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Written by: Mukarram Mawjood | Bullionite Asset Group
More clients are asking the same question lately. Can I put retirement money into something other than funds and stocks? A private real estate deal, a stake in a friend's company, a position in gold or crypto. The federal mood has shifted in that direction, and after the 2025 push to widen access to alternatives in retirement plans, the question is only going to come up more often.
The conversation almost always centers on the investment itself. Is it a good deal, what is the return, what is the risk. Those are the right questions, but they are not the ones that come back to bite people. A self-directed IRA is not a brokerage account with a wider menu. It is a different wrapper with its own rules, and four of those rules tend to surface years after the purchase, at the least convenient moment, with nothing to do with whether the asset was a good idea.
Getting the money back out
Start with the one most people never picture. A required minimum distribution is calculated on the account's value at the end of the prior year. The IRS does not care whether the account holds cash or a quarter interest in an apartment building. If a client has spent down the liquid side of a self-directed IRA and is left holding an illiquid private asset, the RMD still comes due, and there is no clean way to pay it. You cannot wire a slice of a rental property to the IRS. The options at that point are all uncomfortable: force a sale on someone else's timeline, distribute a fractional interest in kind and handle the valuation and paperwork that requires, or find the cash somewhere else in a hurry.
The value nobody updates
Valuation is the next problem, and it runs every year rather than just at distribution time. Custodians are required to report the fair market value of hard-to-value assets on Form 5498, but they have no independent way to value a private deal. They report whatever the account owner gives them, which is often last year's number repeated or the original purchase price. Neither is a real fair market value. The stale figure sits quietly until it matters, and it matters most at a Roth conversion, where the tax is based on the asset's value. A number that is too low understates the tax owed and invites an adjustment later. A figure nobody has revisited in three years is not a position you want to defend in an audit.
The tax bill inside a tax-deferred account
Here is the one that surprises clients most, because it feels like a contradiction. A retirement account can owe income tax on its own earnings. Two situations cause it. The first is leverage. When an IRA borrows to buy an asset, the income attributable to the borrowed share becomes taxable, so a rental bought with a loan covering 60 percent of the price sees roughly 60 percent of its income and gain taxed to the account. Note too that the loan itself has to be non-recourse, because an IRA cannot give a personal guarantee, which rules out most conventional financing. The second trigger is operating business income earned through a partnership, as opposed to passive rent, interest, or dividends. Either one is reported on Form 990-T and taxed at trust rates, which reach the top 37 percent bracket at around 15,000 dollars of income, and the return is due in April like a personal return. The self-directed custodian will not prepare it or warn anyone it is due. One workaround worth knowing: a Solo 401(k), available to clients with self-employment income, is exempt from the tax on leveraged real estate that an IRA is not, so the same deal in the right vehicle can avoid the bill entirely. The deal can still be worth doing in an IRA. The after-tax return is simply lower than the pre-tax pitch, and someone has to file.
The one move that can end the account
The most severe rule has the least obvious triggers. The tax code prohibits certain dealings between the IRA and the people closest to it, and the penalty for crossing the line is not a fee. The account can lose its status entirely and be treated as if it distributed everything it holds, taxed as income in a single year, with an early withdrawal penalty on top for a client under 59 and a half. What trips people up is that the prohibited moves look like convenience rather than abuse. Paying a property tax bill on an IRA-owned building from a personal checking account. Spending a weekend fixing up that building yourself, which counts as contributing services to the account. Letting a son or daughter rent the condo the IRA owns. The family rules also surprise people in both directions: a child or parent is off limits, while a sibling is not. The damage is done the moment the transaction happens, not when someone notices.
The questions to ask first
None of this is an argument against alternatives in retirement accounts. It is an argument for a short screen before the purchase rather than after. Four questions catch most of the trouble. Will the client, the client's spouse, parents, or children use, occupy, manage, or work on the asset in any way? If yes, it usually does not belong in that IRA. Is there leverage or an operating business involved? Then expect a 990-T, model the after-tax return honestly, and check whether a Solo 401(k) is the better home. When will distributions begin, and will the account hold enough cash to meet them, or does it need a liquid sleeve beside the illiquid asset? And who values it each year, on what schedule? Ask these before the wire goes out and most of the later surprises never happen.
The investment decision is the part everyone enjoys. The mechanics of the wrapper are where an advisor quietly earns the relationship, because they are invisible until they are expensive. A client who hears this before signing the subscription documents will thank you. The one who hears it for the first time at 73, staring at a distribution the account cannot fund or a penalty notice for a return nobody filed, will remember that no one warned them.
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