What Is a Self-Directed IRA? A Complete Guide from a Custodian 

Introduction 

A Self-Directed Individual Retirement Account (SDIRA) offers investors unprecedented control over their retirement savings, enabling them to invest in assets far beyond the traditional stocks, bonds, and mutual funds available through conventional IRA providers. 

As a qualified custodian specializing in alternative assets, we work with thousands of investors who use Self-Directed IRAs to build diversified retirement portfolios that include real estate, private equity, precious metals, cryptocurrency, and other non-traditional investments. 

This comprehensive guide explains how Self-Directed IRAs work, what you can invest in, the rules you need to follow, and how to determine if this retirement account structure is right for you. 

What Is a Self-Directed IRA? 

A Self-Directed IRA is a type of Individual Retirement Account that allows the account holder to make investment decisions and choose from a broader range of investment options than traditional IRAs. 

Key Distinction: 

The term “self-directed” doesn’t refer to a different type of IRA under IRS regulations—rather, it describes how the IRA is administered. The same tax rules, contribution limits, and distribution requirements that apply to traditional and Roth IRAs also apply to Self-Directed IRAs. 

The Difference: 

• Traditional IRA (at a brokerage): Limited to publicly traded securities the brokerage offers—stocks, bonds, mutual funds, ETFs 

• Self-Directed IRA (at a specialized custodian): Can hold those same securities PLUS real estate, private placements, precious metals, cryptocurrency, private equity, and more 

The “self-directed” aspect means you, the account holder, direct the custodian on which investments to make on behalf of your IRA, rather than selecting from a pre-approved menu of investment options. 

How Self-Directed IRAs Work 

The Three-Party Structure 

A Self-Directed IRA involves three key parties: 

1. The Account Holder (You): You make all investment decisions and direct the custodian on what to buy, sell, or hold 

2. The Custodian (Us): We hold legal title to assets, process transactions, maintain records, and ensure compliance with IRS regulations 

3. The Investment: The asset held within the IRA (real estate, private equity, etc.) 

Important: As your custodian, we don’t provide investment advice or recommend specific investments. Our role is administrative—we facilitate your investment decisions while ensuring compliance with IRS rules. 

The Investment Process 

Here’s how a typical Self-Directed IRA transaction works: 

1. You identify an investment opportunity (e.g., a real estate syndication, private placement, or cryptocurrency purchase) 

2. You direct us to make the investment on behalf of your IRA 

3. We conduct due diligence to ensure the investment is permissible under IRS rules 

4. We execute the transaction using IRA funds, with the IRA as the legal owner 

5. All income, gains, and expenses flow through the IRA 

6. We maintain records and provide reporting for tax purposes 

Types of Self-Directed IRAs 

Self-Directed IRAs can be structured as any standard IRA type: 

Traditional Self-Directed IRA 

• Contributions: Tax-deductible (subject to income limits) 

• Growth: Tax-deferred 

• Distributions: Taxed as ordinary income 

• RMDs: Required starting at age 73 (as of 2024) 

• Best for: Investors who want immediate tax deductions and expect to be in a lower tax bracket in retirement 

Roth Self-Directed IRA 

• Contributions: Made with after-tax dollars (not deductible) 

• Growth: Tax-free 

• Distributions: Tax-free in retirement (if qualified) 

• RMDs: Not required during account holder’s lifetime 

• Best for: Investors who expect higher tax brackets in retirement or want tax-free gains on appreciating alternative assets 

SEP Self-Directed IRA 

• For: Self-employed individuals and small business owners 

• Higher contribution limits: Up to 25% of compensation or $66,000 (2024) 

• Tax treatment: Same as Traditional IRA 

SIMPLE Self-Directed IRA 

• For: Small businesses with fewer than 100 employees 

• Contribution limits: $15,500 (2024), plus $3,500 catch-up if age 50+ 

• Tax treatment: Same as Traditional IRA 

Self-Directed IRA Rollovers 

You can roll over or transfer funds from existing retirement accounts into a Self-Directed IRA: 

• 401(k) rollovers (from former employers) 

• Traditional IRA transfers 

• Roth IRA transfers 

• 403(b), 457, and other qualified plan rollovers 

Advantage: This allows you to access alternative investments without changing your overall retirement savings or contribution strategy. 

