IRS Rules for Self-Directed IRAs: What You Can and Can’t Do

At Forge Trust, we believe investors deserve the freedom to shape their own retirement strategies. For some, that means looking beyond the stock market and traditional IRA options into alternative assets that can offer diversification, tax advantages, potential growth and unique opportunities.

This is where the self-directed IRA comes to the fore. A SDIRA allows account holders to access a wider range of investments—such as real estate, private company shares and funds, precious metals or digital assets—while maintaining the tax advantages of a retirement account.

But with greater flexibility comes greater responsibility. The IRS has established strict SDIRA rules designed to prevent abuse of these tax-advantaged accounts. Failing to follow these regulations can trigger taxes, penalties and even disqualification of your account.

This article breaks down the essentials of SDIRA compliance so you can pursue your investment goals with confidence.

What is a self-directed IRA?

A SDIRA is structurally similar to a Traditional or Roth IRA—established as a trust or custodial account under IRS rules.¹ The difference lies in the range of investments available.

In a standard IRA, a custodian typically limits you to stocks, bonds, ETFs or mutual funds. With an SDIRA, a custodian enables you to choose from a much broader list of asset classes, provided they are permitted by the IRS and the custodian.

Examples of assets you can hold in an SDIRA include:

• Real estate (residential or commercial)
• Private company shares, funds and venture capital investments
• Promissory notes and private lending arrangements
• Precious metals meeting IRS purity standards
• Limited partnerships and LLC interests
• Certain digital assets (depending on custodian policies)

This control allows investors to build a more customized, diversified retirement portfolio aligned with their personal expertise or market outlook.

Some of the key benefits and challenges associated with self-directed IRAs

Benefits

• Diversification: Move beyond the public market into tangible and alternative assets
• Potential growth: Access opportunities with higher upside potential than traditional investments
• Tax advantages: Retain the same tax-deferral (Traditional IRA) or tax-free growth (Roth IRA) benefits
• Control: The account holder—not the custodian—directs the investment strategy

Challenges

• Complexity: Alternative assets require deeper due diligence and market knowledge
• Limited custodian role: A custodian like Forge Trust holds and administers assets but cannot provide investment, or tax advice
• Self-management of your account and investments: With a SDIRA the account owner has sole responsibility for evaluating and understanding the investments in the account
• Increased risk: Investing in alternative assets involves unique risks that may be greater than those associated with traditional investments. Refer to IRS Bulletin for additional information regarding risks associated with SDIRAs
• Illiquidity: Many SDIRA-eligible investments (like real estate or private company shares) are not as easily sold, when compared with public market investments
• Risk of non-compliance: Engaging in a prohibited transaction can jeopardize your entire IRA

In short, a SDIRA offers powerful tools, but it’s essential that investors understand both the opportunities and risks involved, along the rules that govern SDIRAs.

IRS restrictions: What you can’t do

Prohibited transactions

A prohibited transaction can bring into question the tax-deferred status of your self-directed account, potentially resulting in the disqualification of your IRA, and severe tax consequences.

Prohibited transactions are transactions between SDIRA and Disqualified Persons, which include:

• Yourself (the account owner)
• Your spouse
• Your lineal descendants (children, grandchildren) and ascendants (parents, grandparents)
• Entities where disqualified persons hold significant ownership
• Fiduciaries, custodians and anyone with authority over your IRA

Examples of prohibited transactions SDIRA investors must avoid include:

• Buying or selling property between your IRA and yourself or a disqualified person
• Living in or using real estate owned by your IRA
• Lending or borrowing money to or from the IRA
• Personally guaranteeing a loan used by your IRA to acquire assets

Engaging in a prohibited transaction can result in the immediate disqualification of your IRA, triggering taxes and penalties. Penalties can include making the full balance of a SDIRA taxable as ordinary income in the year of a violation, plus a 10% early withdrawal penalty if you’re under age 59½.

IRS rules: What you can do

While restrictions are strict, the IRS actually gives SDIRA investors plenty of room to operate, provided they stay within the guidelines. You can:

• Acquire real estate for investment purposes, as long as neither you nor your family use it personally
• Invest in private companies, provided they are not owned or controlled by disqualified persons
• Hold precious metals in a qualified depository, as long as they meet IRS standards for purity
• Participate in private lending arrangements where borrowers are not disqualified persons
• Grow your retirement portfolio in a tax-advantaged environment, just like with traditional or Roth IRAs

At Forge Trust, our role as custodian is to execute your instructions, maintain compliance reporting and safeguard your account — so you can pursue these opportunities with confidence.

Why compliance matters

The IRS is clear: your SDIRA is designed for retirement savings, not personal enrichment outside of retirement planning. Investors who carefully follow the self-directed IRA rules enjoy the benefits of:

• Preserving the tax-advantaged status of their account
• Protecting their wealth from unnecessary penalties
• Building long-term value through compliant alternative investments

Indeed, compliance is not just about avoiding penalties—it’s about protecting your retirement future.

Final thoughts

SDIRAs unlock powerful opportunities for investors who want more control over their retirement strategies. But with that freedom comes the responsibility of understanding and following SDIRA rules.

Forge Trust is here to serve as your partner in custody, compliance and account administration—so you can focus on building a retirement portfolio that reflects your unique vision.

Whether you’re exploring real estate, private company investments or other alternatives, knowing what you can and can’t do with an SDIRA is the first step toward successful, confident investing.