Self-Directed IRA (SDIRA) Rules You Need to Know
A Self-Directed IRA (SDIRA) can provide you with unique benefits to maximize your retirement. At SouthStar Bank, you can utilize your SDIRA to invest in options beyond stocks and bonds, including real estate, private equity, tax liens, and private loans. While there are numerous benefits to using an SDIRA, the IRS enforces strict regulations to protect your retirement savings and maintain your account’s tax advantages.
In this guide, we’ll cover the most important Self-Directed IRA rules you need to know to avoid penalties and maximize your retirement benefits.
What Is a Self-Directed IRA?
A Self-Directed IRA is an individual retirement account that allows investors to diversify their portfolios with alternative assets. Unlike traditional IRAs, which limit investments to stocks, bonds, and mutual funds, SDIRAs offer a broader range of investment options, including real estate, precious metals, private loans, and other alternatives.
Top Self-Directed IRA Rules You Must Follow
1. Account Holders Must use an IRS-approved Custodian or Trustee
Every Self-Directed IRA must be held by a qualified IRA custodian or trustee. SouthStar Bank offers custodial services to customers for their SDIRAs that have Checkbook Control-style accounts1. This structure allows you to invest in alternative assets beyond conventional options and provides easier access to your funds compared to traditional IRAs.
2. Account Holders Must Avoid Prohibited Transactions and Disqualified Persons
The IRS prohibits certain transactions, known as prohibited transactions, involving disqualified individuals. Disqualified individuals include the IRA owner, spouse, ancestors, descendants, and controlled entities. Examples of prohibited transactions are:
- Buying property from yourself or a family member
- Using IRA-owned property for personal use
- Lending money to yourself or related parties
Violating these rules can trigger taxes and penalties, disqualifying your IRA’s tax benefits.
3. No Self-Dealing
Self-dealing occurs when you personally benefit from your SDIRA investments outside the account. For example, living in or using real estate owned by your IRA is strictly forbidden. All income and expenses must flow through the IRA to preserve its tax-advantaged status.
4. Know What You Can and Cannot Invest In
While SDIRAs allow many alternative investments, certain assets are banned by the IRS, including:
- Collectibles like art, antiques, and most coins (except specific precious metals)
- Life insurance policies
Always verify investment eligibility with your custodian before proceeding.
5. Required Minimum Distributions (RMDs) Apply
If you have a traditional SDIRA, you must start taking required minimum distributions (RMDs) by age 73 (as of 2023). It’s important to note that Roth SDIRAs do not require RMDs during the owner’s lifetime.
6. Be Aware of UBTI and UDFI Tax Rules
Investments generating Unrelated Business Taxable Income (UBTI) or Unrelated Debt-Financed Income (UDFI) can incur additional taxes. For example, using leverage (non-recourse loans) to buy real estate or investing in an active business may trigger these taxes, which reduce your overall returns.
In Conclusion
Understanding the rules of a Self-Directed IRA is crucial to legally maximizing your retirement account’s growth and avoiding costly penalties. From working with an experienced custodian to steering clear of prohibited transactions, knowledge is your best defense.
Ready to diversify your retirement portfolio with alternative assets? Contact your SouthStar Bank IRA experts at ira@southstarbank.com or 512.384.3948, and they’ll be happy to answer any questions!
1SouthStar Bank S.S.B. is an independent passive Custodian and is not associated or affiliated with and does not recommend, promote or advise any specific investment, investment opportunity, investment sponsor, investment company or investment promoter or any agents, employees, representatives or other of such firms or entities. Investments are not insured, have no guarantee, and may lose value. SouthStar Bank S.S.B. customers have FDIC bank deposit insurance for non-invested cash deposited into their Custodian Checkbook IRA account up to the standard insurance amount of $250,000 per depositor, per insured bank, for each account ownership category. The Bank follows the FDIC Insurance guidelines for custodians as outlined HERE.
