Most investors assume their IRA is stuck holding mutual funds and index positions. It isn’t. You can hold private real estate, a syndication, a private credit fund, or a note deal inside an IRA, and the vehicle that lets you do it is the self-directed IRA. For the right investor, putting retirement dollars into private markets this way can be powerful.
It also adds a second layer of rules, and those rules have nothing to do with whether the deal itself is any good. Break them and the damage lands on your entire retirement account, not just the one investment. So a self-directed IRA really gives you two jobs: get the deal right, and get the IRA structure around it right.
What a Self-Directed IRA Is
A self-directed IRA is just a regular IRA, traditional or Roth, held by a custodian willing to hold alternative assets rather than limiting you to publicly traded stocks, bonds, and funds. The tax treatment is identical to any other IRA. “Self-directed” only describes the wider menu of what you’re permitted to own.
Some investors go a step further with a “checkbook” structure, where the IRA owns an LLC and the investor runs that LLC’s account directly. That buys you control. It also opens up more ways to step on a landmine, which is exactly why the rules below matter even more once you’re in that setup.
What You Can and Can’t Hold
The range is wide: private real estate, syndications and funds, private debt and notes, private company equity, and plenty more. But the tax code flatly prohibits a handful of things in any IRA. The big ones are collectibles — art, most coins, and the like — and life insurance. Holding an interest in certain entities, such as an S corporation, creates problems of its own. Confirm an investment is permissible before you direct your custodian to fund it.
The Three Issues That Actually Cause Problems
For alternative assets, nearly all the trouble traces back to three rules.
1. Prohibited transactions. The tax code bars your IRA from transacting with “disqualified persons” — you, your spouse, certain family members, and entities you control — and from being used for your personal benefit. A single prohibited transaction can disqualify the entire IRA, with severe tax consequences. This is the big one, and it has its own article: Prohibited Transactions: How to Disqualify Your IRA Without Meaning To.
2. UBTI and UDFI. A tax-deferred IRA can actually owe tax now. When an IRA invests in an operating business through a pass-through entity, or in real estate carrying a mortgage, part of the income can become taxable to the IRA itself. Most real estate syndications use leverage, so this comes up far more often than investors expect — see UBTI and UDFI: The Tax Surprise in IRA Real Estate Deals.
3. Custody, valuation, and distributions. Your custodian has to hold the asset and report its value, and that’s a harder job for an illiquid private interest than for a public stock. The account is also still an IRA. Traditional IRAs require minimum distributions (RMDs) beginning at age 73 under current law (rising to 75 in 2033), which gets awkward when your capital is locked in a deal you can’t sell. Roth IRAs have no lifetime RMDs. Illiquidity and RMD timing can collide.
Why the Deal Review and the IRA Review Are Separate Jobs
A deal can be excellent on its own merits and still be a mistake inside your IRA, because of how it’s leveraged, how the entity is built, or your relationship to the sponsor. And the cleanest IRA setup in the world won’t rescue a bad deal.
That’s why these are genuinely two questions. A legal review of the offering documents tells you what you’re agreeing to and where the legal red flags sit. A qualified tax professional advises on the IRA-specific consequences for your situation. Before you commit retirement money to a private deal, you want both.
Frequently Asked Questions
Can my IRA invest in a real estate syndication or private fund?
Generally yes, if you use a self-directed IRA with a custodian that permits alternative assets, and the investment isn’t a prohibited type (like collectibles or life insurance). The deal must also avoid prohibited transactions and account for any UBTI/UDFI.
Does my IRA have to pay tax on a private investment?
It can. Income from an operating business held through a pass-through, or the debt-financed portion of leveraged real estate income, can be taxable to the IRA as UBTI/UDFI — even though IRAs are otherwise tax-deferred.
What happens if I break the rules?
A prohibited transaction can cause the entire IRA to be treated as distributed, triggering income tax and possibly a 10% early-distribution penalty. The stakes are much larger than the single investment, which is why upfront review matters.
Should I get advice before investing IRA money in a private deal?
Yes — and from two angles. A tax professional on the IRA consequences, and an attorney on the offering documents themselves. The cost of both is small next to the size of the account at risk.
Investor Diligence is a service of Waypoint Law PLLC, a Minnesota-based law firm serving investors nationwide. We provide legal advice, not tax or financial advice — IRA rules are complex and fact-specific, so consult a qualified tax professional about your situation. This article is for informational purposes only and is not legal, tax, or financial advice, and reading it does not create an attorney-client relationship.
Putting retirement money into a private deal? Get a legal review of your investment or schedule a discovery call.