<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=191325388179113&amp;ev=PageView&amp;noscript=1">

Self-Directed IRA Guide

Learn more about SDIRA plans, starting with the basics.

Today’s investment opportunities are changing. While investors are still certainly turning to stocks and bonds for investments, they are also looking at other options to bolster their portfolios. Cryptocurrency, for example, is gaining popularity, and investors are exploring ways to incorporate it and other alternative investments as part of their retirement savings options.

While cryptocurrency might be a hot topic, alternative investments are not a new concept. Investing in LLCs, real estate, or precious metals has always been an option. However, actually getting and holding those investments can be a challenge compared to just acquiring stocks and bonds. Keeping them for retirement is even more challenging in many cases.

A self-directed IRA (individual retirement account) functions similarly to a traditional IRA. However, in a self-directed IRA, you have the option to invest and hold a much wider variety of investments.

Opening and maintaining a self-directed IRA requires more due diligence and attention than a traditional IRA. Still, the payoff might be worth the extra time and attention for motivated investors.

What is a Self-Directed IRA?

A self-directed IRA or SDIRA is very similar to a traditional IRA. The government generally treats these retirement fund options as if they are one and the same. For example, the same investment limit that you will find for a traditional IRA is used for an SDIRA. In 2022, you can contribute up to $6,000 (or $7,000 if you are over the age of 50).

You also have the option to use a traditional SDIRA or a Roth SDIRA. Like a Roth IRA, a Roth SDIRA is after-tax, which means your investments grow tax-free while they sit in your account.

The difference between an IRA and a self-directed IRA is the variety of alternative investments that you can put in the SDIRA. In a regular IRA, the custodian of your IRA (which is usually a bank or brokerage firm) specifically limits your investing options. You are only permitted to invest in pre-approved assets.

A self-directed IRA custodian will hold a larger range of assets. However, you do not buy these assets from the custodian as you might from your traditional IRA broker. Instead, you purchase them from one broker and then transfer them to your self-directed IRA custodian to hold.

Assets don’t necessarily have to be purchased from a broker, either. An LLC IRA, for example, would involve a completely different purchasing process.

This investing process can make self-directed IRAs a bit more complicated to manage for the beginning investor, but the benefits a self-directed IRA presents can be worth the additional time investment.

Understanding a Self-Directed IRA

One of the most important differences between a traditional IRA and a self-directed IRA is that the account holder has more responsibility in terms of both purchasing and maintaining assets. As the investor, you have to do your own due diligence in most cases, and the purchasing process differs from the more traditional IRA and investing route.

The other major difference is the variety of assets that each account can hold. In general, the purpose for creating and maintaining a self-directed IRA is its flexibility to include unique assets or investment opportunities that you want to pursue and use as part of your retirement account.

What Assets Can You Hold in a Traditional IRA vs. a Self-Directed IRA?

Pre-approved assets for a regular IRA will generally include things like:

  • Stocks
  • Bonds
  • Exchange-traded funds (ETFs)
  • Mutual funds

In contrast, a self-directed IRA might hold assets such as:

  • Bitcoin
  • Gold bars
  • LLC membership units
  • Private placements
  • Commodities
  • Tax lien certificates and deeds on foreclosed properties
  • Real estate
  • Startups
  • Foreign currency
  • Mineral rights
  • Promissory notes
  • Livestock and crops

You have a lot more options for assets in a self-directed IRA. However, there are still some limitations on what assets you can hold. For example, the IRS has “purity standards” when it comes to precious metals that must be met to place an asset in an IRA.

Who Can Open a Self-Directed IRA?

Almost any individual can open a self-directed IRA (Learn more about who can open a self-directed IRA here). However, you have to find a custodian that supports nontraditional assets. It cannot be just anyone. The IRS specifically requires that your SDIRA custodian be one of the following:

  • Bank
  • A federally insured credit union
  • Savings and loan association
  • An “entity approved by the IRS to act as a trustee or custodian”

These are the same entity restrictions that are used for traditional IRA providers as well. That means that if you want to set up an SDIRA, you need to find a custodian that not only qualifies for tax purposes but is also willing to take on the alternative investments you want to use for your retirement fund.

If you want a Roth SDIRA, keep in mind that the same income restrictions apply to Roth SDIRAs as traditional Roth IRAs. There are age restrictions to opening a new IRA as well. Generally, you must be under the age of 70 ½ to start a new IRA.

