Self-Directed Roth IRA: Permitted Investments, Prohibited Transactions, UBIT

A self-directed Roth IRA, often called an SDIRA, is a Roth IRA whose custodian supports assets beyond the usual publicly traded stocks and funds. It is not a separate tax category. Normal Roth contribution, income-eligibility and withdrawal rules still apply, alongside restrictions on investments, dealings with related people, and custody. Some investment income can be taxable to the IRA itself.

What “self-directed” means

The term usually describes a custodian’s alternative-asset offering. It can also describe an ordinary brokerage account in which you choose the investments. Neither use creates an extra tax exemption or a larger contribution allowance.

The owner chooses the investment; the custodian provides custody and administration. Acceptance by a custodian is not an IRS approval of the asset, its promoter or its expected return. The SEC’s self-directed IRA investor alert warns about fraud, limited disclosures, illiquidity and fees, and explains that custodians generally do not investigate investment quality.

Ordinary Roth contributions are made with after-tax money and are not deductible. A qualified distribution requires the Roth five-tax-year period plus age 59½, death, disability, or an eligible first-time-homebuyer distribution subject to the $10,000 lifetime limit and its other conditions. In ordinary nonqualified withdrawals, regular contributions come out first, then conversions in order, then earnings. Earnings may be taxable; recently converted taxable amounts can face a separate five-year additional-tax rule, with exceptions. See IRS Publication 590-B (2025), Roth IRA distributions. Choosing alternative assets changes none of those rules.

What the account can hold

Real estate, private-company interests and private loans can be possible holdings. But “not a collectible” does not mean every purchase is lawful: ownership structure, related parties, personal benefit, custody and the custodian’s terms all matter.

Collectibles include art, rugs, antiques, metals, gems, stamps, coins and alcoholic beverages, subject to the statutory exceptions. A distribution deemed to occur on acquisition is equal to the asset’s cost. Its income-tax and additional-tax consequences depend on the applicable Roth rules; the cost is not automatically all taxable. The IRS also explains that amounts included in income on acquisition are not included again when the collectible is later distributed. See Publication 590-B, investments in collectibles.

S corporations: §1361 contains a narrow grandfather rule for certain bank or depository-holding-company shares already held by an IRA on October 22, 2004. It separately allows certain §401(a) qualified trusts exempt under §501(a) as shareholders. Acquisition by an ineligible shareholder can terminate the corporation’s S election under §1362(d)(2). That corporate tax result is not, by itself, a finding that the IRA engaged in a prohibited transaction or lost IRA status. The current shareholder regulation, §1.1361-1(h), describes the grandfathered exception.

The life-insurance restriction above is an IRA rule, not a claim that every employer retirement plan has the same ban. §72(m)(3) separately addresses life insurance bought through certain qualified plans. An individual retirement annuity under §408(b) is also a different arrangement from an IRA buying a life insurance policy.

Coins, bullion and personal custody

The exceptions in §408(m)(3) cover specified U.S. gold, silver and platinum coins, coins issued under the laws of a State, and qualifying gold, silver, platinum or palladium bullion. This is not blanket permission for every government-minted or collectible coin. A collector premium alone does not decide whether a coin falls within the statutory exception.

For bullion, the statute uses the minimum fineness required for regulated futures-market delivery and requires physical possession by a qualified IRA trustee. The coin exceptions do not waive the general IRA custody requirements. A home safe or an IRA-owned LLC is not a substitute for analyzing those requirements. See IRS guidance on the coin and bullion exceptions.

In McNulty v. Commissioner, 157 T.C. No. 10 (2021), court opinion reproduced by The Tax Adviser, an owner’s personal possession of IRA-purchased American Eagle coins resulted in distributions, even though an IRA-owned LLC bought them. The opinion did not hold that this was a §4975 prohibited transaction that automatically disqualified her entire IRA; the IRS conceded that issue. It concerned traditional IRAs. A Roth distribution requires its own tax analysis.

Prohibited transactions: who is involved and who benefits?

IRC §4975(c)(1) identifies six categories, including sales or leases, loans or credit, goods or services, use of plan assets for a disqualified person, fiduciary self-dealing, and payments to a fiduciary from a party dealing with the plan. Direct and indirect arrangements both matter.

