The custodian says the account holder cannot fix the leaking faucet

Question

A common moment on an intro call with a self directed custodian. The investor is moving part of a brokerage IRA over to buy a small rental, and the rep says that if the IRA owns the house, the account holder cannot do any work on it. Not even paint or a faucet washer, and it makes no difference that no money changes hands. For someone who does their own work on everything held outside the IRA, that feels backwards. The instinct is that unpaid labor is a gift to the account. The rep says no and moves on to fees. The rep will also keep saying "disqualified person" as if everyone already knows the term. It covers the account holder and family, but where does it stop? What about a brother in law who does HVAC?

Rena Guide · Accepted Answer

The rep is right, and the reason is that unpaid work counts as you putting value into the IRA outside the contribution rules. The prohibited-transaction rules in the tax code don't ask whether money changed hands. They ask whether a disqualified person provided services or benefit to the plan. Your labor is a service. So the faucet gets fixed by a plumber, paid from the IRA's own cash, with the invoice going to the custodian.

Disqualified person is a defined term, and the core of it is you, your spouse, your lineal ascendants and descendants (parents, kids, grandkids) and their spouses, plus any entity you control. A brother-in-law is not lineal, which is why HVAC brothers-in-law come up constantly in this room, but the answer to whether a specific person is inside or outside the line is one to run past a tax attorney or CPA who works with these accounts, because the entity-control side gets messy fast.

The part that catches people later is cash. Every expense on that house has to come out of the IRA and every dollar of rent has to go back into it. If the water heater dies and the IRA has $400 in it, you can't write a personal check to cover the difference. That's a contribution at best and a prohibited transaction at worst. People who run these accounts well keep a real reserve sitting in the IRA, not just enough for taxes and the custodian's annual fee.

chriswalton8 · Answer

The unpaid labor rule stops feeling backwards once the IRA is framed as a separate person, one that happens to be you when it comes to giving instructions and a stranger when it comes to everything else.

Rena Expert · Answer

Add one thing to the labor answer: the risk isn't a penalty, it's disqualification. A prohibited transaction can be treated as the entire IRA distributing to you as of the first day of that tax year. Not the $200 faucet. The whole balance, ordinary income, plus early distribution consequences depending on your age. That asymmetry is why the answer to "can I just..." Is almost always no.

On the brother-in-law, the lineal test is the easy half. The other half is control. If your brother-in-law's HVAC company is 60 percent owned by you, it's a disqualified entity regardless of how the family tree runs. Percentages and attribution rules apply here and they're not intuitive, so confirm the specific relationship with a tax professional rather than reasoning from the family tree alone.

The practical trap in your setup is documentation, not intent. If you self-direct the purchase and then a vendor invoices you personally and you get reimbursed by the IRA, you've created a paper trail that looks like exactly what you're not allowed to do, even if the economics were clean. Get vendors set up to bill the custodian in the name of the account, something like "XYZ Trust FBO Quarry IRA," from the first invoice. Custodians process what you send them. They don't check whether it's compliant, and several will say so in the account agreement.

luis_carrera · Answer

The thing to pin down before moving anything is turnaround time. If the custodian has to sign the purchase agreement and cut the earnest money check, ask how that works on a deal with a 3 day earnest money deadline. On its face it rules out anything competitive.

joe_delgado5 · Answer

@luis_carrera it does, mostly. Custodians quote a few business days to fund and some are slower. On thin-margin stuff where the seller wants proof of funds today and cash in five, an SDIRA is not the tool. It's for the boring hold you found through an agent with a 30 day close.

dmitri_248 · Answer

The line worth underlining is that the custodian processes but does not police. That means the account agreement is where you find out what they will and will not sign, and those documents differ a great deal between custodians. Read two or three side by side before picking one.

nicole_adeyemi · Answer

On the labor question, land is the cleaner version of this. There is nothing to fix and no tenant or vendor invoices, just property taxes and perhaps mowing, both paid from the account. The tradeoff is no rent coming in, so the account has to keep being fed through contributions to cover holding costs, and contributions are capped.

The custodian says the account holder cannot fix the leaking faucet

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