The Deal
Rental cash flow, distributions, dividends — whatever the deal pays out each year.
Tax & Account
Used to tax cash-side annual cash flow (rental, distributions, dividends). Distribution tax for a Traditional SDIRA is set separately below.
Trust tax brackets compress to ~37% federal at modest income levels.
Self-Directed IRA Option
Traditional: distribution taxed as ordinary income. Roth: tax-free distribution if age 59½+ and 5-year rule met.
Your expected marginal rate when you take the distribution — usually lower than your current ordinary rate. Default 20%.
If under 59½, a 10% early-withdrawal penalty applies on the Traditional distribution and on Roth earnings.
Scenario A: Taxable Cash Account
Operating Period (7 yr)
Exit (Year 7)
Scenario B: Traditional SDIRA
Operating Period (7 yr)
Exit (Year 7)
Distribution at Age 65
The Bottom Line
For this deal, holding it in cash beats the SDIRA by roughly $102,963 over 7 years.
The SDIRA still gets tax-deferred growth, but the ordinary-income tax owed at distribution age — combined with any UBIT on leverage — can give back more than it earns versus a taxable account with LTCG treatment on the appreciation. Toggle leverage, account type, and your tax assumptions to see the breakpoint.
Pressure-test this against your actual situationWhat is a Self-Directed IRA?
A Self-Directed IRA (SDIRA) is a tax-advantaged retirement account that can hold alternative assets — real estate, private placements, syndications, private notes — rather than just publicly traded stocks and funds. The IRA itself owns the investment; the investor cannot personally use or benefit from the asset without triggering a prohibited transaction. Custodians like Equity Trust, Madison Trust, and IRA Financial handle the administrative side. UBIT (Unrelated Business Income Tax) is the critical gotcha: when the SDIRA uses debt to acquire an asset, the income and gain attributable to the debt-financed portion is taxed at trust rates, which compress to the top bracket fast.
Key Considerations
UBIT on Leverage
Debt-financed income and gain in an SDIRA trigger UBIT at trust tax rates (top federal bracket ~37%). A small annual exclusion (~$1,000) applies. UBIT is the single biggest reason leverage often kills the SDIRA advantage.
Depreciation Goes Unused
In a taxable account, real-estate depreciation shields ordinary income. Inside an SDIRA, that shield is “wasted” — the income is already tax-deferred. For high-depreciation deals (real estate, syndications), this can swing the math toward cash.
Early Withdrawal Penalty
Distributions before age 59½ trigger a 10% federal penalty on top of ordinary tax (Traditional) or on the earnings portion (Roth). If you might need the capital before then, the SDIRA is structurally illiquid in a way cash isn't.
Prohibited Transactions
You cannot live in, use, manage, or benefit personally from an SDIRA-owned property. Family members of certain degrees are also disqualified. Violating the rules can disqualify the entire IRA, triggering immediate full taxation of the account balance.
No Step-Up at Death
Assets held in a Traditional IRA do not receive a stepped-up basis at the owner's death. Heirs inherit the embedded ordinary income tax liability (subject to the 10-year withdrawal rule). Taxable real estate, by contrast, gets a full step-up — potentially eliminating decades of appreciation tax.
Roth's Quiet Edge
A Roth SDIRA gives up the up-front deduction but eliminates the back-end ordinary tax entirely. For investments with strong expected appreciation held to 59½+, Roth often produces the largest after-tax outcome of the three options.
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