Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Self-Directed IRAs for Alternative Assets
Transcript
- Lucas: Luna, I want to talk about a tool that a lot of wealthy families use but that most people have barely heard of: the Self-Directed IRA. Luna: Okay, I've heard the term, but isn't an IRA just an IRA? What's different about a 'self-directed' one? Lucas: Great question. A standard IRA — whether traditional or Roth — typically limits you to publicly traded stocks, bonds, mutual funds, and ETFs. A Self-Directed IRA, or SDIRA, lets you invest in pretty much anything the IRS doesn't explicitly prohibit: private equity, real estate, precious metals, private company notes, even cryptocurrencies. Luna: So it's like a retirement account that can hold a startup investment or a rental property? Lucas: Exactly. And for ultra-high-net-worth families, that's the whole point. They don't want their retirement assets trapped in a market-correlated portfolio. They want to deploy that capital into the same alternative investments they use in their taxable accounts — but inside a tax-sheltered wrapper. Luna: So the tax advantage is the big draw. But I know the IRS has strict rules about this stuff. What can't you do? Lucas: The key restriction is something called the prohibited transaction rules. You cannot invest the IRA in anything that benefits you personally — your own business, your personal residence, your family members. You also can't use the IRA to buy assets from yourself or lend money to yourself. And crucially, you cannot provide services to an asset the IRA owns. Luna: So if I use my Self-Directed IRA to buy a rental property, I can't manage it myself? Lucas: Correct. You have to hire a third-party property manager. If you fix a leaky faucet yourself, that's a prohibited transaction. The IRS views that as you personally benefiting from the IRA's asset. And the penalty is harsh — the entire IRA is deemed distributed to you, subject to income tax plus a 10 percent early withdrawal penalty if you're under 59 and a half. Luna: Yikes. So mistakes can be incredibly costly. But let's talk about what's actually working for families right now. What are you seeing in 2026? Lucas: One of the most popular uses is investing in private credit funds. We've talked about private credit on this show before, but doing it inside a Self-Directed IRA means the interest income — which can be 8 to 12 percent — grows tax-deferred or tax-free, depending on whether it's a traditional or Roth SDIRA. Luna: And the minimums for those funds are often high — 100k, 250k plus. So this is really for accredited investors. Lucas: Absolutely. And another big one is direct real estate. Not just residential rentals, but commercial properties, triple-net leases, even raw land. I know a family in Texas that used a Self-Directed Roth IRA to buy a strip mall. All the rental income — tax-free. They've been doing it for seven years and have accumulated over four million dollars inside that Roth. Luna: That's impressive. But how do they handle the administration? I imagine you can't just open a Schwab account and buy a strip mall. Lucas: No, you need a special custodian — a company that specializes in Self-Directed IRAs. They hold the assets, handle the paperwork, and ensure compliance with IRS rules. But they don't provide investment advice; you're on your own for due diligence. And they charge fees — setup fees, annual fees, transaction fees — which can be a couple thousand dollars a year. That's another reason this tends to be for wealthier families: the fees eat into smaller balances. Luna: So it's not for someone with a 50k IRA. But for someone with 500k or more, it could make sense. What about checkbook control? I've heard that term. Lucas: Checkbook control is a strategy where you set up a limited liability company — an LLC — inside the SDIRA. The IRA owns the LLC, and you, as the manager of the LLC, have a checkbook to make investments directly. It speeds things up because you don't need custodian approval for every trade. But it's also riskier from a compliance standpoint — the IRS scrutinizes these structures more closely. Luna: And I imagine that if you're not careful, you can accidentally trigger a prohibited transaction. For example, if you use the LLC's funds to pay for your personal vacation. Lucas: Exactly. The line is clear: no personal benefit. But people cross it all the time. I read a case a few years ago where someone used their SDIRA to invest in a startup, and then they took a job as an employee of that startup. The IRS ruled that was self-dealing — the IRA owned the company, and the owner was providing services to it. The entire IRA was disqualified. Luna: Ouch. So if you're going to use an SDIRA, you need a good tax attorney or a CPA who really knows these rules. Lucas: Absolutely. And that's another reason this is a wealth-management tool: the advisory costs are real. But for families with significant retirement assets who want to diversify into alternatives, the tax benefits can outweigh those costs. Let's talk about one more angle: the landscape in 2026. The IRS has been issuing more guidance on valuation of illiquid assets inside SDIRAs. Luna: Right, because if you hold a private company stake, how do you value it for RMD purposes or for Roth conversions? Lucas: Exactly. The IRS now requires annual valuations for certain hard to value assets. And if you overvalue or undervalue, you could face penalties. This is an area where the wealth-management industry is stepping in — some family offices now offer valuation services specifically for SDIRA assets. Luna: So the ecosystem is maturing. It's not just the wild west anymore. Lucas: It's definitely maturing. And that's good for investors, because it means more clarity and more professional support. But it also means the IRS is paying closer attention. I think the bottom line is: Self-Directed IRAs are a powerful tool, but they're not a DIY project for most people. You need a team. Luna: Speaking of teams — and this is a little off-topic, but it connects — if our money conversations have helped you think about a decision differently, we'd love it if you considered supporting the show. We keep it ad-free, and listener support is what makes that possible. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, and we really appreciate everyone who's already contributed. It lets us keep diving into these niche wealth-management strategies without any sponsor pressure. So thank you. Luna: Alright, back to SDIRAs. Lucas, you mentioned that some families use them for startup investing. Can you give me a concrete example of how that works? Lucas: Sure. Let's say a family has 200k they want to invest in a friend's biotech startup. They can't just write a check from their IRA at Fidelity — Fidelity doesn't allow that. But they can transfer that 200k to a Self-Directed IRA custodian, then direct the custodian to invest in the startup's equity. The startup issues shares in the name of the IRA. If the startup goes public or is acquired, the proceeds go back into the IRA, still tax-sheltered. Luna: And the key is they can't work for the startup or be on the board, right? Lucas: Correct. They can be a passive investor only. If they want to be involved, they should invest from their personal account. That's a common mistake — people think 'I'll invest my IRA, then I'll help the company grow.' The IRS says no. Luna: So it's really about discipline. One last question: what's the future of SDIRAs? Do you see any regulatory changes coming? Lucas: There's been talk in Washington about expanding the types of investments allowed — maybe including certain types of hedge funds. But also about tightening the rules on checkbook control. The DOL and IRS have both signaled they're watching. I'd expect more audits of SDIRA holders in the next few years. Luna: So if you have one, get your paperwork in order. And if you're thinking about opening one, work with a specialist. Lucas: Exactly. And maybe start small. You don't have to move your entire retirement — just a portion. Test the waters with one alternative asset. See how the custodian works, how the reporting works. Then scale up.