Published · Loren Wernette
Most people are told their retirement account can hold stocks, bonds and mutual funds. That is a description of what a particular custodian offers — not a description of the law. The tax code has always permitted an IRA to hold private real estate, private notes and private funds. What it takes is a custodian willing to hold those assets, and a clear understanding of three rules that can turn a good decision into an expensive one.
The short answer: yes — a self-directed IRA (SDIRA) can hold rental property, land, private notes and interests in private real estate funds. The tax code has always permitted it; the limit comes from what your custodian offers, not from the law. You move money by opening an SDIRA with a custodian that administers alternative assets, then requesting a trustee-to-trustee transfer or a direct rollover — typically about four weeks end to end. Three rules decide whether it is a good idea for you.
- What can move in. A trustee-to-trustee transfer from an existing Traditional or Roth IRA, or a direct rollover from a former employer’s 401(k). A current employer’s 401(k) usually cannot move until the plan permits in-service distributions.
- What it costs. Roughly $50–$300 to open and $199–$2,000 a year, driven mostly by whether the custodian charges flat per-asset fees or a percentage of account value.
- Where it goes wrong. Transacting with a disqualified person can disqualify the entire account retroactively; and leverage inside the investment can create taxable income (UDFI) that the IRA itself reports on Form 990‑T.
- What fits best. Ordinary-income strategies — lending, notes, short-hold construction profit — because that is where the shelter is worth the most.
This article covers the “why” first, because it is more specific than it usually gets credit for — retirement dollars are not equally advantaged across every kind of real estate income. Then the mechanics. Then the parts most sponsor articles leave out.
Why: the tax shelter is worth more on some real estate income than others
The reason to hold an asset inside an IRA is that the income it produces is not taxed as it is earned. The value of that shelter is exactly the tax rate you would otherwise have paid — so the shelter is worth the most on income the code treats least favorably.
Real estate produces at least four different kinds of income, and they are not taxed alike:
Top federal rate that applies in a taxable account, 2026, by type of real estate income
Top marginal ordinary rate and top long-term capital gains rate for an unmarried individual, 2026, per Rev. Proc. 2025‑32. Excludes the 3.8% net investment income tax and any state tax, both of which widen the gap. Inside an IRA, none of this income is taxed in the year it is earned.
Read the chart as a ranking of where retirement dollars do the most work. Sheltering ordinary income — interest on private loans, short-term gains, rent before depreciation — is worth up to 37 points. Sheltering a long-term capital gain is worth 20.
This cuts against the way IRA money is usually pitched, and it is worth being direct about it. A deal whose return is mostly long-term appreciation, and which already generates depreciation, is a poor candidate for IRA dollars: you are spending a 37-point shelter on 20-point income, and the depreciation deductions the deal produces are wasted inside an account that owes no current tax anyway. Income-oriented strategies — lending, notes, short-hold construction profit — are the natural fit for retirement money, and appreciation-heavy, depreciation-rich deals are often better held in a taxable account. Which of Loam’s funds fits which pocket of your capital is a conversation, not a rule, and it is one of the first things worth working through on a call.
The second reason is scale. As of March 31, 2026 there was $18.2 trillion sitting in IRAs and $9.9 trillion in 401(k) plans, out of $47.6 trillion in total US retirement assets. Forty percent of the IRA total — $7.3 trillion — was in mutual funds, and most of the rest sits in publicly traded securities held at brokerage custodians. For a great many investors, the largest pool of capital they control has never been available to anything other than a public market, purely because of where the account is held.
How: what a self-directed IRA is, and what it is not
A self-directed IRA is not a different kind of retirement account. It is the same Traditional or Roth IRA, held at a custodian whose business is administering assets that do not trade on an exchange. The tax treatment does not change. What changes is the menu. The phrases you will see marketed — real estate IRA, SDIRA, checkbook IRA — all describe the same underlying account, differing only in what it holds or who directs it.
Three things follow from that, and they are the source of most confusion:
- The custodian does not vet your investment. A brokerage custodian implicitly limits you to assets it has approved. A self-directed custodian holds title and processes paperwork; the diligence is yours. Custodial agreements say this explicitly, and the SEC has warned that fraud promoters exploit the assumption that a custodian’s presence means an asset has been reviewed.
