Is a Self-Directed IRA Right for You?

For those who want control over their retirement account, a self-directed IRA may be your choice. Individual retirement accounts (IRAs) are tax-advantaged retirement savings accounts, and their contents grow tax-free. When you put money into it, you take a tax deduction and pay taxes on it when you withdraw, starting at age 59 ½ years and mandatory when you turn 72.

A self-directed IRA (SDIRA) is structured like standard IRAs, including the same contribution limits, distribution rules, and tax advantages. Two things set SDIRAs apart: The wide variety of investment options they offer and who decides how to invest.

A regular IRA can hold stocks, bonds, mutual funds, ETFs, CDs, and other traditional investments, all regulated by the IRS. In addition to these investments, SDIRAs can hold alternative assets such as real estate, tax liens, precious metals and gold, private mortgages, livestock, farmland, Cryptocurrencies, promissory notes, partnership, and private equity. 

All IRAs must be held at some financial institution that acts as a custodian or trustee. In a standard IRA, brokers, wealth managers, or financial planners at that institution can advise you on investments or even make trades for you on your behalf.

A custodian or trustee also administers SDIRAs, but the account holder directly manages them. Custodians of SDIRAs are prohibited from giving financial advice. Because of this, many traditional brokerages, banks, and investment companies do not offer self-directed IRAs.

Finding a custodian is the first step in setting up a self-directed IRA. You should look around to see your investment options, and a particular asset in mind may be helpful when shopping for this type of account. 

Once you find a custodian, you must decide between a traditional IRA and a Roth IRA. SDIRAs can be set up as traditional IRAs (tax-deductible) or Roth IRAs (tax-free distributions). It will depend on your age when you start saving for retirement and your projected income after retirement. Choosing a Roth IRA may be a good idea if you anticipate your post-retirement income to be higher than your current income and pay the taxes accordingly.

After establishing which type of SDIRA you want, you must select your preferred investments. Perhaps you already know which assets you plan to make with your savings.

Lastly, you have to get a broker to make your purchases. To purchase your investments, you must get your custodian to act on your behalf. 

Funding options for SDIRAs include:

  • Direct contributions.
  • Transfers from other investment or bank accounts.
  • IRA and 401(k) rollovers.

In 2024, the contribution limit is $20,500 for those under 50 and $27,500 for those over 50.

Tax-advantaged retirement savings are available in all IRAs. The self-directed version offers a few extra benefits that can boost an investor’s retirement savings. These include better diversification, higher potential returns, and more flexibility with your investments. With a SIDRA, you can access the capital and direct how to put it to work; examples can be buying a building or even a racehorse; because you are not withdrawing the money, you won’t have any penalties or taxes. As well as the above, you are also given legal protection. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act provided bankruptcy protection for IRAs. Regardless of bankruptcy or legal action, your SDIRA investments, including valuable assets like real estate, would remain untouched. 


Despite SDIRAs being “self-directed,” the IRS requires a certified custodian or trustee to oversee your investments, and they don’t work for free. You will be charged fees to establish the account, plus annual fees and service fees for tasks such as bill paying handled by the custodian. 

Stocks, bonds, and mutual funds are easy to buy and sell. It’s not always the case with SDIRA assets; your capital could be locked up in unwanted assets. The price you get when you sell may not be what you anticipated.

Within the strict rules, self-directed IRAs offer greater freedom in retirement investing. Making a prohibited transaction could set you back your savings with penalties and interest. If you, your beneficiary, or a disqualified person misuse your SDIRA, that is considered a prohibited transaction. Self-dealing is a prohibited transaction: If you own assets in an account, you cannot benefit directly or immediately from them. There is a possibility that an IRA could be penalized or disqualified for tax benefits if this happens. 

Certain people cannot participate in SDIRA transactions (this relates directly to the self-dealing rule that prohibits personal gain). The IRS defines disqualified persons as fiduciaries (including yourself), family members and descendants, employers, corporations, estates, partnerships, or trusts where a disqualified individual owns 50% or more, directors and officers, or 10% or greater partners or shareholders. 

While SDIRA custodians can make certain investments available, they cannot give financial advice. Securities and Exchange Commission (SEC) warns custodians do not evaluate the quality or legitimacy of investments in self-directed IRAs. The risk of fraud increases without this guidance.

Developing a strategy and picking investments with the help of an outside advisor (but not the custodian) is undoubtedly an option. All decisions must be made by you and directed to the custodian. 

It’s ultimately up to you to evaluate any investment’s soundness and understand the tax consequences.