What Can You Invest In with a Self-Directed IRA? 

The investment options available through Self-Directed IRAs are extensive. Here are the major asset classes: 

Real Estate 

Real estate is one of the most popular Self-Directed IRA investments: 

• Residential properties: Single-family homes, condos, townhouses 

• Commercial properties: Office buildings, retail spaces, warehouses 

• Raw land: Undeveloped property for appreciation 

• Real estate syndications: Pooled investments in larger properties 

• REITs: Both public and private Real Estate Investment Trusts 

• Real estate notes: Secured by property 

Key Rule: You cannot personally use or live in property owned by your IRA. It must be held strictly for investment purposes. 

Private Equity and Private Placements 

Self-Directed IRAs can invest in private companies and funds: 

• Startup equity: Direct investments in private companies 

• Private equity funds: Pooled investments in private companies 

• Venture capital funds: Early-stage company investments 

• Hedge funds: Alternative investment funds (if you meet qualifications) 

Precious Metals 

Physical precious metals must meet IRS fineness standards: 

• Gold (0.995 fineness or higher) 

• Silver (0.999 fineness or higher) 

• Platinum and Palladium (0.9995 fineness) 

Important: Precious metals must be held by an approved depository, not stored at home. 

Cryptocurrency and Digital Assets 

Many investors use Self-Directed IRAs to hold digital assets: 

• Bitcoin, Ethereum, and other cryptocurrencies 

• Digital tokens 

• NFTs (with proper valuation) 

Advantage: Cryptocurrency’s volatility makes the tax-free growth potential of a Roth SDIRA particularly attractive. 

Private Lending 

Your IRA can act as a lender: 

• Mortgage notes: Loans secured by real estate 

• Business loans: Lending to companies 

• Peer-to-peer lending: Through platforms or directly 

• Promissory notes: Various secured and unsecured debt instruments 

Income: All interest payments flow back into the IRA, growing tax-deferred or tax-free. 

Tax Liens and Deeds 

Some investors use SDIRAs to purchase: 

• Tax lien certificates 

• Tax deeds 

• Properties sold at tax sales 

Structured Settlements and Annuities 

Certain private annuities and structured settlements can be held in Self-Directed IRAs. 

Limited Partnerships and LLCs 

Your IRA can be a limited partner in: 

• Limited Partnerships (LPs) 

• Limited Liability Companies (LLCs) 

• Joint ventures 

Note: If your IRA invests in a pass-through entity conducting active business, it may trigger UBIT (Unrelated Business Income Tax). 

What You Cannot Invest In 

IRS regulations prohibit certain investments and transactions: 

Prohibited Investments 

• Life insurance contracts 

• S-Corporation stock (IRAs cannot be S-Corp shareholders) 

• Collectibles (with precious metals exception):  

• Art, antiques, gems, stamps, coins (except specific bullion coins) 

• Alcoholic beverages, certain other tangible personal property 

Prohibited Transactions 

The most critical rules involve “prohibited transactions” with “disqualified persons.” 

Disqualified Persons Include: 

• You (the IRA owner) 

• Your spouse 

• Your lineal ascendants and descendants (parents, grandparents, children, grandchildren) 

• Spouses of your descendants 

• Entities you control (corporations, partnerships where you own 50%+) 

• Fiduciaries of the plan 

Prohibited Transaction Examples: 

• Buying property from your IRA 

• Selling property to your IRA 

• Living in real estate owned by your IRA 

• Using IRA assets for personal benefit 

• Having your IRA pay you a salary for managing IRA property 

• Borrowing money from your IRA 

• Using IRA assets as collateral for a personal loan 

Consequences: Prohibited transactions can result in the entire IRA being distributed and taxed, plus penalties. 

