The Self-Directed IRA

What is a Self-Directed IRA?

You're probably familiar with Traditional IRAs (Individual Retirement Accounts)—the tax-deferred savings accounts with no income limits. So what makes Self-Directed IRAs different? Well, the only difference (with few exceptions) is what you can invest in.

While traditional and Roth IRAs do not allow those investments, Self-Directed IRAs are broader and do not have these same restrictions. Although they remain less common, they are not a recent phenomenon.

Investors can use Self-Directed IRAs to save for retirement in a tax-deferred account and diversify their assets by investing in nontraditional assets such as startups, real estate, precious metals, cryptocurrencies, commodities, and private placements. All of the assets in the account, whether they are investments in a new business or a new real estate deal, are administered by a trustee or custodian.

The only difference between a traditional or Roth IRA and a Self-Directed IRA is the types of assets you are allowed to hold in them. Traditional and Roth IRAs have tighter restrictions and require that investors stick to stocks, bonds, mutual funds, and exchange-traded funds (ETFs), giving high-net-worth individuals fewer choices. However, many millions of people use traditional IRAs as a way to continue a retirement investment strategy that started with a corporate 401(k).

For many people, this can be a worthwhile strategy to build a good retirement savings asset base. Once your assets have grown to a point where it makes sense to diversify beyond traditional options offered by large financial institutions such as Fidelity, Charles Schwab, or Vanguard, using a Self-Directed IRA can be an excellent strategy to supplement existing investments.