7 Things to Know About Partnering Your Self-Directed IRA

Partnering your Self-Directed IRA (SDIRA) with other funds, whether they’re personal, from a spouse, or another investor, an be a powerful way to access larger investments and diversify your retirement portfolio. But it’s important to understand the rules before diving in. Here are seven key facts to keep in mind when partnering your SDIRA at the inception of an investment:

1. Partnership Must Begin at the Start
   To stay compliant with IRS rules, your Self-Directed IRA must enter the investment at the same time as any other partners. You cannot add your IRA to an existing investment after it's already been made. Doing so could trigger a prohibited transaction, which comes with steep penalties.
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2. Ownership is Fixed and Proportional
   When partnering, the ownership split is based on the initial contributions of each party. If your IRA contributes 70% and you personally contribute 30%, that ratio is locked in. All income, expenses, and distributions must be divided according to these percentages for the life of the investment.
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3. You Can Partner with Yourself (Carefully)
   You’re allowed to partner your IRA with your own personal funds, your spouse’s IRA, or even a business partner, as long as the investment is structured properly at the outset. It’s crucial that you and your IRA act as separate entities, and all dealings are strictly passive.
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4. All Income and Expenses Must Be Divided Accordingly
   Once the investment is in place, all profits, losses, and expenses must be split according to the original ownership percentages. Co-mingling of funds is prohibited. For example, if a property repair is needed, your IRA and your co-investor must each pay their share based on the ownership breakdown.
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5. No "Sweat Equity" Allowed
   You cannot provide labor or services to the investment—even if you’re a co-owner. This includes property management, renovations, or even bookkeeping. The IRS views this as a benefit to a disqualified person and could disqualify the entire IRA.
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6. Requires Due Diligence and Paperwork
   Partnering investments need to be well-documented. You’ll need legal agreements that reflect the ownership structure, correct titling (typically in the name of the IRA), and transparency on all transactions. Working with a knowledgeable administrator and legal advisor helps ensure proper compliance.
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7. Partnering Can Increase Buying Power
   One of the biggest advantages of partnering is that it lets your IRA take part in investments it might not be able to afford on its own, like real estate, private placements, or promissory notes. This strategy allows you to leverage both tax-advantaged retirement funds and personal capital to build a stronger portfolio.

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Conclusion

Partnering your Self-Directed IRA can be an excellent way to expand your investment reach, as long as it’s done correctly from day one. Always consult with your financial or tax advisor to make sure your investment structure is compliant and aligned with your long-term goals.

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