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Self-Directed IRA (SDIRA) Tax Guide for CPAs

Introduction

As a CPA, you frequently advise clients on tax-efficient investment strategies. Many investors are looking for ways to diversify their portfolios using tax-advantaged accounts, but they may not be aware of the benefits and rules surrounding Self-Directed IRAs (SDIRAs). This guide provides an overview of how SDIRAs work, their tax implications, and best practices for advising clients on these accounts.

What is a Self-Directed IRA (SDIRA)?

A Self-Directed IRA (SDIRA) is a retirement account that allows investors to hold alternative assets beyond traditional stocks and bonds. These include real estate, private equity, venture capital, and cryptocurrency, among others. SDIRAs offer the same tax benefits as traditional and Roth IRAs but require more active management.

Types of SDIRAs

  • Traditional SDIRA – Contributions are tax-deductible, and withdrawals are taxed as income.

  • Roth SDIRA – Contributions are made with after-tax dollars, and withdrawals are tax-free in retirement.

  • SEP & SIMPLE SDIRAs – Designed for small business owners and self-employed individuals with contribution limits that exceed standard IRAs.

How Are SDIRAs Funded?

Clients can fund their SDIRA in several ways:

  1. IRA-to-IRA Transfer – Moving funds from an existing traditional or Roth IRA to a self-directed custodian without tax consequences.

  2. 401(k) Rollover – Rolling over funds from a previous employer’s 401(k) into a self-directed IRA. This can be done tax-free if handled properly.

  3. Annual Contributions – Clients can contribute up to IRS limits each year (e.g., $7,000 for individuals under 50 and $8,000 for those 50+ in 2024).

  4. Employer Plan Rollovers – SEP IRAs and SIMPLE IRAs can also be rolled into SDIRAs for self-employed clients or small business owners.

By understanding these funding mechanisms, CPAs can help clients determine the most tax-efficient way to move money into their SDIRA while staying compliant with IRS regulations.

Tax Advantages of SDIRAs
  1. Tax-Deferred or Tax-Free Growth

    • Traditional SDIRAs: Investments grow tax-deferred until withdrawals begin at retirement.

    • Roth SDIRAs: Earnings grow tax-free, allowing for 100% tax-free withdrawals in retirement.

  2. Tax Deductions & Contributions

    • Traditional SDIRA contributions may be deducted from taxable income, reducing immediate tax liability.

    • SEP & SIMPLE SDIRAs allow for higher contribution limits, benefiting self-employed clients.

  3. UBIT & UDFI Considerations

    • Unrelated Business Income Tax (UBIT): Applies if the SDIRA invests in an active business that generates operating income.

    • Unrelated Debt-Financed Income (UDFI): Applies if an SDIRA purchases real estate using leverage.

    • CPA’s Role: Helping clients structure investments strategically to minimize or avoid these taxes.

What CPAs Should Watch For
  1. Prohibited Transactions & Disqualified Persons

    • The IRS prohibits certain transactions within an SDIRA, including:

      • Buying property for personal use.

      • Lending money to disqualified persons (e.g., the account holder, spouse, children, or fiduciaries).

    • CPA’s Role: Educating clients on what is and isn’t allowed to prevent tax penalties.

  2. Recordkeeping & Compliance

    As a CPA, it’s critical to ensure that clients maintain proper records for their Self-Directed IRA (SDIRA) transactions. The IRS requires accurate reporting to avoid penalties and ensure compliance with tax laws.

    Key IRS Reporting Requirements for SDIRAs
    • Form 5498 – IRA Contributions & Fair Market Value (FMV) Reporting

      • Custodians file Form 5498 annually to report contributions, rollovers, and the fair market value (FMV) of the SDIRA.

      • The FMV of non-traditional assets (real estate, private equity, etc.) must be updated yearly, typically using third-party valuations.

    • Form 1099-R – SDIRA Distributions

      • If an account holder takes a distribution from their SDIRA (including cash withdrawals or in-kind asset distributions), the custodian reports it on Form 1099-R.

      • Distributions may be taxable or penalty-free, depending on factors like age (59½ rule), Roth vs. Traditional IRA, and exceptions (e.g., first-time home purchase, medical expenses, etc.).

      • Required Minimum Distributions (RMDs) for Traditional SDIRAs begin at age 73 under the SECURE Act 2.0.

    • Prohibited Transactions & UBIT Compliance

      • SDIRA investors must avoid prohibited transactions, such as self-dealing (e.g., buying property they personally use) to maintain tax-advantaged status.

      • If the SDIRA invests in an active business structured as an LLC or partnership, it may trigger Unrelated Business Income Tax (UBIT), which requires filing Form 990-T.

  3. RMDs for Traditional SDIRAs

    • Required Minimum Distributions (RMDs) begin at age 73 for Traditional SDIRAs.

    • Roth SDIRAs have no RMDs, making them attractive for wealth transfer strategies.

How CPAs Can Help Clients with SDIRAs
  1. Educate Clients on Alternative Investments

    • Many investors are unaware of how to use SDIRAs for real estate, private equity, or venture capital.

    • Offer a consultation to explore SDIRA options tailored to your client’s financial goals.

  2. Assist with Proper Structuring

    • Help clients avoid UBIT and UDFI taxes by advising on investment structures.

    • Ensure compliance with IRS regulations on prohibited transactions.

  3. Partner with a Trusted SDIRA Custodian

    • Work with a reliable custodian to ensure seamless tax reporting and recordkeeping.

    • Consider co-hosting educational workshops to help clients navigate SDIRA benefits.

Partner with Us

We specialize in custody and administration of self-directed IRAs, helping CPAs and their clients invest confidently in alternative assets.

Next Steps:

  • Schedule a complimentary CPA training session on SDIRAs.

  • Offer this guide to your clients as an educational resource.

  • Contact us for co-branded materials and SDIRA support.