There are many SDIRA custodian options, but they’re unlikely to be your neighborhood bank or credit union. Be sure you understand the services and information you are getting before you pick a custodian to hold your self-directed IRA assets.

How to Open a Self-Directed IRA

  1. Find a custodian or trustee for the account.

Creating a self-directed IRA starts with searching for the right custodian. You can find a variety of options online, but be sure that whoever you choose is reputable and approved by the IRS. If they do not have IRS approval, then you cannot get the tax advantages of having an IRA from this custodian or trustee. Do a quick check to ensure that the trustee or custodian has good reviews and no complaints filed with federal agencies.

Although you don’t have to have your assets picked out when you choose a custodian, it is helpful to have an idea of the assets you want before deciding on a custodian. That way, if you have a specific asset in mind, you can ensure the custodian will hold that particular kind of asset. Some custodians specialize in certain types of assets as well (such as gold or cryptocurrency).

You don’t want to be in the middle of a large purchase that you intend on putting in an SDIRA only to find out that your custodian won’t hold that type of asset.

Keep in mind that you generally do not have to have a minimum amount of money to open a self-directed IRA. However, individual custodians or trustees may require that you hold a minimum value of assets, and annual contribution limits from the IRS still apply when you open the account. Most custodians will also typically charge a setup fee to get the account established.

  1. Choose the assets to purchase and complete the transaction.

Remember that in an SDIRA, you purchase the assets yourself and then transfer them into the SDIRA or instruct your custodian to purchase them with the funds you provide. You might have some options to buy assets through your custodian if they are also a broker, but if you are after specific assets, you will generally have to purchase them yourself.

Some custodians will already have some established partnerships with reputable dealers that you can use to buy specific assets. If they don’t, be sure to take the time to do your own due diligence on whatever asset you want—you shouldn’t rely on your custodian to do any vetting for you.

One option you may want to consider is a self-directed IRA LLC with checkbook control. Essentially, the self-directed IRA holds the LLC. The “checkbook control” portion is that the IRA owner has complete signing authority over the IRA funds (the LLC funds). In this type of checkbook IRA, the LLC is generally the only asset held by the self-directed IRA.

  1. Plan for withdrawals.

Just like traditional IRAs, you have to take certain withdrawals from your self-directed IRA. Unless you have a Roth self-directed IRA, you will owe taxes on whatever assets you withdraw in retirement. If you take withdrawals too early (before 59 ½), you will also owe a 10% IRS penalty as well.

Traditional vs. Roth Self-Directed IRA

A traditional IRA severely limits the type of assets that you can hold. In general, you can only hold assets that are available for your broker to purchase themselves. In a self-directed IRA, you have a lot more flexibility on which assets you can hold, and you can often purchase assets yourself to transfer into the self-directed IRA.

A Roth IRA and a self-directed Roth IRA function the same. Both retirement funds offer the option to be taxed on the value of the assets immediately so that the assets can grow tax-free within the IRA. This is essentially the same benefits as a Roth 401(k) that is often available from employers to their employees. Individual retirement accounts (IRAs), however, are set up independently from any employer, and they are maintained by you and your broker or custodian.

The Internal Revenue Service has the same restrictions and limitations for traditional IRAs as it does for any retirement plan that includes an IRA, such as a Roth IRA or self-directed IRA or self-directed Roth IRA. Examples of these restrictions include:

  • Annual contribution limits
  • Limitations on when assets can be withdrawn without penalty
  • Limitations on what age an IRA must be established
  • Taxes on non-Roth IRA distributions

All of these retirement accounts offer benefits and drawbacks, but if you are leaning toward a simple IRA, you might want to consider using a traditional IRA rather than a self-directed IRA. Traditional IRAs require significantly less oversight and direction from the investor or account holder.

Self-Directed IRA Benefits

There are generally two main reasons to consider a self-directed IRA. That rationale is explained in more detail below.

Potential for Higher Returns

You have likely heard that the greater the risk, the greater the reward. In the case of alternative investments, that sentiment is often true. Alternative assets often give you the potential for much higher returns than would be available in a standard IRA. However, those higher returns can come with higher risks than those associated with more traditional asset classes.

Real estate investing, for example, is an asset class available in your self-directed IRA. If you want a good portion of your retirement to come from real estate, you can get additional tax benefits by putting the value of those assets in a self-directed IRA.

