Self-Directed IRA Rules & Regulations
Investing in alternative assets with a self-directed IRA offers a lot of flexibility. The IRS has self-directed IRA rules and regulations that limit certain holdings and transactions, as well as persons with whom your IRA can transact. You should also be aware of account contribution guidelines, ways you can fund your retirement account, and applicable taxes under certain circumstances.
Review the information below to ensure you do not violate any of the self-directed IRA rules and risk the tax-advantaged status of your self-directed retirement account. For example, IRA owners cannot vacation in homes owned by their IRAs. Also, if you have leveraged an investment purchase using a non-recourse loan, you should understand the unrelated business income tax (UBIT) tax that may apply. If you have any questions, please contact Advanta IRA.
Prohibited Transactions
Per the IRS, there are two types of restrictions with self-directed IRA— prohibited investments and prohibited transactions with disqualified persons.
Contributions
You can make annual cash contributions to your account, but the IRS has put some limits on the amount you can contribute depending upon the type of account.
Transfers & Rollovers
If you have an existing retirement account, you can rollover or transfer funds from that plan to a self-directed plan.
UBIT & UDFI
There are circumstances where unrelated business income tax and unrelated debt-financed income tax apply to alternative investments in IRAs.
Fair Market Value
The IRS requires all IRA owners to report the fair market value (FMV) of assets held in their account(s) at the end of each year.
Understanding IRS Rules & Regulations
Prohibited Transactions
Explore our prohibited transactions section to discover in-depth information and examples of transactions you and your IRA must avoid to comply with IRS regulations.
You will learn:
- which investments are not allowed in your self-directed plan
- who disqualified persons are relevant to dealings with your IRA
- the punishment the IRS doles out for people and IRAs who don’t comply
Contributions
Our contributions section defines annual contribution limits for IRAs, 401(k)s, ESAs, and HSAs. You can contribute as little as you want to each of these accounts. But you must not exceed contribution limits or your account may be subject to stiff penalties.
Transfers & Rollovers
There are several ways you can fund your self-directed IRA or solo 401(k) if you have an existing retirement account. This section explains transfers and rollovers, the differences between the two, and the rules you must adhere to when you use either method to move funds into a new account.
UBIT & UDFI
Even though the earnings in your IRA grow on a tax-free (Roth IRA) or tax-deferred (traditional, SEP, and SIMPLE IRAs) basis, there are ways your account can incur a tax liability. Unrelated business income tax (UBIT) may be owed in two circumstances:
- When your IRA receives unrelated business taxable income (UBTI) if it owns a business that is not taxed as a C corporation
- If your IRA earns unrelated debt-financed income (UDFI) from assets that were purchased with additional financing outside the account
These transactions and investment strategies can be complex. We encourage you to review our section on UBIT and UDFI to understand how it works and how you can avoid some circumstances of UBIT by using a different type of retirement plan.
Fair Market Valuations
One of your responsibilities as a retirement plan owner is to provide the IRS with fair market valuations (FMVs) of the investments your plan holds. The IRS requires these values be assessed as of December 31st of the tax reporting year. Read our Fair Market Value page for detailed answers to FAQs, and short videos that explain how FMVs work for specific investments.
