A story about freedom… and responsibility
Here at uDirect IRA Serivces, we have a savvy investor (we’ll call him Alex). Alex decided retirement investing didn’t have to stop at stocks, bonds, and mutual funds. Alex managed a Self-Directed IRA (SDIRA) and knew one of its biggest advantages: the ability to invest in alternative assets … things like real estate, private companies, and even energy-related investments.
But Alex also understood the other side of the coin:
The more control you have, the more responsibility you carry.
That mindset is what kept Alex out of trouble—and it’s the mindset every SDIRA investor needs.
The opportunity: investing in producing oil & gas assets through an LLC
Alex discovered a unique private investment: a limited liability company (LLC) raising capital to acquire a portfolio of proved, producing oil and natural-gas wells. The business model focused on buying existing production and the related interests that often come with it, such as:
- mineral interests
- overriding royalties
- leasehold rights
For an SDIRA investor, these types of deals can be compelling because they may generate ongoing cash flow tied to production—sometimes over long periods.
Why Alex used an SDIRA LLC (“checkbook control”)
To move quickly, Alex had already established an IRA-owned LLC (often called an “SDIRA LLC”) to create checkbook control (meaning Alex could execute investments from the LLC’s bank account without asking the custodian to approve every transaction). The LLC may add some speed to the transaction, but it eliminates the asset review we do here at uDirect IRA Services. We review assets to see if we spot a prohibited transaction. If so, we advise the account holder.
But back to Alex. His SDIRA (via the IRA-owned LLC) became a member of the oil & gas LLC and purchased membership interests.
Alex also understood two critical structural realities:
- The IRA (not Alex personally) had to be the investor.
The subscription paperwork and operating agreement needed to show the SDIRA/IRA-owned LLC as the purchaser/owner. - Separate finances weren’t optional. They were everything.
All investment income had to flow back to the IRA LLC structure, and all investment expenses had to be paid from the IRA/LLC, not Alex’s personal funds.
The benefit Alex wanted (and the benefit Alex avoided)
Alex liked the potential of receiving a portion of production revenue through the membership interest, and the LLC structure offered liability protection at the personal level.
But just as important, Alex wanted to avoid the landmines that come with self-direction—especially:
- Prohibited transactions
- UBTI (Unrelated Business Taxable Income)
- Bad paperwork that accidentally makes you the buyer instead of your IRA
Key Tax Implications for 2025 (SDIRA + Oil & Gas Edition)
Important: This is general education, not tax advice. SDIRA tax issues get technical fast. Talk to a tax professional who has dealt with SDIRAs and Form 990-T before you invest.
1) UBTI: when IRA income becomes taxable
Even though IRAs are generally tax-advantaged, they can owe tax when they earn Unrelated Business Taxable Income (UBTI). The IRS explains that IRAs are among the entities subject to the tax on unrelated business income, and that Form 990-T is required if gross income from unrelated business activities totals $1,000 or more.
Practical takeaway:
If your SDIRA investment produces UBTI and it crosses the $1,000 gross-income threshold, your IRA may need to file Form 990‑T and potentially pay tax from IRA funds.
2) Royalties vs. Working Interests: not all oil & gas income is treated the same
Here’s where many SDIRA investors get surprised.
The IRS’s own exempt-organization guidance makes a clear distinction:
- Overriding royalties are generally excluded from UBTI under IRC 512(b)(2).
- Working interests in oil & gas can produce UBTI (i.e., they’re treated like active business income for UBTI purposes).
Translation:
If your IRA is simply collecting qualifying royalty income, it may avoid UBTI. If it owns a working interest where it is not relieved from development/operating costs, that income generally won’t be excluded and may trigger UBTI.
3) Debt can change the result
Even income that is normally “passive” can become taxable to an IRA if it’s tied to debt-financed property. IRS guidance notes that certain royalties connected to debt-financed property may be included in computing unrelated business taxable income.
Translation:
If leverage is involved anywhere in the structure, you want a tax pro to review the setup before you invest.
4) Why UBTI can sting: trust tax rates ramp up quickly in 2026
UBTI taxes for IRA-type entities are often discussed in the context of trust tax rates, and those brackets get steep fast.
For tax year 2025, IRS inflation adjustments show that estates and trusts hit the top 37% bracket at $15,650 of taxable income.
That’s why UBTI planning matters: you don’t need a huge amount of taxable income before you’re in the top bracket.
5) “But oil & gas has amazing deductions!” Not inside an SDIRA
Many oil & gas deals highlight tax benefits like Intangible Drilling Costs (IDC) or other deductions. Outside of retirement accounts, those may help offset personal taxable income.
Inside an SDIRA, those tax attributes generally flow into the retirement structure—not your personal return—so you typically don’t get to use them to offset your W‑2 income or other personal income.
Compliance rules Alex took seriously (and you should too)
Prohibited transactions: the fastest way to blow up an IRA
The IRS is very direct: a prohibited transaction generally involves improper use of IRA assets by the IRA owner, beneficiary, or a disqualified person. Disqualified persons include family members such as a spouse, ancestor, and lineal descendants (and spouses of lineal descendants).
Real-world examples of how people accidentally cross the line:
- Buying into a deal that you (or certain family members) already own or control
- Paying an IRA-owned LLC expense with a personal credit card “just to be quick”
- Depositing income into your personal account “and I’ll move it back later”
The theme is always the same: your IRA must benefit—without you personally benefiting today.
The “Do This Next” Checklist (Actionable Steps)
Here’s the exact kind of checklist Alex followed—and what I recommend any SDIRA investor do before wiring a dollar.
1) Verify the asset type (this drives the tax outcome)
Ask in writing:
- Are the interests working interests or royalty/overriding royalty/mineral interests?
- Will the IRA receive a K‑1?
- Is there any debt anywhere in the acquisition or operating structure?
2) Monitor UBTI and filing requirements
- Discuss you UBTI concerns with your competent tax advisor.
- Track whether gross income from unrelated business activities is approaching the $1,000 threshold.
- If filing is required, note that an IRA generally must file Form 990‑T by the 15th day of the 4th month after the end of its tax year (often April 15 for calendar-year IRAs).
3) Review the operating agreement (don’t skip this)
Confirm the documents correctly list:
- the SDIRA (or the IRA-owned LLC) as the investor/member/subscriber
- the correct titling language (this matters)
- the mechanics of distributions (they must flow back to the retirement structure)
4) Complete the subscription agreement correctly
This is where many investors make an expensive mistake. Make sure the subscription paperwork reflects the IRA/IRA-owned LLC as the purchaser, not you personally.
Final thought: the power of self-direction is in the discipline
Alex’s story is a simple reminder:
A Self-Directed IRA can be an incredible vehicle for building retirement wealth through alternative assets—but it’s not “set it and forget it.” It’s “self-directed,” and that comes with real responsibilities: compliance, paperwork accuracy, tax awareness, and consistent separation between personal and retirement finances.
If you want the upside of control, you also have to accept the job that comes with it.
Contact Us:
Whether you want to invest in real estate, crypto, or private companies, we can help you get started with a self-directed IRA. We’re here to help you stay compliant while you grow your retirement wealth confidently and intelligently.
Call us today at (866) 447-6589
Email us at info@uDirectIRA.com
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Let’s make your retirement investing work for you—not just Wall Street.