A disqualified person can include a fiduciary, a service provider, specified employers and owners, certain family members, and entities or people covered by the ownership and role tests in §4975(e). An owner who directs IRA investments is acting as a fiduciary. The family definition includes a spouse, ancestors, lineal descendants and descendants’ spouses. Siblings and cousins are not included solely by that family definition, but their other roles or an indirect benefit to the owner can still matter. Nor is “less than 50% ownership” a universal safe harbor.

Examples that raise prohibited-transaction concerns include the IRA buying property from its owner, lending to the owner’s child, the owner personally guaranteeing the IRA’s loan, or the owner using IRA-owned property. Personal labor, management arrangements and compensation require their own review; not every administrative act has the same legal result.

The law has conditional exemptions, including provisions for some necessary services and reasonable compensation, and administrative exemptions. They do not excuse all dealings with a related person or all fiduciary self-dealing. Custodian acceptance, an LLC, a fair market price, or using a nonrecourse loan does not independently resolve every prohibited-transaction question. See IRS prohibited-transaction guidance.

What happens if the owner or beneficiary engages in one?

Under §408(e)(2), if the owner or beneficiary engages in a prohibited transaction with respect to an IRA, that affected account ceases to be an IRA as of the first day of that individual’s tax year. For a calendar-year taxpayer, that is January 1. All assets in that account are treated as distributed at their fair market value on that date, not merely the amount used in the transaction. Other IRAs are not automatically disqualified by this rule. Each plan is treated as a separate contract for this purpose under §408(e)(2)(A)(iii).

A deemed distribution is not the same as making the entire Roth value taxable. Roth basis, contribution and conversion records, the deemed distribution date, and the qualified-distribution conditions matter. Regular contributions are not earnings; qualified Roth distributions are excluded from income. A nonqualified distribution can include taxable earnings, and taxable conversion amounts can have a separate early-distribution rule. The 10% additional tax is not automatically imposed on the whole account merely because the owner is under 59½. See §1.408A-6 and Publication 590-A (2025), prohibited transactions. Ordinary Roth aggregation rules should not be substituted uncritically for the separate-contract rule here.

Other disqualified persons can face the separate excise-tax regime in §4975: an initial 15% tax on the amount involved and, if the transaction is not corrected within the taxable period, a 100% tax on that amount. This is not a universal 100% tax on a Roth IRA’s balance. Section 4975(c)(3) coordinates the owner’s or beneficiary’s excise-tax treatment with loss of IRA status. The law contains correction provisions, but undoing a transaction is not a promise that lost IRA status will be restored. A suspected violation needs prompt, account-specific professional review.

Pledging part of an IRA as loan security also has a distinct rule: §408(e)(4) treats the pledged portion as distributed. It should not be confused with every prohibited transaction causing loss of the affected account’s status.

UBTI: when the IRA itself can owe tax

UBTI means unrelated business taxable income; UBIT is the tax on it. Section 408(e)(1) preserves this tax even for an otherwise tax-exempt IRA. Roth status does not erase it.

Interest, dividends, ordinary investment gains and many real-property rents generally have exclusions under §512(b). Those exclusions have limits. An operating-business partnership can pass UBTI to its IRA partner even without a cash distribution. Rents involving substantial services, some personal-property or profit-based rentals, dealer activity, controlled-entity income and debt financing can require different treatment. “No mortgage” does not by itself make all real-estate activity exempt. See IRS Publication 598 (March 2021), exclusions and partnership income.

Debt-financed income is not a fixed down-payment percentage

UDFI, unrelated debt-financed income, generally brings a share of otherwise excluded investment income into the tax calculation. Under §514, the usual annual fraction is average acquisition indebtedness divided by average adjusted basis, capped at 100%. The same fraction allocates allowable connected deductions, with special depreciation rules. It is not simply the original loan divided by the purchase price forever.

Illustration, not a tax estimate: suppose the statutory averages are $70,000 of acquisition debt and $100,000 of adjusted basis. The fraction is 70%. With $12,000 of gross rent and $4,000 of allowable connected deductions, the included amounts are $8,400 and $2,800, leaving $5,600 before the specific deduction and other applicable adjustments. These inputs are hypothetical, not a prediction of returns or proof that a particular loan arrangement is permissible.

