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Which Self-Directed IRA Should I Choose?

Which Self-Directed IRA Should I Choose?

A Self-Directed IRA is a retirement account vehicle that is designed to allow IRA owners the ability to use retirement funds to buy alternative assets, such as real estate.  It can be established using a traditional IRA, Roth IRA, SEP IRA, or SIMPLE IRA.  This article will explore the different types of Self-Directed IRA accounts, and which may be the best option for you.

Key Points
  • Choosing the right type of Self-Directed IRA comes down to personal choice
  • Traditional and Roth IRAs are well-suited for individual savers
  • SEP and SIMPLE IRAs may be options for your small business

What is an IRA?

An IRA is an individual retirement account that is set up by, you got it, individuals! It is typically funded by direct contributions or via rollover from 401(k) plans.  For 2022, you may contribute up to $6,000 plus an additional $1,000 if you are at least age 50. When opting for the rollover, there is no limit on how much you can move to your IRA.

The two most common types of IRAs are the traditional, or pretax, IRA and the Roth IRA.  Further, if you have your own business, you may choose the SEP or SIMPLE IRA.

When using a Self-Directed IRA, there are two ways one can make investments: (i) full-service/custodian controlled, and (ii) Checkbook Control/IRA LLC.

Full Service/Custodian Controlled

A custodian controlled Self-Directed IRA offers one more investment option than an IRA opened at a “regular” financial institution. Generally, you will need a special custodian for your plan – one that allows for the investments you wish to make.

Unlike a typical financial institution, most IRA custodians generate fees simply by opening and maintaining IRA accounts and do not offer any financial investment products or platforms. With a custodian controlled Self-Directed IRA, the funds are generally held with the custodian and, at the IRA holder’s sole direction, the custodian will make the investment(s) on your behalf.

Checkbook Control/IRA LLC

The Self-Directed IRA LLC with “checkbook control” has quickly become the most popular vehicle for investors looking to make alternative assets investments, such as rental real estate, that require a high frequency of transactions. Under the “Checkbook IRA” format, a limited liability company (“LLC”) is created, which is then funded and owned by the IRA. You, the IRA owner, serve as the manage of the plan.

This allows you to eliminate certain costs and delays often associated with using a full-service IRA custodian.  The Checkbook IRA LLC structure allows the investor to act quickly when the right investment opportunity presents itself, cost effectively and without delay.

Self-Directed IRA Choices 

Traditional Self-Directed IRA

The traditional IRA was first established by the Employee Retirement Income Security Act of 1974 (ERISA).  Contributions made to the plan are typically tax deductible and are subject to the annual limits set forth by the IRS.

Distributions can be taken at any time and the amount withdrawn will be subject to tax. However, prior to age 59 1/2, expect to pay an additional 10% early withdrawal penalty. Once you reach that age, only tax will be due on the distribution.

Lastly, once you reach age 72, mandatory withdrawals, called required minimum distributions (RMD) are to be taken. An RMD is approximately 3% of the value of all your traditional IRAs combined. Again, the amount withdrawn will be treated as taxable income each year they are taken.

Best For:

Individuals who wish to receive an income tax deduction. Since a traditional IRA is funded with pretax money, you don’t pay tax on the money contributed to the plan.

Keep in mind, if you or your spouse have access to a 401(k) plan, and you earn more than $129,000 ($214,000 married filing jointly) you will not receive the tax deduction. If you don’t have access to a workplace plan, there is no income limitation for deductions.

Taxes on the IRA assets are tax-deferred until they are withdrawn.

Self-Directed Roth IRA

The Taxpayer Relief Act of 1997 introduced the Roth IRA. Unlike a traditional IRA, a Roth is funded with after-tax money. There is no upfront tax deduction. However, all qualified distributions will be tax-free during retirement. To be qualified, you must be at least age 59 1/2 and any Roth must be open for at least five years. Plus, contributions to the Roth can be taken at anytime, without tax or penalty.

Anyone with earned income can directly contribute to a Roth IRA, unless you are over the income restrictions set by the IRS. For 2022, individuals earning $144,000 and those married filing jointly who earn $214,000 cannot directly contribute to a Roth IRA. The same annual contribution limits for the traditional IRA apply to a Roth.

