Quick answer: A self-directed IRA (SDIRA) lets you invest retirement money in alternative assets — real estate, private loans, tax liens, promissory notes, private equity, and precious metals — not available in a standard brokerage IRA. All the same IRS rules and contribution limits apply ($7,000/year in 2024, $8,000 if 50+), but you control the investment choices through a qualified SDIRA custodian rather than a traditional broker.
What You Can (and Cannot) Hold in an SDIRA
The IRS defines what's prohibited — everything else is generally permitted:
- Allowed: rental real estate, raw land, mortgage notes, private company stock, tax lien certificates, gold and silver bullion, crowdfunded real estate, promissory loans to third parties
- Not allowed: life insurance contracts, collectibles (art, wine, rugs), S-corporation stock, and most coins (with some gold/silver exceptions)
- Prohibited transactions: you cannot buy property you already own, lend yourself money, or transact with "disqualified persons" (you, your spouse, parents, children, or anyone with 50%+ control over your business). Violating this triggers immediate distribution and penalties.
SDIRA for Texas Real Estate Investors
Texas real estate investors use SDIRAs to purchase rental properties, raw land, or participate in private real estate deals using tax-deferred or tax-free retirement dollars. Rental income and eventual sales proceeds flow back into the IRA tax-deferred (traditional) or tax-free (Roth). Over time, this can dramatically accelerate portfolio growth. Key requirement: all expenses must be paid by the IRA, and all income must return to the IRA — no personal use of the property or mingling of funds. Violations constitute prohibited transactions and trigger immediate penalties.
UBIT: The Tax Most SDIRA Investors Don't Expect
Unrelated Business Income Tax (UBIT) applies when an IRA earns income through debt-financed property or active business income. If your IRA buys a rental property with a mortgage (debt-financed), the portion of income attributable to the loan is subject to UBIT — currently taxed at trust rates (37% above $14,450 in 2024). This significantly reduces the tax benefit for leveraged real estate inside an IRA. Consult a CPA who specializes in SDIRA taxation before using leverage inside a retirement account.
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Kyle Ellison is a licensed financial professional in TX, CA, NV, MT, UT, NM helping families protect and pass on what they've built.