Rules and Regulations
Understanding self-directed IRA rules & regulations
Stay compliant and maximize the benefits of your self-directed IRA with key IRS guidelines, contribution limits, tax rules, and prohibited transactions.
SDIRA investor knowledge essentials
Managing a self-directed IRA (SDIRA) offers flexibility and opportunity—but it also comes with important responsibilities. To keep the tax advantages of your IRA intact, it’s essential to understand and follow IRS requirements:
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Avoid prohibited transactions
Know what activities and relationships the IRS restricts.
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Stay within contribution & withdrawal rules
Follow annual limits and timelines to avoid penalties.
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Plan for required minimum distributions (RMDs)
Understand when and how much you must withdraw.
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Keep up with reporting & valuations
Ensure accurate tax reporting and fair market value updates.
IRS rules for self-directed IRAs
Self-directed IRA investors should be mindful of IRS rules governing contributions, withdrawals, prohibited transactions, and investments that are considered off-limits. Because an IRA is a tax-advantaged account, the IRS sets clear guidelines on how funds may enter, grow within, and be distributed from the account.
Prohibited transactions
Making a prohibited transaction can cause you to lose the tax-deferred status of your account and face taxes and penalties. Any gains you’ve earned may also be erased, since the IRS will disqualify the account.
Prohibited transactions are based on intent—if the action provides immediate personal financial benefit rather than serving your retirement, it’s prohibited.
Disqualified persons include the account holder, their spouse, lineal descendants, account fiduciaries, trustees, investment managers/advisors, and any company in which the account holder has 50% or more ownership. See IRC 4975 for full details.
Examples
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Borrowing
Personally borrowing money from the IRA.
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Property deals
Selling, leasing, or exchanging property to the IRA account.
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Compensation
Accepting unreasonable pay for managing IRA-held assets.
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Collateral
Using the IRA as security for a loan.
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Fiduciary misuse
Allowing fiduciaries to use or borrow against IRA assets for personal gain.
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Transactions with disqualified persons
Transferring plan assets, lending money, or providing goods and services to disqualified persons
Important Note: STRATA does not provide tax or legal advice. Please consult a qualified professional for guidance for your specific situation.
Not permitted investments
One of the advantages of a self-directed IRA (SDIRA) is the wide range of investment choices available. The IRS, however, maintains a short list of investments that are not allowed. Attempting these could result in penalties and the disqualification of your IRA.
See IRC Section 408, IRS Publication 590-A, and IRS Publication 590-B for full details.
Examples
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Collectibles
Artwork, coins, stamps, rugs, antiques, beverages, and other personal property.
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Gemstones & metals
Gemstones and metals, except for certain U.S. coins and bullion that are specifically allowed. View IRA Allowable Precious Metals for a full list.
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Insurance contracts
Insurance contracts cannot be purchased or held in an IRA.
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S-stock
Typically not permitted, as IRA ownership may disqualify the favorable tax status of this structure.
Important Note: STRATA does not provide tax or legal advice. Please consult a qualified professional for guidance for your specific situation.
IRA contribution rules and timing
If you’re eligible to make an IRA contribution, you can contribute up to the IRS-set annual limit for that tax year. Individuals age 50 or older may also be able to make an additional “catch-up” contribution.
You can choose how often to contribute—monthly, quarterly, or in a single lump sum—so long as your total contributions for the year do not exceed your allowed limit.
Contributions for a given tax year must generally be made by the federal tax filing deadline (typically April 15, excluding extensions). If contributing for the prior tax year, your contribution must be sent to STRATA by that deadline, with a valid postmark date. Contributions for the current tax year may be made at any time beginning January 1.
You may refer to STRATA’s IRA Annual Limits chart for the most current IRS contribution amounts for Traditional, Roth, SEP, and SIMPLE contribution limits.
Important Note: STRATA does not provide tax or legal advice. Please consult a qualified professional for guidance for your specific situation.
IRA withdrawal rules at a glance
Understanding when and how you can take money from your self-directed IRA helps you avoid unnecessary taxes and penalties. The chart below highlights the key withdrawal rules, including age requirements, required minimum distributions, and exceptions to the 10% early withdrawal penalty.
| Category | When allowed: When allowed | Key rule: Key rule | Notes / exceptions: Notes / exceptions |
| Penalty-free withdrawals | When allowed: Age 59½ (Roth: 5+ years open) | Key rule: Withdrawals avoid the 10% penalty | Notes / exceptions: Roth contributions (not earnings) can be withdrawn anytime if account is 5+ years old |
| RMDs | When allowed: Begin by April 1 after turning 73 | Key rule: Calculated annually using IRS life expectancy tables | Notes / exceptions: Applies to Traditional, SEP, SIMPLE IRA accounts |
| RMD aggregation | When allowed: Each year | Key rule: Must meet cumulative total RMD requirement | Notes / exceptions: RMD obligations may be aggregated across accounts; withdrawals are not required from each individual account. |
| Early withdrawals (<59½) | When allowed: Anytime | Key rule: Subject to 10% penalty + taxes | Notes / exceptions: Exceptions may apply (see below) |
| Penalty exceptions | When allowed: Before 59½ | Key rule: Certain events allow penalty-free withdrawals | Notes / exceptions: Death, disability, higher education, first home, medical expenses, health premiums (if unemployed), IRS levy, qualified reservist, equal periodic payments |
Important Note: STRATA does not provide tax or legal advice. Please consult a qualified professional for guidance for your specific situation.
