A Self-Directed Roth IRA is a Roth IRA that allows a wider set of investments, including real estate, while keeping the Roth structure built on after-tax contributions and potential tax-free qualified withdrawals. Because the investment menu expands, the account also comes with tighter operational discipline around titling, payments, and prohibited transactions.

This guide breaks down how a Self-Directed Roth IRA works, what rules shape real estate deals inside the account, and where investors tend to make mistakes. It also includes real estate examples with numbers, a contribution-limit table, and a custodian selection checklist.

Understanding Self-Directed Roth IRAs

A Self-Directed Roth IRA starts with the same core foundation as a standard Roth IRA: contributions are made with after-tax dollars, and qualified distributions can be tax-free if the rules are met. A “self-directed” format changes the investment access, not the tax label, so the account can hold alternative assets that most brokerage Roth IRAs do not support.

It also differs from a traditional Roth IRA at a practical level. Standard Roth accounts are optimized for liquid assets like ETFs and mutual funds, while a self-directed setup is built to administer paperwork-heavy holdings like property deeds, private placements, and promissory notes. The custodian is an administrative hub, not an investment adviser, so the investor drives due diligence and deal selection.

How a Self-Directed Roth IRA Works

Custodian role & account mechanics (what custodian can/cannot do)

A self-directed custodian opens and maintains the Roth IRA, processes contributions, executes investment paperwork based on your direction, and handles reporting. The custodian typically holds the asset title in the Roth IRA’s name (or supports an IRA-owned LLC structure in some setups), and it provides statements and transaction records.

What the custodian does not do is just as important. Custodians generally do not vet the investment quality, verify valuations the way an appraiser would, or confirm that a deal structure avoids prohibited transactions. That gap creates freedom, but it also means the investor must build a repeatable compliance workflow: correct titling, clean payment routing, third-party vendors, and documented valuations.

Contribution flow (after-tax dollars), tax treatment on growth/withdrawals

With a Roth IRA, contributions come from after-tax dollars, so there is no deduction for the contribution itself. In exchange, growth inside the account can be powerful: rents, interest, and long-term appreciation can compound without annual tax drag in many situations.

Withdrawals have two layers. Contributions can often be accessed under Roth ordering rules, while earnings usually need a qualified distribution to avoid taxes and penalties. Qualified distributions typically depend on meeting the five-year rule and an eligible reason (such as reaching the applicable age threshold). Investors who treat a Self-Directed Roth IRA as a long-term vault often design deals around that calendar, choosing assets that can be held without needing early liquidity.

Example: Investor uses SD-Roth for residential rental

Imagine an investor funds a Self-Directed Roth IRA with $7,000 per year across several years and rolls over additional eligible Roth assets from another plan, building a $120,000 cash balance. The Roth IRA purchases a small residential rental for $110,000, with $4,000 in closing costs and $6,000 held back for initial reserves.

The property rents for $1,350 per month. After property taxes, insurance, repairs, and professional management, net cash flow averages $650 per month, or $7,800 per year. That cash stays inside the Roth IRA for future reserves or another purchase. Five years later, the property sells for $145,000 with $9,000 in selling costs. Net sale proceeds of $136,000 return to the Roth IRA. If the account holder later takes a qualified distribution, that growth can come out tax-free under Roth rules.

Eligible Investments

Real estate examples

A Self-Directed Roth IRA can be used for:

Buy-and-hold rentals: single-family homes, small multifamily, and condos used strictly as rentals.
Raw land: long-term holds or land leased to third parties.
REITs: publicly traded REITs in a standard Roth IRA, or private REIT offerings in some self-directed setups, depending on custodian support and offering terms.
Syndications: fractional ownership via private placements, when supported by the custodian.

Flips sit in a gray zone for many investors. A flip can collide with prohibited-transaction and “service” boundaries if the owner performs work, directs labor in a way that resembles sweat equity, or creates personal benefit through involvement that looks like self-dealing. Even when contractors do the rehab, frequent transactional activity and financing can bring extra tax complexity in retirement accounts. The safest mental model is this: the Roth IRA owns an investment, and all benefits must stay inside the Roth IRA, with no personal use and no personal services that feel like you are “working for your IRA.”

Alternative assets

Many self-directed custodians support alternative assets such as:

Private equity and venture funds.
Private debt notes.
Cryptocurrency (through custodial solutions and approved platforms).
Precious metals (often with specific rules around allowable metals and storage through approved depositories).

Restrictions usually appear through three gates: what the law allows, what the custodian can administer, and what can be held without prohibited transaction risk. Even if an asset is permitted in theory, the paperwork, valuation cadence, and custody chain must still function inside retirement account administration.

Contribution Limits, Withdrawals & Distribution Rules

Annual contribution limits change over time, and income-based phaseouts can apply. Use the table as a planning snapshot, then confirm the current year’s number before publishing or making a deposit.

Tax year	Roth IRA contribution limit	Catch-up (age 50+)
2023	$6,500	$1,000
2024	$7,000	$1,000
2025	$7,000	$1,000

Qualified distributions generally depend on two ideas: a five-year holding period and a qualifying condition. Early withdrawals can trigger taxes and a 10 percent penalty on earnings in many cases, with some exceptions. Because real estate is illiquid, distribution planning matters. A property can rise in value while still being hard to sell quickly, and that mismatch can create timing stress if cash is needed.

