The IRS rules for self-directed IRAs are the same rules that govern any Traditional or Roth IRA, plus a set of restrictions that matter far more when you pick your own investments: you must use a qualified custodian, you cannot transact with yourself or close family, certain assets are off-limits, and some income inside the account can still be taxed. Break the prohibited transaction rules and the entire account can lose its IRA status in a single tax year. For 2026, the contribution limit is $7,500, with a $1,100 catch-up for those 50 and older.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
You Must Use a Qualified Custodian
Every IRA has to be held by a qualified custodian or trustee. That means a federally insured bank, credit union, savings association, or another entity the IRS has specifically approved.2Office of the Law Revision Counsel. 26 USC 408 Individual Retirement Accounts You cannot hold the assets in your own name or stash them in a personal safe deposit box.
The custodian’s job is administrative. They hold the assets, process buy and sell orders, keep records, and file the tax forms: Form 5498 each year reporting contributions and the account’s fair market value,3Internal Revenue Service. About Form 5498, IRA Contribution Information and Form 1099-R for any distributions.4Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
What the custodian does not do is vet your investments, advise you, or warn you when a transaction is illegal. That’s your job. For non-publicly traded assets like real estate or a private company stake, the custodian still has to report a fair market value on December 31, and the IRS expects that number to come from the investment sponsor or a genuinely independent third party, not from you or anyone related to you.5Internal Revenue Service. Valuation of Plan Assets at Fair Market Value
Prohibited Transactions and Disqualified Persons
The most important rule for self-directed IRAs sits in Internal Revenue Code Section 4975. You cannot use the tax-sheltered funds in your IRA to benefit yourself, your family, or certain related parties today. The account has to operate at arm’s length from you and everyone close to you.6Office of the Law Revision Counsel. 26 USC 4975 Tax on Prohibited Transactions
Prohibited transactions include selling or buying property between the IRA and a disqualified person, lending money in either direction, and letting a disqualified person use or benefit from IRA assets. Your IRA cannot buy a rental property you currently own. You cannot live in or vacation at a property the IRA holds. Your IRA cannot lend you a down payment for your personal home.7Internal Revenue Service. Retirement Topics – Prohibited Transactions
Who Counts as a Disqualified Person
Section 4975(e)(2) and (6) defines the circle:
- You, the IRA owner
- Your spouse
- Your ancestors: parents, grandparents, and great-grandparents
- Your lineal descendants: children, grandchildren, and great-grandchildren, plus their spouses
- The IRA’s fiduciary, meaning the custodian or any advisor with discretionary control
- Any corporation, partnership, trust, or LLC in which you or another disqualified person holds 50% or more ownership
Siblings, aunts, uncles, and cousins are not disqualified persons.8Office of the Law Revision Counsel. 26 USC 4975 Tax on Prohibited Transactions – Section: Definitions Your IRA could, in principle, buy a rental from your brother. Even so, the IRS scrutinizes transactions that lack economic substance or look designed to route benefits indirectly, so any deal still has to be genuinely arm’s length and at fair market value.
Intent Does Not Matter
These rules operate on strict liability. There is no exception for accidents, good intentions, or small amounts. If your IRA owns a property and you store personal items in its garage, that’s a violation. The IRS does not weigh whether the benefit was trivial or the mistake honest.
No Personal Labor on IRA-Owned Property
This is where most self-directed IRA owners get in trouble, especially with real estate. You cannot perform maintenance, repairs, or improvements on property your IRA owns. No mowing, no fixing a faucet, no painting between tenants. The IRS treats your labor as an indirect benefit to the IRA, which counts as furnishing services between a plan and a disqualified person.7Internal Revenue Service. Retirement Topics – Prohibited Transactions
Every bit of work on IRA-owned property must be done by a paid, unrelated third party, and the IRA has to pay for it from its own funds. You cannot cover the repair bill out of your personal checking account, because paying for services on behalf of the IRA is itself an improper contribution of value. If you’re a contractor by trade and hoped to buy a fixer-upper through your IRA, this rule blocks the whole strategy.
What Your IRA Cannot Own
The tax code flatly bans two categories of investments from any IRA: life insurance contracts and collectibles.9Internal Revenue Service. Retirement Plan Investments FAQs
The collectibles ban is broad. It reaches artwork, rugs, antiques, gems, stamps, alcoholic beverages, most coins, and most metals.10Internal Revenue Service. Investments in Collectibles in Individually Directed Qualified Plan Accounts Any other tangible personal property the IRS classifies as a collectible falls under the ban too.