Lastly, there are no required distributions once you reach age 72. This allows your Roth to grow untouched. If you don’t need those funds, you can pass them on to your beneficiaries in whole.

Best For:

Individuals who don’t need the immediate tax-break of a traditional plan. It may be best suited for younger individuals who are not at their earnings peak. However, anyone can benefit from tax-free money during retirement!

Although high earners cannot directly contribute to a Roth (and won’t receive the tax break of a traditional plan), they can still get money into a Roth. Starting in 2010, the IRS removed income restrictions for making Roth conversions. You can use the Backdoor Roth strategy to supersize your tax-free retirement.

Even though IRA contributions are not tax deductible, the opportunity to shelter all future Roth IRA gains from tax is super tax-advantageous.

Self-Directed SEP IRA

The 1978 Revenue Act implemented the Simplified Employee Pension IRA (SEP IRA), which provided for a contributory retirement account, primarily for small businesses.  A SEP IRA must be adopted by a US-based business.  It is essentially a profit-sharing plan. In 2022, the maximum SEP IRA contribution is $61,000 and must be made in pretax funds.  Contributions are based on a percentage of income/salary (20% or 25% if W-2) and must be made to all eligible employees.

Best For:

A small business or sole proprietor.  Before 2001, the SEP IRA was the most popular plan for small business owners and the self-employed. However, in 2001, EGTRRA was passed and helped bring the Solo 401(k) to the top. If you are self-employed or have an owner-only business, it is generally the better option, as it allows for higher contributions, has a loan option, and Roth feature.

If you have full-time employees, other than a co-owner or spouse, you cannot take advantage of the Solo 401(k). The SEP IRA is still the best option for you.

Self-Directed SIMPLE IRA

The 1996 Small Business Job Protection Act saw the implementation of the Savings Incentive Match Plan for Employees (SIMPLE IRA).  A SIMPLE IRA can be setup by any U.S. business who has less than 100 employees. 

The SIMPLE IRA plan has a lower deferral limit than a 401(k) plan,  however, unlike a 401(k), the SIMPLE IRA uses an IRA-style trust to hold contributions for each employee. In 2022, the annual employee deferral is limited to $14,000 with a $3,000 catch-up contribution for those at least age 50.

Best For:

Business owners who want a retirement plan that is easy to setup and maintain, and also cost efficient. However, the SIMPLE IRA is the least popular type of IRA since it is basically a weaker 401(k) plan. If you’re okay, as a business owner, with low annual contributions, this may be an option for you. All other retirement plans should be considered first.

Below is a chat the summarizes the characteristics of all IRAs:

PlanEligibilityMax ContributionsDistribution Rules
Self-Directed IRAEarned Income or Rollover Funds$6,000 or $7,000 if age 50+Distributions are taxable. If under age 59 1/2: 10% early distribution penalty
Self-Directed Roth IRAEarned income – less than $144,000 or $214,000 if married$6,000 or $7,000 if age 50+Contributions can be withdrawn tax- and penalty-free at any time. Qualified distributions of earnings are tax free.
SEP IRAU.S.-Based Small Businesses$61,000 based on a percentage of compensation for each employeeDistributions are taxable. If under age 59 1/2: 10% early distribution penalty
SIMPLE IRAU.S.-Based businesses with fewer than 100 employees$14,000 or $17,000 if age 50+Distributions are taxable. If under age 59 1/2: 10% early distribution penalty


The Self-Directed IRA is the most popular way one can use retirement funds to make alternative asset investments, such as real estate, cryptos, private placements, and much more.  The use of a Self-Directed IRA can be used with a traditional IRA, Roth IRA, SEP IRA, or a SIMPLE IRA. 

The same IRS prohibited transaction rules apply irrespective of the type of IRA that is used.  However, the contribution and distribution rules and their tax implications vary from plan to plan.

Many factors go into deciding which is the best plan for an individual. Are you looking for an immediate tax break or prefer tax-free distributions? Are you self-employed, or have a business with employees? How old are you and what is your income? It’s up to you to weigh the pros and cons of each plan and decide for yourself what suits you best. Once you have decided, give IRA Financial a call to see if we can work together to set up your new plan!


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