This is one of a multi-part series on the Self-Directed IRA. Depending on how familiar you are with the account type already, you may already know that the Self-Directed IRA one of the best retirement solutions. This is particularly true for experienced investors and self-employed individuals. Even if you’re neither of these yet, you’ll still want to read on. A whole world of profitable investment opportunities is just waiting for…YOU! Think of your Self-Directed IRA as a “retirement investment vehicle” which allows you to use your retirement funds to invest in all varieties of investments. This includes, fortunately for my fellow real estate empire builders out there, real estate. But regardless of your preferred investment types, the best part for all account holders is that if you form and execute your Self-Directed IRA properly, your money grows tax free and you don’t need to take orders from a custodian. This will also free you from the expensive custodian fees that may have been a burden on your retirement account savings for years. Below, we’ll talk about how to take advantage of some of the Self-Directed IRA’s best features, but focusing first, of course, on how to get a loan for your investments.Why Traditional Loans Won’t Work For Your Self-Directed IRAMost investors using retirement funds to make an investment will use cash to make those deals. Whether the investment is in the form of stocks/bonds, gold, or real estate, most investors will not borrow any funds to make an investment. One significant reason why retirement account investors will generally not borrow money (also called debt or leverage) as part of an investment of real estate acquisition is the IRS. This should come as no surprise, as most Americans fear the IRS–and with good reason. Internal Revenue Code Section 4975 prevents you, the IRA holder, from personally guaranteeing a loan made to your IRA. This applies to your Self-Directed IRA, because you are barred from using a typical loan or mortgage loan as part of an IRA transaction. The IRS considers such loans prohibited transactions, which can trigger major consequences and fees for the investor who runs afoul of prohibited transaction rules. The bottom line is simple: you just can’t get an ordinary loan with Self-Directed IRA. But you may still need one to cover your early investments. Don’t worry though. You, as a newly empowered Self-Directed IRA investor, do still have a financing option: a non-recourse loan. What is a Non-Recourse Loan and How Does it Work?Non-recourse loans differ wildly from traditional loans in a major way. Non-recourse loans aren’t guaranteed by anyone at all. Rather, they’re secured by collateral, such as a valuable property or other asset. While in theory any asset could be used for collateral, lenders in this case are typically securing the loan via the asset or property that the loan will be used for. So if you, the borrower, are unable to repay the loan, the lender’s only recourse is against the asset, such as the investment property you intend to use the loan for. They can’t come after you personally. That’s the simple definition of “non-recourse.” On average, non-recourse loans are tougher to obtain than a traditional loans or mortgages. Fortunately, this is a common enough strategy for investors that you will have your pick from a wide variety of reputable non-recourse lenders. But you should be aware of the fact that interest rates on non-recourse loans do tend to be slightly higher than those of personal loans. IRS Rules Regarding Non-Recourse LoansThe IRS has some strict limits on how these types of loans may be used in retirement accounts. The main thing you should know is that Uncle Sam allows IRA and 401k plans to use non-recourse loans solely for financing purposes. The rules covering the use of non-recourse financing by an IRA can be found in Internal Revenue Code Section 514. Section 514 requires debt-financed income to be included in unrelated business taxable income (UBTI or UBIT), which can trigger around a 40% tax for 2017 and 2018. If non-recourse debt financing is used, the portion of the income or gains generated by the debt-financed can also get you hit with the approximately 40% UBTI tax. So for instance, if you choose to invest 60% IRA funds and borrow 40% on a non-recourse basis, 40% of the income or gains generated by the debt financed investment would be subject to the UBTI tax. Let’s keep it simple and imagine for the purpose of this example that the investment property you wish to buy is $100,000. This means that as a Self-Directed IRA investor, if you invest $60,000 IRA funds and borrow $40,000 on a non-recourse basis and the IRA investment generates $1,000 of income annually, 40% of the income or $400 would be subject to the UBTI tax. But don’t stress it too hard. There are ways to reduce the $400 base tax. It should be clear from this example that using as little non-recourse financing as you need is ideal, but that’s not the only way to lower your base tax.How To Save On Taxes By Avoiding the UBTIYou can use a Solo 401k Plan, if you already have one, to dodge the UBTI. This is one reason that Solo 401ks and Self-Directed IRAs are such attractive investment vehicles. Used together, or using strategic rollover methods, you can reduce your need for financing, but the news gets even better. If you use non-recourse financing to invest in real estate through your Solo 401k Plan or your Self-Directed IRA, you will “escape” UBTI/UBIT tax due to an exception. This exception can be found in the Unrelated Debt Financed Income (UDFI) rules found under IRC 514(c)(9). If you’re curious, you’re welcome to learn about how this works, but due to space reasons, I’ll just tell you that many of my clients have used this exception to save thousands in tax dollars while securing the loans they need for their Self-Directed IRA investments. And there’s no reason why you can’t do this too. That’s all for now, but if this subject interests you, keep your eyes peeled for many more upcoming pieces on the Self-Directed IRA and its “big brother” account, the Self-Directed IRA LLC. These will also be discussed in an upcoming book I’m authoring and giving away for free for Bigger Pockets. Stay tuned for updates on that, and happy investing!