which prevent the IRA owner from personally benefiting from or interacting with the IRA asset. This means investor cannot work on the property (e.g., making repairs, managing tenants). They cannot personally guarantee loans on IRA-held property. They cannot rent the property to themselves, family, or related businesses. One misstep here can lead to the entire IRA balance being treated as fully distributed, triggering income tax plus penalties (if under 59 ½).

2. The Overlooked Cost of Form 990-T and UBIT

Many investors (and promoters) fail to recognize that an IRA investing in real estate can be subject to Unrelated Business Income Tax (UBIT) if it uses debt financing to acquire the property. Thus, if the IRA buys a property with a mortgage, any income generated (rental, sale) could be subject to Unrelated Debt-Financed Income (UDFI). This triggers the need to file Form 990-T, and UBIT applies at trust tax rates (which are extremely compressed, hitting 37% at just $15,200 of income in 2025). My experience is many IRA custodians don’t prepare Form 990-T, so investors may need to hire a CPA specializing in exempt organization taxation. Costs maybe range from $1,000 to $2,000 per year? Which of course eats into returns.

3. RMD Problems with Illiquid Real Estate

For Traditional IRAs (and 401(k)s that haven’t been rolled over into Roths), Required Minimum Distributions (RMDs) can be a nightmare. When the investor turns 73 (or 75 for younger cohorts), they must take annual distributions. If the IRA’s primary asset is illiquid real estate, the investor may be forced to sell at an inopportune time or take “in-kind” distributions—which can be complicated and costly to value.

Note: A Roth IRA avoids RMDs, but this doesn’t solve the prohibited transaction, UBIT, or liquidity concerns. Also, a Roth means the investor has now paid tax on the IRA money.

4. Losing the Section 1014 Step-Up in Basis

A giant issue: Investing in real estate inside an IRA forfeits the ability to pass assets to heirs with a step-up in basis at death. E.g., if real estate is held outside an IRA, heirs inherit at fair market value with zero built-in gain, eliminating capital gains tax. But if held inside an IRA, the full pre-tax value is taxable as ordinary income when withdrawn by heirs (unless it's in a Roth). This can significantly increase the tax burden on heirs compared to directly owning real estate.

5. Giving Up Tax Deductions and Income Splitting

Outside of an IRA, direct real estate ownership gives the investor depreciation deductions (including those the investor has juiced up through something like cost segregation), ability to do 1031 exchanges to defer gains, family income splitting, (such as hiring children or structuring ownership to shift taxable income), and just in general lots of business deductions related to real estate operations.

Inside an IRA, these tax benefits do not apply—rental income is tax-deferred, but so are expenses and depreciation.

6. The Alternative: Using Deductions to Offset IRA Withdrawals

Rather than investing inside an IRA, often investors may be better off by taking IRA withdrawals strategically... Using depreciation and bonus depreciation (from cost segregation) to offset taxable income... Paying that 10% penalty on early withdrawals (if under 59 ½) sure... but then avoiding things like ongoing 990-T filing costs, UBIT on leveraged real estate and self-directed IRA custodial fees.

Example: A taxpayer takes $50,000 from an IRA to fund a down payment. They claim $50,000 in bonus depreciation from cost segregation. The early withdrawal penalty is just $5,000, but they avoid all those costs I just mentioned, avoid the RMD issue, and get extra benefits like the step-up in basis for heirs.

Kyle Luman · Answer

I haven't used a SDIRA (yet), but it doesn't seem like a game changer, to me.  It seems to be just another way to deploy your qualified investment money.  Albeit, one that could be outside of the stock market.  I don't see how it gets you out of the middle class trap, though.  Whether your money is in VTSAX or in a duplex or a syndication, you still "can't touch it until age 59 1/2", etc.

But, they did spend time discussing how you don't just have to purchase actual real estate. You can use the SDIRA (or SD HSA or solo 401k for that matter) to invest in syndications, make hard money loans, etc.  These other methods of investing help to limit many of @Stephen Nelson's concerns above which mostly are directed at purchasing real estate directly.  Scott Trench did a good job of raising these issues and John Bowens addressed them head on, I thought.

In the podcast, they did discuss the UBIT issue.  In the end, it sounds like UBIT is not nearly as bad a deal in reality as it is made out to be in these discussions.  It is only limited to the portion of the investment that is financed, which makes complete sense.  If you want to avoid UBIT, purchase the property outright or pay off the non recourse loan.

Stephen Nelson · Answer

My concerns, you're right, really relate to having direct real estate investments inside a tax deferred "container." Especially leveraged real estate investments which are what trigger UBIT concerns.

BTW something sort of similar occurs when someone puts real estate into a corporation or into an LLC treated as a corporation. You lose a bunch of the tax benefits of real estate and increase the complexity and costs. (There are tax accountants who say there's actually an eleventh commandment: Thou shalt not put real estate into a corporation.)

Finally, and not to highjack this thread, but in another thread we've been discussing how nonpassive losses (such as from real estate) can shelter any other type of nonpassive income including IRA or 401(k) withdrawals. Thus, something like a cost segregation study coupled with a tactic to avoid the Section 469 passive loss limitations can be another way to use retirement fund money for real estate investments.