Five Questions That Cover Almost Every Rule
Most explanations of self-directed IRA rules read like a legal textbook: a long list of prohibitions with no obvious order. After two decades of fielding questions about this, I’ve found a more useful way in. Nearly every rule question I get boils down to one of five practical questions an investor is actually asking in the moment.
So then, let’s organize the rules around those five questions instead of a flat list. I’m Dan Anderson, and this is the version of this topic I’d want if I were learning it for the first time.
Key Takeaways
- Almost every SDIRA rule question fits into one of five categories: who you can transact with, what you can invest in, where the money flows, how much you can contribute, and when you must take distributions.
- The IRS defines very few disallowed assets directly. Most restrictions come from the prohibited transaction rules, not a list of banned investments.
- Violating the rules around disqualified persons risks the entire account’s tax-advantaged status, not just the specific transaction involved.
- Leverage and active business income can trigger taxes even inside a tax-advantaged account.
Question 1: Who Can My IRA Transact With?
This is the rule that causes the most expensive mistakes. Your IRA cannot transact, directly or indirectly, with a “disqualified person.” That category includes you, your spouse, your parents and grandparents, your children and grandchildren, and their spouses. It also includes any fiduciary of the account and anyone providing paid investment advice to it.
Notably absent from that list: siblings, aunts, uncles, cousins, and friends. They’re not disqualified persons under IRC §4975, though any deal should still make sense on its own financial merits regardless of who’s involved.
In practice, this rule means you can’t buy a property from your IRA or sell one to it, can’t personally use an IRA-owned asset even briefly, can’t lend yourself IRA money, and can’t perform labor on an IRA-owned property yourself, even unpaid and even for a tiny repair.
Why This Rule Carries More Weight Than the Others
Most rule violations create a tax bill. This one can end the IRA entirely. If the IRA owner or beneficiary is the disqualified person involved, the account is generally treated as fully distributed as of January 1 of that year, triggering immediate taxation on the full balance. That’s a meaningfully different consequence than the rules below, which is why it deserves to be understood first and most carefully.
Question 2: What Can My IRA Actually Invest In?
Here’s something that surprises most new investors: the tax code doesn’t list approved investments. It lists a short set of exclusions, and everything else is permitted by default.
- Life insurance contracts cannot be held in an IRA
- Most collectibles are prohibited, including artwork, antiques, rugs, gems, stamps, and most coins
- S-corporation stock can’t be held, since IRAs aren’t eligible shareholders under S-corp rules
Certain gold, silver, platinum, and palladium coins and bullion are specifically carved out as exceptions to the collectibles rule, provided they meet IRS purity standards and are held by an approved depository rather than personally by the account owner. Beyond these exclusions, real estate, private company stock, private lending, tax liens, and cryptocurrency are all permitted, assuming your custodian supports the asset type and the transaction itself doesn’t violate the disqualified person rules above.
Question 3: Where Does the Money Actually Flow?
This is less a single rule than a discipline that underlies everything else. Every dollar connected to an IRA-owned asset, including rental income, dividends, and sale proceeds, has to land inside the IRA itself, never in your personal account. Every expense connected to that asset, such as repairs, taxes, and insurance, has to be paid from IRA funds, never out of your own pocket.
This is where well-intentioned investors most often slip up, often paying a small expense personally because it’s faster than requesting funds through the custodian. Even a modest personal payment toward an IRA-owned asset’s expenses can be treated as a prohibited transaction, regardless of how small the payment or how good the intention behind it was.
Question 4: How Much Can I Put In, and How?
Contribution rules for a self-directed IRA are identical to those for any other IRA. We update our contribution limits page on our website each year when the amounts are released. Just remember that the limit applies to the combined total across all your Traditional and Roth IRAs, not to each account. Contributions must be made in cash, deposited into your IRA’s cash balance first, and recorded by your custodian before being directed into any specific investment. You can’t contribute an asset directly into the IRA in place of cash.
Rollovers and transfers from other retirement accounts don’t count against this annual contribution limit, which is why many investors fund a meaningful self-directed IRA primarily through a rollover rather than relying solely on annual contributions.
Question 5: When Do I Have to Start Taking Money Out?
