When it comes to retirement, a standard IRA can do the job, but savvy investors know it’s self-directed IRAs (SDIRA) that hold true financial power. SDIRAs expand upon the key features of an IRA, such as tax-free growth, by allowing account holders to invest in alternative and potentially more lucrative assets, such as real estate, commodities, and private equity.

SDIRA holders also gain extended control of their retirement. With checkbook control, you can make decisions about investments as the opportunity arises. There’s no need to wait for a third party to make a move on your behalf.

Despite the enhanced freedoms offered by SDIRAs, some rules and regulations govern various aspects of this investment vehicle, including how much you can contribute, how earnings must be managed, and what you can invest in.    

Understanding these self-directed IRA rules can help you decide if it’s the best retirement account for you and ensure your savings can grow free of penalties. Here’s what you need to know. 

Disqualified Persons

A disqualified person is any individual restricted or prohibited from engaging in a transaction. Generally, a disqualified person is someone who directly benefits from your investments. 

Surprisingly, to some, the account holder is considered a disqualified person. That’s because the goal of the account is to benefit you after you retire, not before.  

Other disqualified persons include:

  • Account holder’s spouse
  • Account holder’s parents, grandparents, etc. 
  • Account holder’s descendants (children, grandchildren, adopted children, etc.) and their spouses. 
  • SDIRA custodian and anyone else who provides account services, such as a financial advisor. 
  • Any entity in which the account holder has 50% or more ownership.
  • Officers or highly compensated employees that work for a disqualified entity. 


You recently purchased a residential property with your IRA and need to do some remodeling before you put it up for rent.  Your daughter’s husband is a contractor, and it would be easy to hire him to complete the job.

However, because he’s a disqualified person, you cannot hire him or his company to complete the job. Doing so would be a prohibited transaction

How to avoid it:

You can avoid disqualified persons penalties by not completing an investment transaction that includes a disqualified person. For instance, if you’ve purchased a commercial real estate office, you couldn’t rent a space out to a disqualified person or set up your office there. 

When you invest in tax liens, earnings come from the interest applied to the lien

Personal Benefit Rules

As specified above, the IRA account holder is considered a disqualified person. As such, if you have an SDIRA, you cannot directly benefit from a transaction at any point, whether you’re acquiring, holding, or selling the assets.  


You purchase a vacation home using your IRA. You intend to rent this property out and return your earnings directly back to your IRA. A few months after purchasing the property, you decide to remodel your primary residence. Since you have a lot of rental income coming in from your property, you will use part of that earnings to purchase supplies and hire a contractor. 

Because the income from your IRA-held vacation property must go directly back to the IRA, this would be considered a breach of personal benefit rules, as you’d be directly benefiting from the rental income. 

How to avoid it

Any transaction you engage in, either while purchasing, holding, or selling an asset held by your IRA, must only benefit your IRA. That means any income earned from your asset must go directly back into your IRA. You also can’t make money off your IRA, so if you can benefit from a transaction while holding an IRA, such as paying yourself to remodel a property, you must avoid doing so.

5 Prohibited Transactions

The IRS specifically outlines five types of transactions that are considered prohibited.

  1. The transfer of IRA-held assets or income from those assets to a disqualified person for use or benefit by that person
  2. Any instance where a fiduciary, such as a plan custodian or financial advisor, engages with IRA-held assets or income earned from those assets for their interest or benefit (e.g., a financial advisor selling precious metals to one of their SDIRA clients). 
  3. Selling, exchanging, or leasing any IRA-held property to a disqualified person. 
  4. Extending credit or otherwise lending money from the IRA to a disqualified person. 
  5. Providing goods, services, or facilities via an IRA-held asset to a disqualified person. 

If you’re considering a transaction and are concerned it may be defined as prohibited, contact a trusted financial or tax advisor who can assist you in determining if a transaction is legal within the confines of IRA rules and regulations. 

Restricted Investments

The IRS also sets specific rules that govern what types of assets you can invest in with your IRA. Under the most current IRS regulations, you cannot use IRA funds to purchase the following assets:

  • Art
  • Antiques
  • Gems and Jewelry
  • Cars, such as collectible vehicles. 
  • Coins and precious metals, unless approved by the IRS, such as gold and silver, meet purity standards. 
  • Stamps
  • Life insurance

Purchasing and subsequently holding a restricted asset in your IRA will result in a penalty. An experienced SDIRA custodian can help you determine if an asset is allowed in your IRA. 

Are Self-Directed IRAs Worth It?

Despite IRS rules and regulations, SDIRAs are absolutely worth it for many investors. When you invest in a standard IRA, whether it’s a traditional or Roth IRA, your investment options are limited to common assets, like stocks and mutual funds. And while these assets have a place in any IRA, they often don’t allow for the same growth that accompanies other alternative assets, like real estate or promissory notes. 

SDIRAs also give you enhanced freedoms that make it possible to invest in assets you believe in and diversify your portfolio in a way that lets you leverage multiple earning streams while hedging against inflation. You won’t be subject to the investment decisions and limitations accompanying IRAs held by a typical financial institution, such as a bank or broker. 

It’s also important to note that, though restrictions regulate the type of assets you can hold in your SDIRA and transactions in which you can engage, many SDIRA rules and regulations are the same as those that govern standard IRAs. 

For instance, the contribution limits for an SDIRA are the same as those set for a standard IRA. The same is true for eligibility requirements and withdrawal and distribution timelines. 

Ultimately, a self-directed IRA will allow you to invest your funds as you see fit, whether that’s taking advantage of assets in the stock market or other opportunities, such as private equity or commercial real estate. 

FAQs: Self-Directed IRA Rules

Can I invest in a business I’m personally involved in?

Yes, you can technically invest in a checkbook LLC you have established as the approved manager. However, you will still need to follow rules around prohibited transactions, which bar you from using your checkbook LLC to purchase assets you or a disqualified person own with private funds. 

What are the tax implications of real estate investments in a self-directed IRA?

Generally, when you purchase real estate with your SDIRA, you don’t have to pay taxes on rental income or other gains while earnings are in the account. If you have a traditional SDIRA, you’ll pay taxes on distributions. If you have a Roth SDIRA, your funds will be taxed prior, so distributions will be tax-free.

There are some circumstances under which real estate earnings may be taxed, however. Specifically, if you use a non-recourse loan to purchase real estate in the name of your IRA, you’ll be required to pay unrelated business income tax (UBIT) on the portion of the financed property. 

How do I ensure compliance with IRS rules to avoid penalties?

The best way to ensure compliance with IRS rules is to thoroughly read and understand the current IRS guidelines for IRAs or work directly with a custodian who can ensure your transactions are in compliance. A qualified custodian will understand not only the latest IRS guidelines but also industry-based regulations.

Can I convert my Traditional IRA into a Self-Directed IRA?

Yes, you can convert your traditional IRA into a self-directed IRA by opening an SDIRA account and completing an IRA transfer. An IRA transfer is when you move funds from one IRA into another.