- The IRA is the investor, not you. Subscription documents are signed by the custodian for the benefit of your IRA. Distributions return to the IRA. You cannot take the income personally, and you cannot use the asset personally.
- “Checkbook control” is a structure, not a feature. Some investors have their IRA own a single-member LLC and direct it themselves. It removes per-transaction custodian delays. It also puts the prohibited-transaction rules in your own hands, and it is a structure to enter with counsel, not from a webinar.
What can move into one
| Account you have now | Can it move? | What to watch |
|---|---|---|
| Traditional IRA | Yes — trustee-to-trustee transfer | The simplest case. A direct transfer between custodians is not a reportable distribution and is not subject to the one-rollover-per-year limit. |
| Roth IRA | Yes — trustee-to-trustee transfer | Same mechanics. The five-year clock and basis follow the account. |
| SEP or SIMPLE IRA | Yes | A SIMPLE generally must be at least two years old before it can be moved to a non-SIMPLE IRA without penalty. |
| 401(k) from a former employer | Yes — direct rollover | Usually straightforward. Insist on a direct rollover to the custodian, not a check to you. |
| 401(k) from your current employer | Often no | Depends entirely on whether the plan permits in-service distributions. Many do not. This is the most common reason a plan stalls — check the plan document first, before anything else. |
| 403(b), 457(b), TSP | Generally yes once separated | Governed by the plan’s own rules. Same in-service question applies. |
| Roth conversion of pre-tax money | Possible, and taxable | Converting creates ordinary income in the year of conversion. It can make sense before a long-hold investment, and it is a decision for your CPA, not a step in a rollover. |
The sequence, and how long it really takes
Indicative timeline once the account paperwork starts
Indicative only, drawn from Loam’s own experience and published custodian timelines — not a commitment. The transfer step is the one that slips: a slow releasing custodian, a medallion signature requirement, or a plan that does not permit in-service distributions can add weeks or stop the process entirely. Start the transfer request before you need the money to land.
Two practical notes. First, the accreditation step is not optional. Loam’s funds are offered under Rule 506(c), which requires the Manager to take reasonable steps to verify that every Member is an accredited investor — a written representation is not sufficient. That verification usually means tax documents, brokerage statements or a letter from your CPA or attorney, and it is a good idea to have that ready rather than discovering it at signing. Second, if you are moving only part of an account, you can leave the rest where it is; a self-directed IRA does not have to hold everything.
Contribution limits, for the record
Most self-directed real estate money arrives by rollover, not by contribution — annual limits are far too small to fund a fund subscription. Still, they matter if you are building the account over time:
| Contribution | 2026 | 2025 |
|---|---|---|
| IRA contribution | $7,500 | $7,000 |
| IRA catch-up, age 50+ | $1,100 | $1,000 |
| 401(k) employee deferral | $24,500 | $23,500 |
| 401(k) catch-up, age 50+ | $8,000 | $7,500 |
| 401(k) catch-up, ages 60–63 | $11,250 | — |
Source: IRS Notice 2025‑67 / IR‑2025‑111. Income limits on Roth contributions and on deducting Traditional contributions apply separately.
The three rules that decide whether this works for you
Everything above is procedure. What follows is where money is actually lost. None of it is a reason not to do this — it is the reason to do it deliberately.
Rule 1: prohibited transactions, and why the penalty is so severe
Section 4975 of the code bars your IRA from transacting with a list of “disqualified persons.” The list is narrower than people assume in one direction and wider in another:
| Disqualified person | Detail |
|---|---|
| You | As a fiduciary of your own IRA, you are a disqualified person with respect to it. |
| Your family | Spouse, ancestors, lineal descendants, and the spouses of lineal descendants. Notably, siblings and cousins are not on the statutory list — but building a plan around that distinction is a question for counsel, not a loophole to lean on. |
| Entities you control | A corporation, partnership, trust or estate in which 50% or more of the interests are owned by the persons above. |
| Their key people | An officer, director, or 10%-or-more owner or partner of such an entity. |
The barred acts include selling, exchanging or leasing property between the IRA and a disqualified person; lending money or extending credit between them; furnishing goods, services or facilities; transferring or using the IRA’s assets; a fiduciary dealing with the assets in their own interest; and a fiduciary receiving consideration from a third party dealing with the IRA.
