By Harry Prabandham · Updated September 27, 2026
Investing & Markets
Self-Directed IRAs: Rules, Risks, and Prohibited Transactions
A self-directed IRA can hold assets like real estate or private stock, but prohibited-transaction rules, UBTI, fees, and fraud risk come with it.
Self-Directed IRAs: Rules, Risks, and Prohibited Transactions
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What is a self-directed IRA?
- It is a traditional or Roth IRA held at a custodian that allows assets most brokerages won't hold, such as real estate, private stock, or notes.
- The tax rules match any other IRA; only the menu of permitted investments changes.
- The custodian holds assets and handles reporting but generally does not check whether an investment is sound or legitimate.
- Funding follows normal IRA rules: for 2026, contributions are capped at $7,500, or $8,600 at age 50 and older, plus rollovers.
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Full Guide
What is a self-directed IRA?
- It is a traditional or Roth IRA held at a custodian that allows assets most brokerages won't hold, such as real estate, private stock, or notes.
- The tax rules match any other IRA; only the menu of permitted investments changes.
- The custodian holds assets and handles reporting but generally does not check whether an investment is sound or legitimate.
- Funding follows normal IRA rules: for 2026, contributions are capped at $7,500, or $8,600 at age 50 and older, plus rollovers.
What can't an IRA own?
- Life insurance contracts.
- Collectibles such as art, antiques, gems, stamps, and most coins, except certain U.S. coins and bullion meeting fineness standards.
- S-corporation stock in practice, because an IRA is not an eligible S-corp shareholder and could end the company's S election.
- Any asset whose purchase or management would require a prohibited transaction.
Who counts as a disqualified person?
- You, your spouse, your parents and grandparents, your children and grandchildren, and their spouses.
- Fiduciaries and service providers to the IRA, and entities that disqualified persons own 50% or more of.
- Officers, directors, 10% owners, and highly compensated employees of those related entities.
- Siblings, aunts, uncles, and cousins are not family disqualified persons, though deals with them still deserve care.
What counts as a prohibited transaction?
- Buying, selling, or leasing property between the IRA and a disqualified person, such as selling your rental home to your IRA.
- Lending money between them, including personally backing a loan made to your IRA.
- Using IRA assets for personal benefit, like staying in an IRA-owned vacation property.
- If the owner engages in a prohibited transaction, the account stops being an IRA as of January 1 of that year and is treated as fully distributed.
- That deemed distribution is taxable, and a 10% additional tax may apply if you are under 59½.
Taxes and costs inside the IRA
- Income from an operating business held through a pass-through, or from debt-financed property, can be unrelated business taxable income.
- UBTI above $1,000 a year requires a Form 990-T, with the tax paid by the IRA at trust rates.
- Setup, annual, and per-transaction custodian fees are typically higher than at a brokerage IRA.
- Illiquid assets need annual valuations and can be hard to sell when required distributions come due.
Fraud risk
- The SEC and state regulators have warned that fraudsters favor self-directed IRAs because custodians generally don't vet investment merits.
- Warning signs include promised high returns, pressure to move retirement money quickly, and unregistered offerings.
- Private stock of your own employer can be held, but valuation and disqualified-person issues need review if you control or run the company.
Key takeaways
- A self-directed IRA widens investment choices but does not change IRA tax rules.
- One prohibited transaction can disqualify the whole IRA, not just the investment involved.
- UBTI, higher fees, illiquidity, and fraud risk are part of the cost.
- Review any structure with a CPA or ERISA attorney; Rubric does not give legal advice.
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