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Understanding the Self-Directed IRA

understanding the self-directed ira
3 Minute Read

Understanding the self-directed IRA may seem challenging, but in fact, this retirement account is similar to a traditional IRA. The defining difference is that plan participants are permitted to make alternative investments, such as real estate, which they otherwise are unable to do with traditional individual retirement accounts.

In this article, we better help investors understand the self-directed IRA and how it can be used to make investments they know and understand, while diversifying their retirement portfolio.

Understanding the Self-Directed IRA

A self-directed IRA allows you to save for retirement on your own terms. Similarly to a traditional or Roth IRA, it lets you save on a tax-advantage basis, with the same IRA contribution limits. What sets a Self-Directed IRA apart, though, is what you can invest in. Whereas traditional IRAs only allow stocks, bonds, and other common investments, Self-Directed IRAs have many, many more options. And the investing direction comes from you when you choose to gain checkbook control.

Alternative Investments

Some of the options you can invest in include rental properties, horses, tax lien certificates, or a privately held company. These are known as alternative investments, which are investments outside of the classification of traditional investments, such as stocks, bonds, mutual funds, etc.. You are limited to only your imagination and the custodian of your plan, who can advise on IRS rules. In fact, the main reason investors seek out a Self-Directed IRA is so they can diversify their investments and seek higher returns. The Self-Directed IRA has been around since the IRA was established in 1974, but hasn’t received widespread publicity simply because most custodians of IRA accounts offer only traditional investment options.

Self-Directed IRA Custodians (Passive Custodian)

Not every brokerage firm handles Self-Directed IRAs, and you will need to do some research into the companies that do, to make sure your goals and vision align. You will definitely want to find a company that has extensive work and experience in these types of plans, preferably a passive custodian, that offers no investment advice. You’ll need a custodian who can guide you on what investments are allowed by the IRS and make certain your paperwork is in order, so you’ll want to carefully evaluate the costs and level of support you will receive. But the trustee will not provide financial advice, as they are prohibited from doing so. For this reason it is important that investors complete their due diligence regarding potential investment opportunities.

Once you’ve found your custodian, like IRA Financial Trust, you’ll open up an account and begin making contributions to it in the same way you would a more traditional IRA. Your Direction of Investment will advise your custodian where to invest your funds, how much money goes towards the investment, and if there is additional paperwork needed. Your Self-Directed IRA will be named and this will be the title for your paperwork, as it will not be in your personal name.

What are the Risks?

There are risks to the Self-Directed IRA, including prohibited transactions, which can have a negative impact on your ultimate tax benefits. There are fees associated with this type of account as well that you will need to consider. A lack of liquidity regarding investments can also present challenges if you suddenly come to need cash – it can be difficult to get money out of your fund, but this can be true for more traditional IRAs as well. Additionally, some of the investments available may not be regulated, which can be a risk.


Self-Directed IRAs provide tax advantages, in the same way as traditional or Roth IRAs, and participants must follow the same eligibility requirements and contribution limits. The maximum contribution for 2019 is $6,000 and you are able to start withdrawing at age 59 ½. The list of possible investments to make is long and varied, from alpaca farms to cryptocurrency to rental properties. Self Directed IRAs are not for everyone, but if you long to direct your own investment portfolio and strategy, they might be for you.

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