Our Role as Custodian: We help you structure transactions to avoid prohibited transaction issues, but ultimate responsibility for compliance rests with the account holder. 

Self-Directed IRA Rules and Regulations 

Contribution Limits 

Self-Directed IRAs follow the same contribution limits as traditional IRAs: 

• 2024 Limits: $7,000 per year ($8,000 if age 50+) 

• SEP IRA: Up to $66,000 or 25% of compensation 

• SIMPLE IRA: $15,500 ($19,000 if age 50+) 

Required Minimum Distributions (RMDs) 

Traditional and SEP Self-Directed IRAs require RMDs starting at age 73. Roth SDIRAs have no RMDs during the account holder’s lifetime. 

Challenge with Illiquid Assets: If your SDIRA holds illiquid investments (like real estate), you may need to maintain cash reserves or plan liquidation strategies to meet RMD requirements. 

UBTI and UDIT 

Two tax concepts apply to certain SDIRA investments: 

UBTI (Unrelated Business Taxable Income): If your IRA owns a business or interest in a pass-through entity conducting active business, income may be subject to UBTI tax. 

UDFI (Unrelated Debt-Financed Income): If your IRA uses leverage (debt) to purchase assets, a portion of income may be taxable as UDFI. 

Example: If your IRA buys rental property with 50% financing, roughly 50% of the income and gains could be subject to UDFI tax. 

Fair Market Value and Annual Reporting 

As your custodian, we’re required to report the fair market value of your IRA assets annually to the IRS. For alternative assets without public market prices, you may need to provide valuations. 

Valuation Requirements: 

• Real estate: Recent appraisals or tax assessments 

• Private equity: Statement from the company or fund 

• Notes/lending: Outstanding principal balance 

• Cryptocurrency: Market price on valuation date 

Benefits of Self-Directed IRAs 

1. Investment Diversification 

Self-Directed IRAs allow true portfolio diversification beyond public markets. You can invest in assets you understand, industries you know, or opportunities unavailable through traditional brokerages. 

2. Tax Advantages 

All the standard IRA tax benefits apply: 

• Traditional SDIRA: Tax-deductible contributions and tax-deferred growth 

• Roth SDIRA: Tax-free growth and distributions 

• Potential for significant tax savings on high-appreciation alternative assets 

Example: Real estate purchased for $100,000 that appreciates to $500,000 generates $400,000 in gains completely tax-free in a Roth SDIRA. 

3. Control Over Investment Decisions 

You make all investment decisions based on your expertise, interests, and research—not limited to what a brokerage offers. 

4. Access to Alternative Assets 

Invest in opportunities typically reserved for institutional investors or high-net-worth individuals: 

• Private placements 

• Real estate syndications 

• Startup equity 

• Private funds 

5. Inflation Hedge 

Tangible assets like real estate and precious metals can serve as inflation protection within your retirement portfolio. 

6. Potential for Higher Returns 

While not guaranteed and carrying higher risk, alternative investments may offer return potential beyond traditional portfolios. 

Risks and Considerations 

1. Illiquidity 

Many alternative assets lack immediate liquidity. Unlike stocks you can sell instantly, real estate or private equity may take months or years to liquidate. 

Consideration: Maintain adequate cash reserves for RMDs, expenses, and emergencies. 

2. Valuation Challenges 

Determining fair market value for private assets can be complex and may require professional appraisals. 

3. Due Diligence Responsibility 

As custodian, we don’t evaluate investment quality. You’re responsible for researching investments, understanding risks, and making informed decisions. 

4. Complexity and Compliance 

Self-Directed IRAs involve more complex rules than traditional IRAs. Mistakes can trigger taxes, penalties, and disqualification. 

Our Role: We provide guidance on rules and help structure compliant transactions, but you must understand and follow IRS regulations. 

5. Fees 

Specialized custody for alternative assets typically involves higher fees than traditional brokerage IRAs due to the administrative complexity. 