Traditional self-directed IRAs require required minimum distributions (“RMDs”). The starting age for an RMD is a bit of a moving target depending on your birth year: Born in 1950 or earlier: Age 701/2 or 72; Born 1951 to 1959: Age 73; Born 1960 or later: Age 75.
Because the contributions were made after-tax, Roth self-directed IRAs never require RMDs for the original account owner.
This rule interacts with illiquid assets in a way that catches people off guard. An RMD doesn’t pause because your IRA happens to hold a piece of real estate that’s hard to sell quickly. If a large share of your account sits in an illiquid asset as you approach RMD age, that’s worth planning around well in advance, not discovering the year a distribution is due.
Two Tax Wrinkles That Live Inside an Otherwise Tax-Advantaged Account
A self-directed IRA’s tax-advantaged growth has two narrow exceptions worth knowing, even though most investors never encounter either one.
1. Unrelated Business Income Tax (UBIT)
If your IRA invests in an active trade or business through a pass-through entity like an LLC or partnership, the income generated can be subject to UBIT, taxed at compressed trust rates rather than treated as ordinary tax-deferred IRA income.
2. Unrelated Debt-Financed Income (UDFI)
If your IRA uses a loan to purchase an asset like real estate, the percentage of income tied to that borrowed portion can be subject to UDFI, a close relative of UBIT. This applies to both ongoing income and the eventual gain when the asset sells.
Neither tax makes leverage or active business investment a bad idea. Both simply mean the math needs to account for a tax line a typical stock or fund investment inside an IRA would never generate.
A Practical Gut-Check Before Any Transaction
- Does this involve me, my spouse, or a close family member personally benefiting in any way? If yes, stop and reconsider entirely.
- Is the asset type clearly outside the narrow list of exclusions (life insurance, most collectibles, S-corp stock)?
- Will every dollar in and out flow directly through the IRA, with nothing touching my personal accounts?
- Does this transaction involve borrowed money or an active business that could trigger UBIT or UDFI?
- Am I within my annual contribution limit, and have I planned for RMDs if I’m approaching that age?
Where IRA Express Fits In
At IRA Express, we handle the administration and recordkeeping that keeps your account compliant with these rules day to day. We can’t tell you whether a specific investment is wise, but we can flag when a transaction’s structure raises a compliance question before it becomes a problem.
If anything here is unclear for your specific situation, please contact me, Dan Anderson, directly. I personally respond to calls and inquiries, and a short conversation before a transaction is far cheaper than untangling one afterward.
You can also review our Self-Directed Plan Types page, or see the full menu of supported assets on our Investment Options page.
Frequently Asked Questions
Is there an official list of approved self-directed IRA investments?
No. The IRS defines a short list of exclusions (life insurance, most collectibles, S-corp stock), and everything outside that list is permitted by default, assuming your custodian supports it and the transaction doesn’t violate the disqualified person rules.
Can my IRA do business with my brother or sister?
Generally yes. Siblings aren’t disqualified persons under the prohibited transaction rules, unlike spouses, parents, and children.
What’s the single most common rule violation you see?
Paying a small personal expense, like a minor repair, out of pocket for an IRA-owned asset rather than routing it through the custodian. It’s almost always unintentional, and it’s almost always avoidable with a habit of keeping personal and IRA funds completely separate.
Do these rules differ between a Traditional and Roth self-directed IRA?
No. The prohibited transaction, disqualified person, and permitted-asset rules apply identically regardless of account type. Only RMD timing and contribution deductibility differ.
Can I personally guarantee a loan made to my IRA?
No. The IRS treats a personal guarantee on an IRA-related loan as an indirect extension of credit between you and the IRA, which is a prohibited transaction.
The Bottom Line
Self-directed IRA rules feel overwhelming as a flat list. Organized around the five practical questions above: who you can transact with, what you can hold, where the money flows, how much you can contribute, and when distributions begin, they’re genuinely manageable. Most investors who run into trouble didn’t lack the intelligence to follow the rules. They simply never had them organized in a way that matched how decisions actually get made.
Remember, you’re welcome to contact me directly if you’d like to talk through how these rules apply to a specific situation you’re considering. I’d welcome your call!
Sources: Internal Revenue Code §4975 and §408 (Cornell Legal Information Institute); Internal Revenue Service, Retirement Topics – Prohibited Transactions and Retirement Topics – IRA Contribution Limits.