A self-directed IRA is an individual retirement account whose owner picks the investments, which can include assets beyond the usual stocks and funds, such as real estate or private offerings. It is still an IRA, so the same IRS rules apply, including strict limits on dealing with yourself or family through the account.
You have an old IRA or 401(k) balance and a friend who says you could use it to buy a rental property or a private deal. The idea is appealing, because the tax advantages stay in place. The catch is that you, not a broker, become responsible for choosing, checking and following the rules.
How is a self-directed IRA different from a regular IRA?
The tax treatment is the same, and the difference is the menu of allowed investments and who does the research. A typical brokerage IRA offers stocks, bonds, mutual funds and ETFs. A self-directed IRA is held by a custodian willing to hold other assets, and you decide what to buy.
The IRS does not give a separate "self-directed" account type. It is the same traditional or Roth IRA, held at a custodian whose offerings are wider. The contribution limits, tax rules and withdrawal rules do not change. Our page on 2026 IRA contribution limits covers the annual caps.
What can a self-directed IRA invest in?
The law does not list every allowed investment, so the practical question is what your custodian will hold and what the IRS prohibits. Common examples people ask about include:
Real estate
Rental or investment property can be held in an IRA, but you cannot use it yourself. The IRS lists buying property for personal use, now or in the future, with IRA funds as a possible prohibited transaction.
Private placements and private company stock
Some owners buy interests in private offerings. These are often illiquid and harder to verify than public securities. See what a private placement is and what an accredited investor is, since many private offerings are limited to accredited investors.
Private loans and notes
An IRA can hold notes in some cases, but it cannot lend to you or family members. The IRS lists lending money or extending credit between a plan and a disqualified person as a prohibited act.
Other assets
Precious metals, tax liens and similar assets show up in the self-directed market. Whether a particular asset is allowed under IRS rules, and whether a custodian will hold it, should be confirmed with the custodian and a tax professional.
What is a prohibited transaction?
A prohibited transaction is improper use of the IRA by the owner, a beneficiary or another disqualified person, and it is the biggest rule to understand. The IRS page on prohibited transactions gives these examples for an IRA:
- Borrowing money from it
- Selling property to it
- Using it as security for a loan
- Buying property for personal use with IRA funds
Disqualified persons include the IRA owner's fiduciary and family members: a spouse, an ancestor, a lineal descendant and a descendant's spouse. The IRS also says a fiduciary's act of dealing with plan assets in their own interest can be a prohibited transaction.
What happens if you break the rule?
The consequence can be severe. According to the IRS, if an IRA owner or beneficiary engages in a prohibited transaction at any time during the year, the account stops being an IRA as of the first day of that year. The account is treated as distributing all its assets at fair market value on that date.
If the total exceeds your basis in the IRA, the difference is a taxable gain included in your income. In plain terms, one improper deal can turn the whole account into taxable income for the year. Ask a CPA before you act on any unusual IRA investment.
What are the risks of a self-directed IRA?
The main risks are not tax-related. They come from the investments and from the fact that nobody is checking your work.
| Risk | What it means for you |
|---|---|
| Illiquidity | You may not be able to sell quickly when a required distribution or a need for cash arrives |
| Valuation | Private assets have no daily price, so reported values may be estimates |
| Fraud | Unfamiliar or unregistered offerings need extra verification. See how to spot investment fraud |
| Concentration | One property or deal can dominate a small account |
| Rule violations | Prohibited transactions can disqualify the account |
Alternative assets can lose value, and you can lose some or all of what you invest. Our guide to liquidity risk explains why being unable to sell is a risk in its own right.
Questions to ask a custodian before you open one
- What types of assets will you hold, and which do you refuse?
- What are the annual, per-transaction and asset-based fees?
- Do you review or verify investments, or only follow my instructions?
- How are values reported to me and to the IRS?
- How do I request a distribution or move an asset out?
Get answers in writing, and check the custodian's registration and complaint history the way you would for an adviser.
Frequently asked questions
Is a self-directed IRA legal?
Yes, a self-directed IRA is a normal IRA held at a custodian that allows a wider set of assets. Legality depends on following the IRS rules, especially the prohibited-transaction rules.
Can I use my IRA to buy a house to live in?
No. The IRS lists buying property for personal use, present or future, with IRA funds as a possible prohibited transaction.
Can a self-directed IRA hold private placements?
Often yes, if the custodian agrees, though many private offerings are limited to accredited investors and are illiquid. Read the offering documents and understand the risks first.
Does a self-directed IRA have different contribution limits?
No. The limits and the tax treatment are the same as any traditional or Roth IRA. Only the investment menu changes.
Related: IRA contribution limits for 2026 · What is a private placement? · How to spot investment fraud