Rules, Prohibited Transactions & Disqualified Persons

Self-directed accounts succeed when the owner treats the IRA as a separate financial universe. Money does not move casually between personal accounts and the Roth IRA. Ownership does not blur. Services do not blur.

Examples of actions that can blow up compliance:

Buying a property in your own name and “moving it” into the Roth IRA later.
Living in the IRA-owned property, even briefly.
Renting the IRA-owned property to a disqualified person, such as certain close family members.
Paying a property bill personally, then reimbursing yourself from the Roth IRA.
Using Roth IRA property as collateral for a personal loan.

Common mistakes investors make

An investor finds a “too good to lose” deal and puts earnest money down from a personal account to move fast. Later, the investor tries to have the Roth IRA reimburse the earnest money at closing. That reimbursement can look like personal funds paying IRA expenses, which is a compliance hazard. Better workflows use Roth IRA funds routed through the custodian, with timelines planned around the custodian’s processing requirements.

Advantages & Risks

Advantages	Risks
Tax-free growth potential on qualified distributions.	Illiquidity, especially with direct real estate.
Diversification beyond stocks and bonds.	Custody, transaction, and third-party service fees.
Ability to target local-market opportunities.	Compliance complexity and paperwork friction.
Rents and sale proceeds can recycle inside the Roth IRA.	Valuation and reporting burden for alternative assets.

Setting Up a Self-Directed Roth IRA

Use this checklist to keep setup clean and repeatable:

Choose a self-directed custodian that supports your target asset type.
Open the Self-Directed Roth IRA and select beneficiaries.
Fund the account (annual contributions, transfers, eligible rollovers).
Identify an investment and complete direction-of-investment paperwork.
Confirm titling format before signing any purchase contract or subscription documents.
Build the operating system: third-party property manager, repair vendors, insurance, reserve policy.
Track ongoing compliance: annual valuations, income and expense routing, tax filings if UDFI or other special tax situations apply.

Costs & Fees

Costs often show up in layers:

Account fees: annual administration and recordkeeping.
Transaction fees: purchase processing, document review, outgoing wires, and asset-specific handling.
Third-party costs: escrow, title, insurance, property management, appraisals, and legal reviews.
Tax advice: CPA support for retirement-account reporting, and specialized filings if the IRA triggers additional tax forms.

A useful way to view fees is “drag versus control.” Direct real estate provides control and tangible underwriting, but it often carries more moving parts and more invoices than a simple ETF portfolio.

Real Estate Use Cases

Rental property buy-and-hold

A buy-and-hold rental inside a Self-Directed Roth IRA often aims for steady net cash flow plus long-term appreciation. Example: a $160,000 property is purchased with Roth IRA cash. Net income after management and expenses averages $9,600 per year. Over 10 years, the Roth IRA collects $96,000 in net rents, and the property sells for $230,000 with $14,000 in selling costs. Net sale proceeds of $216,000 return to the Roth IRA, which can then redeploy into another property or sit in cash for future opportunities.

Syndication & private placements

Syndications can suit investors who want real estate exposure with less day-to-day operational responsibility. The trade-off is control. Investors rely on sponsor performance, deal documents, and timelines that are not fully in the investor’s hands. Distributions typically flow back into the Roth IRA, and the custodian handles receipt and reporting.

What NOT to do

Avoid any structure where the account holder personally performs labor, manages rehab crews as a hands-on operator, or uses personal funds to “bridge” costs. Those patterns can resemble self-dealing or improper benefit. Flips can also involve debt, rapid transactions, and operational intensity, which increases the chance of paperwork mistakes and tax complexity. If a short-term rehab strategy is still the goal, it is safer to model it as a fully third-party-run project with clean payment routing and professional tax guidance from the start.

Tax Considerations & Estate Planning

Roth accounts are often used with legacy planning in mind because qualified withdrawals can be tax-free, and that tax profile can be meaningful for heirs. Beneficiary designations deserve the same attention as the investment itself. A well-structured Roth IRA can pass efficiently, while a poorly documented one can create delays and confusion.

Rollovers and transfers have their own rule sets, and the source account matters. Keep a written funding map that lists each deposit type, date, and source plan. That record becomes valuable later when distribution questions come up.

What to Look for When Choosing a Custodian

Custodian selection is where many Self-Directed Roth IRA experiences are won or lost. Use this checklist:

Real estate transaction experience and a clear closing workflow.
Transparent fee schedule with examples for common actions.
Clear titling instructions and document turnaround times.
Support for alternative assets beyond real estate if future diversification is planned.
Education resources that explain operational boundaries.

Talk with Nevada Trust Company

Ready to explore a Self-Directed Roth IRA strategy built around long-range retirement and legacy goals? At Nevada Trust Company, we have provided trust, custody, escrow, retirement, and investment management services since 1995, guided by a client-first approach. Contact our team to discuss account setup, administration, and the next steps for your real estate plan.