6. Fraud Risk 

Alternative investments, particularly private placements, carry fraud risk. The SEC has issued warnings about SDIRA-related scams. 

Protection: Work only with reputable investment sponsors, conduct thorough due diligence, and verify all documentation. 

How to Open a Self-Directed IRA 

Step 1: Choose a Qualified Custodian 

Not all financial institutions offer Self-Directed IRA services. You need a custodian experienced with alternative assets who can facilitate the investments you want to make. 

What to Look For: 

• Experience with your desired asset types 

• Responsive customer service 

• Transparent fee structure 

• Strong compliance and security protocols 

• Technology platform for account management 

Step 2: Complete Account Application 

Opening a Self-Directed IRA involves: 

• Completing account application forms 

• Providing identification and verification documents 

• Selecting account type (Traditional, Roth, SEP, etc.) 

• Reviewing and signing custodial agreements 

Step 3: Fund Your Account 

You can fund your Self-Directed IRA through: 

• Direct contributions: Annual contributions within IRS limits 

• Transfers: Moving funds from another IRA (non-taxable event) 

• Rollovers: Moving funds from 401(k) or other qualified plans 

• Conversions: Converting Traditional IRA to Roth (taxable event) 

Step 4: Identify Investment Opportunities 

Research and identify alternative investments that align with your: 

• Investment goals 

• Risk tolerance 

• Time horizon 

• Expertise and knowledge 

Step 5: Direct Investment Instructions 

Once you’ve identified an investment: 

1. Submit investment direction to your custodian 

2. Provide all necessary documentation 

3. Custodian reviews for compliance 

4. Custodian executes transaction on behalf of your IRA 

5. Assets titled in the name of the IRA 

Step 6: Ongoing Management 

After investing: 

• Monitor investment performance 

• Ensure all income flows back to the IRA 

• Pay expenses from IRA funds 

• Maintain proper records 

• Provide valuations as needed 

• Plan for RMDs if applicable 

Self-Directed IRAs vs. Checkbook Control 

Some investors establish a structure called “Checkbook Control” by having their IRA invest in an LLC they manage. 

How It Works: 

1. Your Self-Directed IRA invests in an LLC 

2. You serve as the LLC manager (but not owner—the IRA is the owner) 

3. You open a checking account for the LLC 

4. You write checks directly for investments (bypassing custodian for each transaction) 

Advantages: 

• Faster transaction execution 

• Lower per-transaction costs 

• More privacy for investments 

Disadvantages: 

• Higher setup costs and complexity 

• Greater compliance risk (easy to make prohibited transaction mistakes) 

• Additional reporting requirements 

• Annual LLC maintenance costs and tax returns 

Our Perspective as Custodian: Checkbook control structures require extreme diligence to avoid prohibited transactions. We’re available to discuss whether this structure makes sense for your situation. 

Common Self-Directed IRA Mistakes to Avoid 

1. Engaging in Prohibited Transactions 

This is the most serious mistake. Always verify that transactions don’t involve disqualified persons or prohibited uses. 

2. Personal Use of IRA Assets 

Never personally use, occupy, or benefit from assets owned by your IRA. This includes: 

• Living in IRA-owned real estate 

• Vacationing at IRA-owned property 

• Using IRA vehicles or equipment 

• Storing IRA-owned precious metals at home 

3. Paying Expenses with Personal Funds 

All expenses related to IRA assets must be paid from IRA funds, and all income must flow back to the IRA. 

Wrong: Paying property taxes on IRA-owned real estate with personal funds Right: Directing custodian to pay property taxes from IRA funds 

4. Commingling IRA and Personal Investments 

Don’t co-invest personally alongside your IRA in the same asset unless properly structured. 

5. Inadequate Due Diligence 

Don’t invest in opportunities you don’t fully understand or that seem too good to be true. 

6. Insufficient Liquidity for RMDs 

Plan ahead to ensure you can meet RMD requirements if holding illiquid assets. 

7. Missing Deadlines 

Contribution deadlines, RMD deadlines, and rollover timelines are strict. Missing them triggers taxes and penalties. 

