With tax day in the rearview, it’s the perfect time to take a breath—and take a closer look at strategies that can help lower the tax bill next for 2025 and beyond. One powerful (and often overlooked) option: Investing through a Self-Directed IRA (SDIRA).
Real estate has long been a go-to for building long-term wealth. But what many investors don’t realize is that real estate can also be held inside a retirement account—potentially reducing or even eliminating taxes along the way.
And with the market doing its best rollercoaster impression lately, it’s no surprise more investors are looking for ways to diversify beyond Wall Street and into investments they understand.
What’s an SDIRA?
In short, an SDIRA is a retirement account that lets you break out of the stock-and-bond box. Instead, you can invest in alternative assets—things like real estate, precious metals, and even crypto.
For investors already active in real estate investing, an SDIRA offers a way to continue investing in something you know and understand—while layering in tax advantages.
Traditional vs. Roth: Which One’s Right for You?
- Traditional SDIRA – You contribute pre-tax dollars and pay taxes when you take distributions. If you expect to be in a lower tax bracket down the road, this could work in your favor.
- Roth SDIRA – You pay taxes upfront, and then all future growth and withdrawals are tax-free. No Required Minimum Distributions (RMDs), which means more flexibility in retirement. If you’re looking for long-term growth, the Roth IRA could be the better fit, especially if you expect to be in a higher tax bracket later.
Why Real Estate Investors Love SDIRAs
Real estate is one of the most popular SDIRA assets for a reason. You get to invest in what you know and watch those assets grow tax-deferred or tax-free, depending on your account type.
In a world where public markets can swing on headlines, earnings reports, or tweets, real estate provides a level of time-tested stability.
A Few Things to Know
SDIRAs come with a few responsibilities, but nothing overly complicated—especially with the right custodian. Here are a few key things to keep in mind:
- Form 5498 – Filed by your custodian to report contributions. If your SDIRA holds real estate, you will have to supply your custodian with an annual Fair Market Value (FMV).
- UDFI Taxes – If your SDIRA uses financing to purchase real estate, income generated from the financed portion may be subject to Unrelated Debt-Financed Income (UDFI) tax, which falls under the broader Unrelated Business Income Tax (UBIT) rules. This typically applies to SDIRAs that invest in real estate. For example, if your IRA doesn’t have enough funds to purchase a property outright and you finance part of the purchase, any income generated from the financed portion will be taxable.
If you’re looking for a way to diversify your retirement savings and take more control in an unpredictable market, SDIRAs are worth a look.
Want to dive deeper? Check out the Getting Started guide we created with our friends over at Horizon Trust.
Also, be sure to visit the video gallery on our FAQ page. Just toggle to “Tax” in the gallery to see all of our tax-related videos.
If you’re ready to set up an SDIRA consultation, click the button below to be directed to Horizon Trust.