The consequence is not a fine on the transaction. It is the account. Where an IRA owner or beneficiary engages in a prohibited transaction, the IRA loses its exempt status and is treated as having distributed everything — retroactive to January 1 of the year the transaction occurred. On a large pre-tax account that is a single-year ordinary income event, plus penalties if you are under 59½. That asymmetry — a small self-dealing act, the whole account — is why the practical rule is to keep the IRA at arm’s length from anything you touch personally.
Rule 2: UBIT and UDFI — the tax bill inside your tax-free account
This is the section most sponsor articles skip, and it is the one that produces surprised phone calls.
An IRA is tax-exempt, but not unconditionally. IRAs are expressly subject to the tax on unrelated business income, and an IRA must file Form 990‑T if its gross income from all unrelated businesses is $1,000 or more. The tax is paid by the IRA, out of the IRA, and it is due whether or not you took a distribution.
For real estate, the usual trigger is not an operating business — it is leverage. Under section 514, income from debt-financed property is unrelated business taxable income in proportion to the debt. The mechanic is a debt/basis percentage: average acquisition indebtedness divided by average adjusted basis. Roughly, if a property is 40% financed, about 40% of the income and 40% of the deductions are pulled into the UBTI calculation. Rent, which is normally excluded from UBTI, loses that exclusion to the extent of the debt.
What makes this bite harder than the headline suggests is the rate table. An IRA filing a 990‑T is taxed at trust rates, and trust brackets compress almost immediately:
2026 marginal federal rate on taxable income of an estate or trust — the rates an IRA’s Form 990‑T uses
2026 rate table for estates and trusts, Rev. Proc. 2025‑32, Table 5. For comparison, an unmarried individual does not reach the 37% bracket until $640,600 of taxable income. Same top rate, arrived at roughly forty times sooner.
Three things follow from that chart:
- The first $1,000 of gross unrelated business income is the filing trigger, so small amounts of UDFI may not require a return at all. Above it, the account files.
- The rate escalates fast. Modest UDFI can be taxed at or near the top federal rate, because the brackets are measured in thousands rather than hundreds of thousands.
- The filing is the IRA’s obligation, not your 1040’s. In practice the custodian will not prepare it for you. Someone has to, the fee comes out of the IRA, and the return is due the 15th day of the fourth month after the tax year ends.
Two examples: one where it applies, one where it does not
The line is not real estate versus notes, and it is not equity versus debt. It is borrowed money. Two cases make that concrete.
Two things move that line, and both are worth asking about:
- How the fund is taxed, not just what it owns. A fund taxed as a partnership passes UBTI through to its Members. One structured as a corporation, or a REIT, generally does not — what reaches the IRA is dividend income, which is excluded. Two funds holding identical leveraged property can land very differently in your account. Ask which one you are buying.
- UBIT without any debt at all. Leverage is the usual trigger, not the only one. If the IRA is effectively running a business — repeated flips that make it a dealer, or an operating enterprise rather than an investment — that income can be unrelated business income on its own merits, with no borrowing anywhere in the picture.
None of this means an IRA should avoid leveraged real estate. Leverage can be worth its tax cost. It means the honest comparison is after-UBIT, and that the question to ask any sponsor before you subscribe is a specific one: does this fund use leverage at the asset level, does it expect to generate UBTI allocable to tax-exempt investors, and does it provide the K‑1 information my IRA needs to file a 990‑T? For Loam’s funds, that treatment is addressed in the offering documents, and it is a question the Manager should answer plainly on a call rather than in marketing copy. If a sponsor cannot answer it, that is information too.
