IRA Alternative Investments: Rules, UBIT, and Custodians

IRA alternative investments are non-traditional assets — real estate, precious metals, private equity, cryptocurrency, tax liens, and private lending among them — that federal law allows an individual retirement account to hold instead of, or alongside, stocks and mutual funds. The Internal Revenue Code takes a negative approach: it names what you cannot hold and treats everything else as permitted. To use that flexibility, you need a self-directed custodian, careful compliance with the prohibited transaction rules, and a realistic view of the taxes and costs that come with owning illiquid assets inside a retirement account. For 2026, the annual IRA contribution limit is $7,500, with an additional $1,100 catch-up contribution for investors age 50 and older.¹

What You Can Hold

Physical real estate is the most common alternative. An IRA can buy residential rentals, commercial buildings, or raw land, but only as an investment. You cannot live in the property, vacation there, or let family members use it. The IRA collects rent, pays expenses, and holds title in the custodian’s name.

Private equity and private placements also qualify. Your IRA can purchase LLC membership interests, invest in a startup through a subscription agreement, or buy into a private fund. That lets retirement capital flow into businesses that never trade publicly.

Cryptocurrency is treated as property by the IRS, so it can be bought and held inside an IRA like any other asset.² Specialized custodians use digital wallets to hold the coins on behalf of the account.

Tax lien certificates purchased at county auctions produce returns through interest or eventual property redemption. Your IRA can also act as a lender, funding private notes that generate interest income for the account.

Precious Metals

Precious metals are allowed, but only in specific forms. The tax code classifies metals and gems as “collectibles,” and buying a collectible with IRA funds triggers an immediate deemed distribution equal to the purchase price. The retirement-account exception covers American Eagle gold and silver coins, platinum coins minted by the U.S. Mint, state-issued coins, and bullion bars that meet the minimum fineness standards required by regulated commodity exchanges.³ In practice, those standards require gold to be at least .995 fine, silver .999 fine, and platinum or palladium .9995 fine.

Qualifying bullion must be in the physical possession of an IRA trustee. You cannot store gold bars in a home safe or a personal bank vault. The metals ship directly from the dealer to an approved depository. Taking personal possession converts the metal into a distribution.

What You Can’t Hold, and Who You Can’t Deal With

Two categories are flatly banned. Life insurance contracts cannot be held in an IRA under any circumstances. Collectibles — artwork, rugs, antiques, stamps, coins that do not meet the exceptions above, alcoholic beverages, and gems — are also off-limits. Buying a collectible with IRA funds is treated as if you withdrew the cash, triggering income tax on the amount.³

Disqualified Persons

Federal law also prohibits certain transactions between your IRA and people connected to you. These “disqualified persons” include you, your spouse, your ancestors (parents and grandparents), your lineal descendants (children, grandchildren, and beyond), and the spouses of those descendants. The category extends to fiduciaries, service providers, and entities where disqualified persons hold 50% or more ownership.⁴

Your IRA cannot buy property from a disqualified person, sell property to one, lend money to one, or provide goods and services to one. Even indirect benefits count. If your IRA owns a rental and you let your adult child stay there rent-free for a weekend, that is a prohibited transaction.

Personal Use

The IRS specifically flags buying property for personal use, present or future, as a prohibited transaction. Other examples include borrowing money from your IRA, selling property to it, and using it as security for a loan.⁵ Most self-directed IRA problems start here, not with obscure technicalities, but with an owner who treats IRA property as their own.

What Happens If You Break the Rules

Two consequences run in parallel, and the second is much worse than the first.

The excise tax track imposes a 15% tax on any disqualified person who participates in a prohibited transaction, calculated on the amount involved for each year the violation remains uncorrected. If the transaction is not corrected within the taxable period, the penalty jumps to 100% of the amount involved.⁴ Correcting means undoing the transaction as much as possible without putting the account in a worse position than if the violation had never occurred.⁶

The second track is the account-killer. When an IRA owner or beneficiary engages in a prohibited transaction, the account ceases to be an IRA as of the first day of that tax year. The entire balance is treated as if it were distributed to you on that date, valued at fair market value.³ That means ordinary income tax on everything in the account, plus a 10% early withdrawal penalty if you are under age 59½.⁷ A single weekend spent in an IRA-owned condo can wipe out years of tax-deferred growth.

Taxes Inside the Account: UBIT and UDFI

Most people assume IRA earnings are tax-free until withdrawal. That holds for stock dividends and bond interest. It does not always hold for alternatives.

Unrelated Business Income Tax

If your IRA earns income from an active trade or business rather than passive investment returns, that income may be subject to unrelated business income tax. The common trigger is an IRA that owns an interest in a pass-through entity, like an LLC or partnership, that operates a business rather than simply holding investments. When gross unrelated business income exceeds $1,000 in a year, your IRA must file IRS Form 990-T and pay tax on the net income.⁸ The tax is paid from IRA funds, not your personal accounts.

Unrelated Debt-Financed Income

When your IRA uses borrowed money to buy an asset, most commonly real estate purchased with a mortgage, a portion of the income is considered debt-financed and taxable. The taxable share is proportional to the debt: if 60% of a property’s value was borrowed, roughly 60% of the rental income is taxable as unrelated debt-financed income.⁹ The same proportional rule applies to capital gains when the property is sold.

