Self-Directed IRA Calculator: Building Wealth Beyond Stocks

A standard IRA holds stocks, bonds, mutual funds, and ETFs. A self-directed IRA (SDIRA) can hold rental property, private loans, tax liens, gold, private equity, and dozens of other alternative assets.

The tax advantages are the same: tax-deferred growth in a traditional SDIRA, tax-free growth in a Roth SDIRA. The difference is what you can buy inside the account.

What a Self-Directed IRA Can Hold

Permitted alternative assets:

• Real estate (residential, commercial, land, foreign property)
• Private mortgage notes (you are the lender)
• Tax lien certificates
• Precious metals (IRS-approved coins and bars)
• Cryptocurrency
• Private equity and LLC interests
• Closely held businesses (with restrictions)
• Farmland and timberland

Prohibited assets (always):

• Life insurance contracts
• Collectibles (art, antiques, rugs, wine, baseball cards)
• S-Corporation stock
• Property personally used by you or a disqualified person

The Prohibited Transaction Rules

This is where SDIRA investors get into serious trouble. A prohibited transaction with an SDIRA can result in the entire account being treated as distributed on January 1 of that year, with full income taxes plus the 10% early withdrawal penalty.

Disqualified persons include:

• You (the IRA owner)
• Your spouse
• Your lineal descendants (children, grandchildren)
• Your parents and grandparents
• Any business entity you or these persons control (50%+)

Prohibited transactions include:

• Buying a property from yourself and selling it to your IRA
• Living in or using a property owned by your IRA (even for one night)
• Using your IRA to make a loan to yourself or a disqualified person
• Personally managing a property owned by your IRA and paying yourself
• Taking a salary from a business your IRA owns

The rules are strict. Many investors who do not fully understand them have lost entire IRA balances to prohibited transaction rulings.

Real Estate in an SDIRA: How It Works

1. Open an SDIRA with a specialized custodian
2. Fund the account with a rollover from an existing IRA or 401k
3. Direct the custodian to purchase a property
4. All rental income goes directly to the IRA
5. All expenses (repairs, property taxes, management fees) come from the IRA
6. When you sell, proceeds go back into the IRA

Critical rule: You cannot personally benefit from the property while it is in the IRA. You cannot stay there, manage it personally for a fee, or hire family members to manage it.

UBIT (Unrelated Business Income Tax): If your SDIRA uses debt financing (a mortgage) to purchase real estate, the income attributable to the debt portion is subject to UBIT. A $200,000 property purchased 50% with IRA funds and 50% with a mortgage generates UBIT on 50% of net rental income.

The SDIRA Custodian

Standard IRA custodians (Fidelity, Vanguard, Schwab) do not allow alternative assets. You need a specialized SDIRA custodian.

Major SDIRA custodians include Equity Trust, The Entrust Group, and Alto IRA. Fees vary:

| Fee Type | Typical Range | |----------|--------------| | Account setup | $50-$250 | | Annual maintenance | $100-$500 | | Transaction fee (per purchase) | $50-$150 | | Asset valuation | $50-$200/year |

These fees are manageable on a large account but significant on smaller accounts. SDIRAs make most sense for accounts of $50,000+.

Self-Directed Roth IRA: Tax-Free Alternative Returns

A self-directed Roth IRA combines tax-free growth with alternative investments. A rental property purchased inside a Roth SDIRA generates tax-free rental income and tax-free appreciation. When you sell at retirement, the proceeds are tax-free.

For high-return alternative investments (private loans at 10-12%, value-add real estate), the Roth SDIRA is particularly powerful because the tax-free treatment applies to what are often higher returns than standard equity markets.

See Best Investing Platforms for comparison of SDIRA custodians and standard retirement account options.

Use the CalcMoney Compound Interest Calculator to model how alternative investment returns inside a tax-sheltered account compare to taxable investment over your time horizon.

Frequently Asked Questions

Can I use an SDIRA for private lending?

Yes. You can lend money from your SDIRA to third parties (not disqualified persons). The borrower makes interest payments to your IRA, growing tax-free. Private mortgage notes at 8-12% interest rates are one of the more common uses.

Can my SDIRA be audited?

Yes. The IRS can audit your IRA. An SDIRA with unusual assets and related-party transactions is at higher audit risk. Maintain detailed records of all transactions, property use, and third-party management.

What happens to real estate in an SDIRA at death?

The real estate passes to your beneficiaries as part of the IRA. Under the SECURE Act, most non-spouse beneficiaries must fully distribute the inherited IRA within 10 years. For illiquid real estate, this can create problems if the property cannot be sold quickly. Liquidity planning matters for estate purposes.