IRS Rules
This sheltering allows you to grow your savings over time by reinvesting and compounding investment gains, rather than seeing gains eroded by taxation.
The trade-off for this tax-sheltering in a retirement plan is that the funds are set aside for your future benefit after retirement age and are not for your personal benefit while inside the plan.
In order to maintain the tax-sheltered status of the plan certain IRS rules must be followed. The same rules apply to all IRA and 401(k) plans, whether self-directed or conventional. When you are investing inside the narrow scope of publicly traded assets in a conventional plan, however, you really do not need to be aware of most rules as there is little chance of breaking them. Once you start taking more direct control in a self-directed retirement plan, you need to be aware of and understand the rules.
In exchange for the additional flexibility and control provided by self-directed IRA and Solo 401(k) plans you need to become familiar with, and take responsibly for following the relevant IRS rules.
A key piece of any self-directed investment strategy is having access to qualified guidance with respect to IRS rules.
At Safeguard Advisors, our team of consultants and attorneys are very well versed in the IRS rules and how they apply in non-traditional asset investing. Our focus on client education and ongoing consulting support is the most valuable component of the services we provide.
Navigating the IRS rules for investing with a self-directed IRA or Solo 401(k) starts with a few basic concepts.
IRS Overview
Following is an outline of the key concepts to understand when investing with a self-directed retirement plan. Click on the linked terms to explore each concept in detail.
Prohibited Investments include a handful of assets such as collectibles, life insurance and S-corporation stock that are not allowed.
The Exclusive Benefit Rule stipulates that all activities of a plan must be for the exclusive benefit of the plan beneficiaries.
Disqualified Persons are those individuals or entities with whom the plan may not interact.
Prohibited Transactions occur when the exclusive benefit rule is violated or when there is a transaction or exchange of benefit between the plan and a disqualified party.Significant Tax Penalties apply when a prohibited transaction occurs.
The Right Mindset Matters
Self-directed IRA and 401(k) plans are a means to take more control of your retirement investing. By investing in what you know, and being more directly involved in executing plan investments, you can potentially achieve better results for your retirement savings. Growing your savings is entirely and exclusively what these plans are about.
Self-directed retirement plans are not a means for you to gain access to your retirement savings personally at the current time. Any attempt to structure transactions that benefit you or close family will likely create a prohibited transaction and the risk of significant tax penalties.
A self-directed IRA is not a way for you to invest in real estate or other alternatives and have access to plan capital to do so. Rather, it is simply a means for your retirement plan to diversify.
The Right Mindset Matters
There are some transactions types that are in full compliance with IRS rules, but that may generate taxable income within the envelope of an IRA or Solo 401(k) plan. While one does not need to be concerned about rules violations, per se, it is important to your investment strategy to understand the rules that apply in these cases.
When a tax-exempt retirement plan uses debt-financing as part of an investment, this can generate Unrelated Debt-Financed Income. Purchasing an income property with a mortgage is a common example of when this type of taxable income is created. The gains the IRA receives that are directly attributable to the IRA capital deployed in the transaction (the down payment) are fully sheltered. The income the IRA receives that comes from the non-IRA capital (the borrowed amount) is considered taxable. The tax cost of UDFI is generally not significant, and in most cases the end result of a leveraged property investment will be a post-tax cash-on-cash return that is higher than a comparable all-cash transaction.
Participation in a trade or business activity on a regular or repeated basis can generate Unrelated Business Taxable Income (UBTI) for a tax-exempt IRA or 401(k) plan. Investments that can have this type of tax exposure include property flipping or new development and certain kinds of venture capital or business equity investments. The concept behind this tax is to level the playing field for tax-paying businesses and protect them from unfair competition. The tax cost that can occur with UBTI generating investments can be significant, and merits close examination. While not always a barrier to good overall return from an investment, this tax can make some opportunities non-beneficial to an IRA investor.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