The Precious Metals Exception
The law carves out a narrow exception. Your IRA may hold American Gold Eagle, American Silver Eagle, and American Platinum Eagle coins, and any coin issued under the laws of a U.S. state. It may also hold gold, silver, platinum, or palladium bullion that meets the fineness standard required for delivery on a regulated futures contract, but only if the bullion is in the physical possession of the IRA trustee.11Office of the Law Revision Counsel. 26 USC 408 Individual Retirement Accounts – Section: Exception for Certain Coins and Bullion
That last condition is the one people miss. You cannot take delivery of IRA-held bullion and store it at home. Companies selling “home storage” gold IRAs are pitching a structure the IRS has not endorsed, and the Tax Court has ruled against IRA owners who tried it.
Your IRA Can Still Owe Federal Tax
One of the least understood traps in self-directed IRAs is that your tax-exempt account can owe income tax. Income from an active trade or business is subject to Unrelated Business Income Tax (UBIT). Income tied to borrowed money used to buy an asset is taxed as Unrelated Debt-Financed Income (UDFI).12Office of the Law Revision Counsel. 26 USC 514 Unrelated Debt-Financed Income
When UBIT Applies
The common trigger is running a business through your IRA. If your IRA owns an LLC that generates revenue from selling goods or services rather than from investment returns, that income is taxable. Certain partnership income that flows through to the IRA hits the same wall. Once the IRA’s gross unrelated business income reaches $1,000 for the year, the custodian must file Form 990-T and the IRA pays tax at trust income tax rates.13Internal Revenue Service. 2025 Instructions for Form 990-T Those rates compress fast: for 2026, trust income above $16,000 is taxed at 37%.
Debt-Financed Income
UDFI catches more self-directed IRA owners than UBIT does, because leveraged real estate is a popular SDIRA strategy. If your IRA takes out a mortgage to buy a rental property, the percentage of rental income and eventual sale proceeds tied to the borrowed portion is taxable. Put 50% down and finance the other 50%, and roughly half of the net rental income and half of any capital gain is subject to UBIT through the UDFI rules.
The taxable share shrinks as you pay down the mortgage. UDFI no longer applies once the debt has been fully paid off for at least 12 months. If your IRA pays off the loan and waits a full year before selling, the entire gain is sheltered again. That’s a planning window many investors overlook.
Contribution and Distribution Rules for 2026
A self-directed IRA follows every contribution and distribution rule that applies to a standard Traditional or Roth IRA. For 2026, the annual contribution limit is $7,500, up from $7,000 in 2025. The catch-up for those 50 and older is $1,100, up from $1,000, for a maximum of $8,600.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The limit applies to all your IRAs combined, not per account.
Tax treatment depends on the account type. Traditional contributions may be deductible, with distributions taxed as ordinary income later. Roth contributions are made with after-tax dollars, and qualified distributions come out tax-free.
Early Withdrawals and RMDs
Take a taxable distribution before age 59½ and you owe a 10% additional tax on top of regular income tax, unless you qualify for an exception such as disability, a first-time home purchase (up to $10,000), or substantially equal periodic payments.14Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
Owners of Traditional self-directed IRAs must begin Required Minimum Distributions at age 73. Under SECURE 2.0, the RMD age rises to 75 for people born in 1960 or later.15Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) Missing the deadline or taking less than required triggers a 25% excise tax on the shortfall, dropping to 10% if you correct it within two years. RMDs get tricky for SDIRAs holding illiquid assets like real estate, because you cannot always sell a property fast enough to fund the distribution. Plan for that liquidity well before you reach the triggering age.
What Happens If You Break the Rules
The consequences for a prohibited transaction in an IRA are harsher than most people expect, and there is no meaningful correction program. Qualified employer plans like 401(k)s can use the IRS’s Employee Plans Compliance Resolution System to fix mistakes and pay an excise tax. IRAs get no such option.
When the IRA owner or a disqualified person engages in a prohibited transaction, the account stops being an IRA as of January 1 of the year the violation occurred. The entire fair market value of the account on that date is treated as a taxable distribution to the owner.16Office of the Law Revision Counsel. 26 USC 408 Individual Retirement Accounts – Section: Loss of Exemption If the owner is under 59½, the 10% early distribution penalty also applies.17Internal Revenue Service. 18Office of the Law Revision Counsel. 26 USC 4975 Tax on Prohibited Transactions – Section: Special Rule for Individual Retirement Accounts Once a prohibited transaction happens inside an IRA, it is effectively uncorrectable.