A Self-Directed IRA (SDIRA) gives you the freedom to invest in alternative assets—such as real estate, private businesses, and even cryptocurrency—while benefiting from tax-advantaged growth. But with that freedom comes added responsibility. Unlike a standard IRA that’s managed by a brokerage, an SDIRA requires you to be more hands-on, especially when it comes to IRS rules and tax-related decisions.
Whether you're a seasoned investor or just getting started, understanding the tax and regulatory considerations of your SDIRA can help you keep your retirement strategy on track. Here are seven important factors to keep in mind as you manage your Self-Directed IRA.
Self-Directed IRAs follow the same annual contribution limits as standard IRAs, but with the added opportunity to invest in assets besides Wall Street products. For 2025, individuals under age 50 can contribute up to $7,000, while those aged 50 or older can contribute up to $8,000 with the catch-up provision.
These contributions must be made by the federal tax filing deadline (April 15, 2025 for the 2024 tax year). It's also important to designate the correct tax year when sending funds—especially if contributing between January 1 and the tax deadline. Mistakes in contribution reporting can lead to incorrect tax documentation and potential penalties.
Whether you're investing with a Self-Directed Traditional IRA or Self-Directed Roth IRA, your contributions must come from earned income and stay within IRS limits across all IRA accounts combined. For high earners or business owners who want to contribute more, a Solo 401(k) may be worth exploring. But for most SDIRA account holders, staying on top of the basics—limits, deadlines, and documentation—can go a long way in preserving tax advantages and maximizing retirement savings.
Required Minimum Distributions (RMDs) apply to Self-Directed Traditional IRAs and begin based on the account holder’s birth year. For most investors, the required age is either 73 (for those born 1951–1959) or 75 (for those born in 1960 or later). Your first RMD must be taken by April 1 of the year after you reach your RMD age, and each year after that by December 31.
Since RMDs must be taken in cash, investors may need to plan ahead to sell an asset, receive sufficient income, or shift their portfolio to meet withdrawal requirements. Self-Directed Roth IRAs are not subject to RMDs.
While Self-Directed IRAs are generally tax-advantaged vehicles, certain types of investments may generate taxable income within the account. Two common triggers are Unrelated Business Income Tax (UBIT) and Unrelated Debt-Financed Income (UDFI).
UBIT applies when an SDIRA earns income from a business activity that is not considered passive. For example, if your IRA owns a share of an active restaurant or manufacturing company—rather than simply holding shares of stock—it could trigger UBIT. The income is considered "unrelated" because it's not tied to passive investments like dividends or rent.
UDFI comes into play when your SDIRA uses non-recourse financing (which is required under IRS rules) to purchase an asset like real estate. The portion of income attributable to the financed amount is subject to tax—even though the rest of the investment may remain tax-deferred or tax-free.
These taxes are reported using Form 990-T, and payment must come directly from the IRA. Understanding how UBIT and UDFI work—and how to structure investments to potentially reduce exposure—can help you preserve more growth of your retirement funds.
The IRS prohibits SDIRA account holders from engaging in certain transactions that result in personal benefit or involve specific people or entities, known as disqualified persons. This includes your spouse, parents, children, and any businesses they own or control. These rules are in place to protect the tax-advantaged status of your account and prevent self-dealing.
Common prohibited transactions include using SDIRA funds to purchase a property you plan to live in, paying yourself to manage an IRA-owned asset, or hiring a disqualified family member to work on an IRA-owned business. It’s important to keep your SDIRA investments completely separate from your personal finances and always transact at arm’s length. That said, upgrading your Self-Directed IRA to a Checkbook IRA can enable you to manage everyday investment transactions through a dedicated checking account rather than going through your Self-Directed IRA custodian to process paperwork.
The IRS requires that SDIRA custodians report the fair market value (FMV) of each account annually, which includes all assets held within the IRA. For liquid assets like stocks or mutual funds, this tends to be more straightforward. But for alternative assets—such as private company shares or real estate—a proper third-party valuation may be needed.
Accurate valuations become especially important when taking RMDs, reporting Roth conversions, or distributing assets out of the IRA. If you hold hard-to-value assets, it’s usually helpful to plan ahead. Most custodians set deadlines each year for FMV submissions to meet IRS reporting requirements (typically for Form 5498). You may need to work with a qualified appraiser, CPA, or valuation firm to assess your asset’s worth. The goal isn’t just compliance—it’s having a clear picture of your portfolio as you plan for the future.
A Roth conversion allows you to move assets from a Self-Directed Traditional IRA to a Self-Directed Roth IRA, paying taxes on the converted amount now in exchange for potential tax-free withdrawals later. This can be a useful strategy if you expect your tax rate to rise in the future or want to reduce future RMD obligations.
However, because you’re paying taxes upfront, it’s important to consider timing, asset value, and liquidity. Converting when asset values are lower may reduce the tax hit, while converting illiquid assets like real estate or private equity may require a valuation and additional planning. Once converted, Roth assets must remain in the account for at least five years before qualifying for tax-free withdrawal of earnings.
With greater control comes the need for more diligence. While your custodian handles certain IRS forms—like Form 5498 for annual valuations and Form 1099-R for distributions—you're ultimately responsible for ensuring the accuracy of your account activity and documentation. That includes:
For SDIRA holders using checkbook control through an IRA LLC or IRA Trust, these responsibilities can increase. You’ll maintain a dedicated checking account, manage all transactions through the entity, and avoid any commingling of personal and retirement funds. A trusted financial professional can help you monitor performance, prepare for distributions, and act on strategic investment decisions over time.
The more proactive you are about understanding SDIRA tax considerations, the better positioned you'll be to protect your account’s tax-advantaged status and capture the full potential of your investments. And the more clarity you have, the more confidently you can structure a retirement strategy that reflects your goals and interests. If you're ready to gain greater control of your retirement with the right support and education, Broad Financial is here to help. Call us today to learn more about opening a Self-Directed IRA or Checkbook IRA.
Address:
One Paragon Drive
Suite 270
Montvale, NJ 07645
Phone: (800) 395-5200
Mondays – Thursdays: 8:00 am – 5:00 pm EST
Fridays – 10:00 am – 4:00 pm EST