Increased Diversification

Diversification is vital if you want to decrease your overall risk in your retirement investments. Diversification in a standard IRA might mean owning a variety of stocks or portions of mutual funds. However, if the entire market takes a hit, it is likely that the value of your entire traditional IRA will decrease.

You can offset or decrease this risk by diversifying even further—away from the market. When part of your retirement savings is in a completely different type of asset, a dip in the market may not have as much of an effect on the overall value of your retirement funds.

Self-Directed IRA Risks

Just like any investment, a self-directed IRA will have some risk. That risk will vary based in large part on the type of assets you have in your self-directed IRA. Cryptocurrency, for example, might be riskier than real estate or precious metals.

Some of the most important risks you should consider before opening a self-directed IRA are included below.

Less Liquidity

One of the biggest disadvantages of assets found in a traditional IRA is that they can be sold very easily. There is a ready and available market for virtually any stock or bond that you can hold. You cannot say the same thing about many of the assets that can be placed in an SDIRA. You often cannot sell these assets quickly to meet fast cash needs.

More Fees

A self-directed IRA is generally going to require more fees compared to a traditional IRA. This is simply a result of the extra work that the custodian has to do to care for or maintain the asset. Physical gold, for example, might require storage fees and insurance, which would not be required to hold stock.

Limited Protections

While your custodian will hold and care for your assets, they are not required to investigate the asset or determine whether it is legitimate. Instead, all of the due diligence that you must do before you invest lies squarely on your shoulders. If you are wrong about the value of an asset, for instance, you will not have any protection to account for that loss. A thorough investigation of each asset is absolutely required before you buy.

Self-Directed IRA Rules

The IRS has strict rules about the investments you can hold in retirement accounts, including SDIRAs. If you violate any of these rules, you run the risk of facing huge penalties and fees. Examples of the IRS rules you might need to consider include:

  • Do not hold any unapproved assets
  • Do not borrow money from your IRA
  • Do not use an IRA as security for a loan
  • Do not use an IRA to buy property for personal use
  • Do not sell any property to an IRA

Additional rules might also apply, and each rule has its own nuances that you should consider. When you have a traditional IRA, these rules are relatively easy to follow, but self-directed IRAs make things a bit more complicated.

Keep in mind that the same contribution and withdrawal limits that apply to traditional IRAs also apply to SDIRAs.

Self-Directed IRA FAQs

What are the benefits of a Self-Directed IRA?

The biggest benefits of having a self-directed IRA include:

  1. You want to get higher returns than would be available in a traditional IRA.
  2. You want to diversify your retirement savings away from more traditional assets.

Both of these goals are often obtainable when you create a self-directed IRA, if you plan correctly.

Are there assets that investors can’t put in a self-directed IRA?

Examples of assets that you cannot put in a self-directed IRA include:

  • Life insurance
  • Collectibles
  • Antiques
  • Precious metals that do not meet the IRS’s purity standards
  • Artwork

Individual custodians might also have restrictions on the types of assets that they are willing to hold on your behalf.

If you hold these non-qualifying assets in your SDIRA, then the purchase price for those items will be considered a withdrawal. The result is that you will have to pay income taxes on it, and you will be on the hook for any early withdrawal penalties that might result as well.

What tax concerns restrictions should investors be aware of with SDIRAs?

In 2022, you can contribute up to $6,000 (or $7,000 if you are over the age of 50) to your IRA or SDIRA.

You also have the option to use a traditional SDIRA or a Roth SDIRA. Like a Roth IRA, a Roth SDIRA is after-tax, which means your investments grow tax-free while they sit in your account.

You might also face tax penalties if you withdraw assets too soon—generally before you turn 59 ½ years old.

What is the difference between an IRA and an SDIRA?

The difference between an IRA and a self-directed IRA is the variety of alternative investments that you can put in the SDIRA. In a regular IRA, the custodian of your IRA (which is usually a bank or brokerage firm) specifically limits your investing options. You are only permitted to invest in pre-approved assets.

Ready to take control?

Step 1

Choose the right account for you and sign up in under 5 minutes—completely online.


Fund your account in just a few short days. Our support team is here to help initiate rollovers.


From there, diversify. Making investments is as simple as writing a check—track it all on your dashboard.