Investment income and tax reporting
Some self-directed IRA investments may generate income that is taxable to the IRA. This income is classified as either UBTI or UDFI. If your IRA falls into either category, you are responsible for reporting it on Form 990-T and ensuring payment of any taxes due from the IRA. We recommend consulting a tax professional to confirm whether these rules apply to your investments.
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UBTI
Unrelated Business Taxable Income (UBTI) occurs when a retirement account earns active business income, which is considered unrelated business income under federal tax law and is subject to its own tax.
If your IRA investments generate $1,000 or more of UBTI in a year, the IRA must pay tax on that income. Because the income is earned within a trust, UBTI is taxed at the trust tax rates. Although certain exclusions apply for income that includes interest, dividends, royalties, capital gains, and rents (if not debt-financed). See IRS publication 598 for additional details.
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UDFI
Unrelated Debt-Financed Income (UDFI) occurs when a retirement account owns a real estate property that is debt-financed (with a non-recourse promissory note) and the property generates income.
The amount of income classified as UDFI is proportionate to the debt owed on the property. As the debt is paid down, the percentage of income that is taxable decreases. If the IRA sells the property and there is any debt during the preceding 12 months, a percentage of the gain will be taxable as UDFI.
Valuation reporting requirements
The IRS requires custodians to obtain and report the fair market valuation (FMV) of IRA assets each year—and before any taxable event such as an in-kind distribution or conversion.
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Annual updates required
FMVs must be reported by April 30 to meet the May 31 IRS deadline.
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Independent valuation
FMVs must come from a qualified third party (e.g., the investment sponsor). For real estate, broker price opinions, appraisals, or reputable sources like Zillow or Redfin may be used.
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Plan ahead
Some assets, like private placements or real estate, may take longer to value. Allow extra time to complete paperwork.
Reminder: A valuation agent must not be a “disqualified person” under IRC 4975.
Need help? We're here for you
Still have questions about SDIRA rules? STRATA’s specialists can guide you through IRS compliance, tax obligations, and contribution limits.
Tax forms filed for you
IRA custodians are required to file certain reports with the IRS each year. It is important, even if you engage a professional to prepare your tax returns or assist with your investments, that you review the information reported on these forms to make certain they are accurate. Accuracy is critical because these forms are sent to the IRS and can affect your tax liability for the year. As a custodian, STRATA will file:
IRS form 1099-R
Reports distributions taken from your IRA during the tax year.
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Issued each January by your custodian for the prior year’s withdrawals
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Shows the gross distribution amount (before taxes/withholding)
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Includes taxable portion and any federal/state taxes withheld
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Needed to complete your annual tax return
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Keep for your records; custodians are also required to send directly to the IRS
Learn more about IRS form 1099-R
IRS form 5498
Reports contributions and year-end value of your IRA.
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Issued each May for the prior tax year
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Shows all contributions (regular, rollover, conversion)
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Reports FMV as of December 31
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Includes details on contributions and RMDs (if any)
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Keep for your records; custodians are also required to send directly to the IRS
Learn more about IRS form 5498
Self-directed IRA FAQs: IRS rules, tax forms & reporting
How is my RMD calculated?
Your RMD is based on your account balance as of December 31 of the year that precedes the year you are taking the distribution. That number is then divided by the amount indicated in the IRS’s Uniform Lifetime Table. Our handy RMD Calculator can help you determine your RMD.
Can I take out more than the suggested RMD amount?
Yes, you can take more than the required minimum amount out of your IRA or retirement plan. Your total distribution amount for the year will be reported on Tax Form 1099-R.
Note: Amounts taken in excess of your RMD for the year are not applied toward any future years’ RMDs.
Is my RMD reported to the IRS?
Yes. If an RMD is due for the year, the custodian will notify the accountholder and report the amount to the IRS on IRS Form 5498. STRATA will release a 1099-R for your distribution by January 31st, the preceding year of the distribution year. Please refer to our FAQ section for additional questions or to learn more about IRS Form 1099-R.
Will I receive notification for an RMD on an inherited IRA?
No. IRA Custodians are not required to send RMD notifications on inherited IRAs or inherited Roth IRAs. Your financial advisor or a qualified tax professional can help you calculate your RMD amount(s) for these plan types. For more information, please see Section 3 of IRS Notice 2002-27.
If you own an Inherited IRA, please work with your financial advisor or a qualified tax professional to calculate your RMD amount(s).
I recharacterized a Traditional IRA contribution to a Roth IRA. Why does IRS Form 5498 still show the original contribution?
IRS rules require that Form 5498 report the original contribution made to your Traditional IRA, even if you later recharacterized it to a Roth IRA.
- Form 1099-R reports the amount moved out of your Traditional IRA.
- Form 5498 reports the amount recharacterized into your Roth IRA.
Both forms work together to show the IRS how the contribution was originally made and where it ended up after the recharacterization.
What is IRS Form 990-T and when does it apply to my self-directed IRA?
IRS Form 990-T is used to report certain types of income generated within a self-directed IRA, specifically:
- Unrelated Business Taxable Income (UBTI)
- Unrelated Debt-Financed Income (UDFI)
This form only applies if your IRA earns more than $1,000 in this type of income during a tax year.
If you receive a Form K-1 from your investment sponsor, it may indicate income that requires filing Form 990-T. We recommend consulting your investment sponsor or a qualified tax professional to determine whether your IRA must file this form.
We're here to help you get started
Stay compliant and make the most of your self-directed IRA. Our team is ready to guide you through the process and answer your questions.
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