Any loan your IRA takes must be non-recourse, meaning the lender’s only remedy for default is seizing the property itself. If you personally guarantee the loan, you have created a prohibited transaction by extending your personal credit on behalf of the IRA.

The Self-Directed Custodian

Every IRA must have a qualified custodian: a bank, trust company, or other entity approved by the IRS to hold retirement account assets. Standard brokerages handle stocks and bonds. Self-directed custodians specialize in the administrative work needed for alternative holdings. They do not give investment advice or judge whether an investment is smart. Their job is compliance and recordkeeping.

Core responsibilities include ensuring every asset is legally titled in the IRA’s name rather than yours, processing transactions based on your signed instructions, and filing IRS Form 5498 annually to report contributions and the fair market value of all assets.¹⁰ The proper titling format is the custodian’s name “for the benefit of” (FBO) you, such as “ABC Trust Co. FBO Jane Smith IRA.” That separation is what keeps the account a distinct tax entity rather than your personal property.

Throughout every transaction, money moves from custodian to investment. It never runs through your personal bank account. Touching the funds personally, even briefly, can create a taxable distribution.

Fees

Self-directed custodians charge more than standard brokerages, and models vary. Some charge a flat annual fee regardless of account size; others charge a percentage of assets under custody. Setup fees for a new account typically run $50 to $300, with annual maintenance fees ranging from roughly $200 to over $2,000 depending on the custodian and the number of assets held. Transaction fees for processing purchases, wire transfers, and earnest money deposits add up separately. Compare total annual cost for the type and number of assets you plan to hold. An asset-based model can become very expensive if your investments appreciate.

Annual Valuation Requirements

Alternative investments do not have a ticker symbol updating every second. Your custodian still has to report the fair market value of every asset annually on Form 5498, and that value must come from a legitimate appraisal, not your estimate of what a property or private business interest is worth.¹¹

For real estate, that means a licensed appraiser every year. For private company interests, you may need a business valuation professional. The IRS requires plan assets to be valued at fair market value, not original cost, to prevent problems with contribution limits, prohibited transactions, and distribution calculations.¹¹ Undervaluing an asset creates risk on several fronts: excess contributions going undetected, understated required minimum distributions, and IRS scrutiny. These recurring appraisal costs are an ongoing expense that many investors overlook when they calculate expected returns.

Getting Money Out

Pulling alternative assets out of an IRA is harder than getting them in, and this is the part that surprises people the most. When you reach the age for required minimum distributions, the IRS does not care that your account holds a rental property instead of mutual fund shares. The distribution deadline still applies.

If the IRA does not hold enough cash to satisfy the required distribution, you have two options: sell an asset to raise cash, or take an “in-kind” distribution of the asset itself. An in-kind distribution means the custodian retitles the property from the IRA into your personal name. For a traditional IRA, this is a taxable event, and you need a professional appraisal to establish the fair market value being distributed. The custodian reports the distribution on IRS Form 1099-R.¹⁰

The practical problem is timing. Real estate appraisals take weeks, and selling a property can take months. If you approach a required distribution deadline with an illiquid portfolio and no cash cushion, you face the real possibility of missing the deadline and triggering the 25% excise tax on the shortfall. Experienced self-directed investors keep enough liquid assets in the account to cover at least a year or two of required distributions, so they are never forced to sell an illiquid asset under time pressure.

Checkbook Control IRA LLC

Some investors set up a “checkbook control” structure to speed up transactions and reduce custodian involvement in day-to-day decisions. The setup is straightforward: your self-directed IRA forms an LLC, the IRA owns 100% of the LLC, and you serve as the LLC’s manager. Because you manage the LLC, you can write checks and sign contracts from its bank account without waiting for custodian approval on each transaction.

The structure is legal but carries real compliance risk. You cannot receive any compensation for managing the LLC. The IRS considers any IRA fiduciary who is paid for managing account assets to be engaging in a prohibited transaction.⁵ Every prohibited transaction rule still applies. You just have fewer guardrails, because the custodian is no longer reviewing each investment before funds move. Some custodians require you to appoint an independent advisor, typically an attorney or CPA, when acting as the LLC manager, precisely because the compliance burden shifts to you.

Setting up a checkbook IRA LLC involves forming the LLC in a state of your choosing, drafting an operating agreement with language your custodian requires, obtaining a federal employer identification number, and opening a bank account in the LLC’s name funded by a transfer from your IRA. State filing fees vary widely, and most states charge annual maintenance or franchise fees on top of formation costs. Factor in attorney fees for the operating agreement, since the document has to reflect IRA-specific requirements that boilerplate templates miss.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
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Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions
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Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
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Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
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Internal Revenue Service. Retirement Topics – Prohibited Transactions
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Internal Revenue Service. Retirement Topics – Tax on Prohibited Transactions
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Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
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Internal Revenue Service. Instructions for Form 990-T
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Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income
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Internal Revenue Service. Form 5498 – IRA Contribution Information
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Internal Revenue Service. Valuation of Plan Assets at Fair Market Value