Let AI Pick Your Perfect Self-Directed Solution!

IRA Financial Blog

Pros and Cons of a Self-Directed IRA

Learn About Self Directed IRA's
Key Points
  • Learning about your retirement can help you plan your future
  • Self-Directed IRA can let you invest in many more things than traditional IRAs
  • The US retirement system can work for everyone

What Is a Self-Directed IRA Account?

A Self-Directed IRA, also known as an SDIRA, is the same as a traditional or Roth IRS regarding contributions and eligibility rules. The main difference is what type of assets you can own in your self-directed IRA. So, let’s learn about the Self-Directed IRA, how it can be used, and what it can do for you.

If you can keep on top of your investments, avoid pitfalls, and manage your portfolio to see the most growth in your long-term investments, you will create a comfy nest egg for your retirement with a Self-Directed IRA account.

Typically, with an IRA, you are limited to investments in stocks, bonds, mutual funds, and investments sold by the bank. In a Self-Directed IRA, your options for investments are much broader.

Possible Investments

Investments that are available to you to make with a Self-Directed IRA include:

There are some investments that you are not allowed to purchase inside of your Self-Directed IRA. These investments include:

  • Collectibles and antiques
  • Property that you or your family currently rent or own
  • Life insurance

Like any investment, there are pros and cons; listed below are a few you need to consider before opening a Self-Directed IRA account. This will help you learn about the plan

Related: Beginners Guide to Alternative Investments

Pros Of a Self-Directed IRA


As an investor, you can build a diverse portfolio with a Self-Directed IRA with both passive and fast-growing assets set for long-term account growth. With a traditional IRA, you are limited to what you can invest in; with a Self-Directed IRA, you have a much larger pool of assets you can draw from.

Tax benefits

When investing with an IRA, you can receive tax break benefits. You can grow your retirement account tax-free or tax-deferred, depending on the IRA you choose.

With a traditional IRA, your assets will grow with your taxes deferred. Initially, you will get a tax break, and your funds will grow rapidly. However, when you withdraw funds from your account, those funds will be taxed as income.

A Roth IRA doesn’t receive the initial tax break, but you won’t be taxed on those withdrawals when you do need to withdraw funds.

You are in control of your investments

As an account holder of a Self-Directed IRA, you indeed are in control of your investments, and you get to decide how to grow your portfolio. You are in control of what you invest in, where you allocate funds and how far you want to spread your investments.

Asset protection

Just like other IRAs, a Self-Directed IRA is protected if you should fall on hard times and need to declare bankruptcy. These accounts are considered separate from their owners and cannot be touched during any financial hard times you may have. You can also pass your self-directed IRA down to your children or grandchildren to help build generational wealth.

Higher return rate

When compared to traditional funds and investments. Self-Directed IRA tends to grow faster. Keep in mind you do need to have some knowledge about the investments that you make, but if you make informed decisions, you can watch your nest egg grow reasonably quickly.

Potential Creditor Protection

Depending on the state, your IRA investments may be protected from creditors. However, it is important to do your research, as some states do not protect IRA investments from creditors. For more information see: IRA Creditor & Lawsuit Protection Laws by State

Cons Of a Self-Directed IRA

Lack of liquidation

Depending on what you choose to invest in, you may not be able to move your funds as you see fit. For example, if you invest in real estate, this is a long-term growth asset and generally is accompanied by a contract. Changing this investment will take some time. Using a Checkbook Controlled Self-Directed IRA can mitigate this problem.

Having a well-balanced portfolio is the best route. Balancing slow-growing investments with some more liquid options.

Paperwork and hidden fees

Two standard fees that self-directed IRA owners run into are Unrelated Business Taxable Income (UBTI) and Unrelated Debt-Financed Income (UDFI).

It would help if you also kept in mind that the custodian of your account or any other financial companies you may hire to assist you may charge some hefty fees. It is essential to do your homework to avoid any unnecessary expenses.

Self-sabotage and complications

The IRS highly regulates Self-Directed IRA accounts to prevent fraudulent accounts and investors. Be sure that you are well-read in the IRS guidelines for self-directed IRA accounts to avoid the risk of tax penalties or account disqualification altogether. Learning about prohibited transactions, such as not reporting account changes to your custodian or accessing your funds before retirement.

You will also need to do your homework on disqualified people, meaning anyone who may benefit from your Self-Directing IRA account must abide by the rules laid out. It would be best if you were well-versed in off-limit assets like life insurance, collectibles, and sentimental items. Doing your research before making any investment is smart and will benefit you overall.

Private ownership

Your Self-Directed IRA account is protected against bankruptcy and can be passed down to the next generation, but there are still some risks of losing your investments. For example, if you invest in a start-up company and they fail. You lose all the money you invested in that company. By being mindful of the high-risk investments in your portfolio, try and be diverse without spreading your funds too thin.

Third-party custodian

Opening a Self-Directed IRA puts you in charge of your retirement funds; the IRS has mandated that you have a certified custodian track your investments.

A custodian is a passive guardian to your investments, meaning they will keep track of your assets and account activity, but they do not give financial advice.

This is another area you need to research; the company you choose may have significant fees for their custodian services.

It is essential to report any changes made to your account to your custodian to ensure that you do not have your account disqualified. As you learn about the Self-Directed IRA you can find the difference between custodian and checkbook controlled accounts.

When a Self-Directing IRA is done right, it can be extremely rewarding. You can build a successful retirement fund for yourself; if you are willing to do research, create a plan, and maintain your investments, you will reap the benefits. Learn about the Self-Directed IRA and take control of your financial and retirement future.


Latest Content

Send Us a Message!