A sale has a different debt lookback: the calculation generally uses the highest acquisition indebtedness during the preceding 12 months, together with the statutory average adjusted basis. Paying off a loan just before a sale does not necessarily eliminate the debt-financed gain calculation.

Employer-plan exception: §514(c)(9) can exclude certain real-property acquisition debt for listed qualified organizations, including a qualified §401 trust. An IRA is not such a trust. A properly qualified solo 401(k) may come within that category, but the purchase-price, financing, related-party, leaseback and partnership conditions still matter. It is not an automatic exemption for every leveraged solo 401(k) investment, and it is not a reason by itself to choose that account type.

Form 990-T: gross income and taxable income are different

The 2025 Instructions for Form 990-T require trustees of IRAs, including Roth IRAs, to file when the account has $1,000 or more of gross income from an unrelated trade or business. The test is not “net profit over $1,000.” A return can be required even when deductions leave no tax due. Each IRA that must file needs its own EIN.

Section 512(b)(12)’s $1,000 specific deduction is part of calculating taxable income, not a substitute for the gross-income filing test. Separate-business, deduction and loss rules can also affect the result. This is a return and potential tax liability of the IRA, distinct from the owner’s personal Roth-withdrawal taxes.

2026 ordinary-income trust brackets

For an IRA taxed as a trust, the 2026 ordinary taxable-income brackets are below. The 37% rate applies only to the amount over $16,000, not to all income. Qualified dividends and net long-term capital gains can require separate tax computations.

Source: Revenue Procedure 2025-32, §4.01, Table 5, applicable to tax years beginning in 2026. These are brackets for taxable income after applicable adjustments, not a statement that UBIT always takes 37% of an investment’s return.

Two dated fee examples, not a market-wide price

Fees depend on the provider, account value, number and type of assets, transactions and services. The examples below are from official fee schedules checked October 4, 2026. They are not rankings, all-in quotes or claims about every SDIRA or brokerage IRA.

The Directed IRA PDF carries a 2026 copyright but does not specify an effective date. Madison’s four-quarter total is an annualization, not an all-in first-year cost. Neither base fee includes every investment-level, transaction, storage or legal expense. A required cash balance is not itself a fee.

Questions that matter beyond the tax rules

A custodian’s willingness to hold an investment does not guarantee its value, liquidity, legitimacy or performance. Private assets can be hard to value or sell, and may require additional funding. Records must distinguish personal money, IRA assets, contributions, conversions and distributions.

• Who owns and holds the asset, and who is responsible for valuation and reporting?
• Is any owner, relative, service provider or related business involved or benefiting?
• Could business income or acquisition debt require Form 990-T?
• What are the account-level and investment-level costs, and how can the asset be sold or distributed?

These are review questions, not a recommendation to use a particular asset, custodian or retirement-plan structure. Tax rules do not make an investment suitable or protect against a loss.

Sources and editions

The linked Code texts are the 2024 U.S. Code edition, except §1362, linked to the verified 2023 edition. Current regulations and IRS guidance are also cited above. Publication 590-A, Publication 590-B and the Form 990-T instructions are the 2025 editions; Publication 598 is dated March 2021. The 2026 bracket amounts come from Revenue Procedure 2025-32, not older publication examples. The McNulty opinion was issued November 18, 2021. Provider charges are dated examples, not tax-law authorities.

Corrections and updates

October 4, 2026 — significant factual correction

Corrected blanket claims about prohibited transactions, loss of IRA status, Roth income tax and the 10% additional tax. Distinguished affected-account disqualification from collectible-cost distributions and unrelated-business tax, and clarified related-person definitions and conditional exemptions.

Corrected coin and bullion exceptions, personal-custody consequences and the S-corporation shareholder distinction; removed a misidentified case citation. Corrected the debt-financed income calculation, conditional employer-plan exception, gross-income filing threshold and 2026 ordinary trust brackets.

Replaced unsupported market-wide fee claims with dated, account-specific fee examples. Removed investor-suitability and performance assertions, and aligned the page summary and question answers with these corrections. The original May 2, 2026 publication date is preserved.

See the dated correction record.