Rule 3: cost, and the fee shape that fits
Self-directed custody is priced differently from brokerage custody, and the shape of the fee matters more than the headline number.
| Cost | Typical range | Notes |
|---|---|---|
| Account setup | $50–$300 | One-time. Higher where the provider is establishing an IRA-owned LLC. |
| Annual recordkeeping | $199–$2,000 | The wide range is the fee shape: flat-per-asset versus a percentage of account value. Over a long hold on an appreciating asset, asset-based pricing costs materially more. |
| Per-asset holding fee | Varies | Charged per alternative asset held. A single fund position is cheap; ten direct properties are not. |
| Transaction and wire fees | Varies | Per purchase, sale, transfer and wire. Relevant for direct ownership; largely irrelevant for a single fund subscription. |
| Form 990-T preparation | Varies | Only if the account has UBTI. Paid from the IRA. Budget for it if the investment is leveraged. |
Ranges as published by IRAR Trust Company, September 2026. Fee schedules change — confirm current pricing directly with any custodian you are considering.
For an investor whose plan is one or two private fund positions held for years, a flat-fee custodian is almost always the right answer, and the total annual cost is small relative to the position. For an investor planning to buy, renovate and sell individual properties inside the IRA, transaction fees and per-asset fees dominate, and the arithmetic changes.
A short decision framework
Putting it together, retirement dollars are the right money for a private real estate investment when most of these are true:
- The income is ordinary in character — interest, short-hold profit, rent — so the shelter is worth its full value.
- The investment is passive and managed by someone unrelated to you, so the prohibited-transaction surface stays small.
- You understand the leverage in the deal and have priced the UBIT consequence, or confirmed there is none.
- The hold period matches the money. Retirement capital is long-term capital, and private real estate is illiquid — those two facts fit each other well, and both fit poorly with money you may need.
- You are not sheltering income that was already tax-advantaged, and you are not stranding depreciation you could have used.
And the honest counter-case: if the account is your only liquidity, if the deal’s return is mostly appreciation, or if you want to be hands-on with the property, retirement money is probably the wrong pocket. There is no version of this where the tax wrapper rescues a bad investment.
Where to go next
If you want the shorter version of the mechanics with a first-hand account of the paperwork, that is in Unlocking the Power of Your Retirement Funds. For why the hold period and the account type suit each other, see Why Real Estate Is a Long-Term Play. For how income from a fund is reported to you and why the numbers rarely tie out to your capital account, see Understanding Your K‑1. Broader questions are collected on the FAQ, and the current fund offerings are on Funds.
If you are weighing whether retirement money or taxable money is the right source for an investment with us, that is a fifteen-minute conversation and a genuinely useful one. Loam’s funds are open to accredited investors only, and Members participate through the fund entity with an unaffiliated Manager — which, as above, is one of the cleaner ways to hold real estate inside an IRA.
Sources
- IRS, 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500 (IR‑2025‑111; Notice 2025‑67).
- IRS, Rev. Proc. 2025‑32 — 2026 inflation-adjusted rate tables, Table 3 (unmarried individuals), Table 5 (estates and trusts), and the section 1(h) capital gains thresholds.
- IRS, Publication 598, Tax on Unrelated Business Income of Exempt Organizations — IRAs as subject organizations, the $1,000 Form 990‑T filing threshold, trust rates, and debt-financed property under section 514.
- Investment Company Institute, Quarterly Retirement Market Data, First Quarter 2026 — $47.6T total US retirement assets, $18.2T in IRAs, $9.9T in 401(k) plans, mutual funds 40% of IRA assets.
- Michael Kitces, Prohibited Transaction Rules That Can Disqualify An IRA — IRC 4975(e)(2) disqualified persons, 4975(c)(1) prohibited acts, and the deemed-distribution consequence.
- IRAR Trust Company, Self-Directed IRA Fees & Custodian Comparison — setup and annual recordkeeping fee ranges.
Loren Wernette is a Founder and Principal of REI Transactional and a principal of the Manager. He is not a tax advisor, attorney, or registered investment adviser, and nothing here is tax, legal or investment advice. Tax law is fact-specific and changes; the figures above are current federal law for the 2026 tax year as of the publication date. Consult your own CPA and counsel before moving retirement assets. Interests in Loam’s funds are offered only to accredited investors under Rule 506(c) of Regulation D, and only through the funds’ official offering documents.