Who Should Consider a Self-Directed IRA? 

Self-Directed IRAs aren’t for everyone. They’re best suited for: 

Ideal Candidates: 

• Investors with alternative asset expertise: You understand real estate, private equity, or other alternative investments 

• Active investors: You’re comfortable researching opportunities and making investment decisions 

• Those seeking diversification: You want exposure beyond traditional stocks and bonds 

• High-net-worth individuals: You have sufficient retirement savings to take meaningful alternative positions 

• Those with long time horizons: Many alternative investments require years to mature 

• Investors comfortable with complexity: You’re willing to learn and follow IRS rules 

Not Ideal For: 

• Hands-off investors preferring professional management 

• Those without alternative investment knowledge 

• Investors needing immediate liquidity 

• Those uncomfortable with complexity and compliance requirements 

• Very small account balances (fees may not justify the structure) 

Working with Financial Advisors 

Many investors work with financial advisors while using Self-Directed IRAs. 

Important Considerations: 

• Not all advisors are familiar with Self-Directed IRAs or alternative assets 

• Advisors must be comfortable with investments they don’t custody 

• Fee structures may differ for non-custodied assets 

• Ensure clear communication about which assets are held where 

Some advisors specialize in alternative investments and Self-Directed IRA strategies. If you’re working with an advisor interested in offering clients access to alternative assets, we provide specialized custody solutions designed for advisory practices. 

Tax Reporting and Compliance 

Your Responsibilities: 

• Maintain accurate records of all transactions 

• Report contributions and distributions on your tax return 

• Calculate and report UBTI/UDFI if applicable 

• Take RMDs if required 

• Provide asset valuations to custodian 

Our Responsibilities as Custodian: 

• Issue Form 5498 (contributions and fair market value) 

• Issue Form 1099-R (distributions) 

• Maintain transaction records 

• Ensure proper asset titling 

• Report account information to IRS 

We recommend working with a tax professional familiar with Self-Directed IRAs and alternative assets to ensure proper reporting. 

The Future of Self-Directed IRAs 

Self-Directed IRAs continue growing in popularity as investors seek: 

• Greater portfolio diversification 

• Access to private markets 

• Inflation-protected assets 

• Tax-advantaged alternative investments 

• Control over retirement investment decisions 

Regulatory frameworks continue evolving, particularly around: 

• Cryptocurrency and digital assets 

• Valuation standards for alternative assets 

• Prohibited transaction guidance 

• Reporting requirements 

As your custodian, we stay current on regulatory changes and ensure our platform evolves to meet investor needs while maintaining compliance. 

Conclusion 

Self-Directed IRAs offer sophisticated investors unprecedented flexibility to build diversified retirement portfolios that include alternative assets alongside traditional investments. From real estate and private equity to cryptocurrency and precious metals, the investment universe is vast. 

However, this flexibility comes with responsibility. Understanding and following IRS rules, conducting thorough due diligence, and working with an experienced custodian are essential for success. 

As a qualified custodian specializing in alternative assets, we’re here to facilitate your investment vision while ensuring compliance with all applicable regulations. We don’t provide investment advice, but we provide the infrastructure, expertise, and support necessary to execute your self-directed investment strategy. 

Ready to explore Self-Directed IRA opportunities? 

Whether you’re interested in real estate, private equity, cryptocurrency, or other alternative assets, we’re here to help you understand your options and get started. 

Contact us to learn more about opening a Self-Directed IRA or explore our educational resources on specific alternative asset types.

Frequently Asked Questions 

Q: What’s the difference between a Self-Directed IRA and a regular IRA? A: The IRS rules are identical. The difference is administrative—Self-Directed IRAs are held at custodians who facilitate alternative asset investments, while traditional IRAs are typically limited to publicly traded securities. 

Q: Can I convert my existing IRA to a Self-Directed IRA? A: Yes, through a direct transfer (non-taxable) or conversion (taxable if Traditional to Roth). 

Q: How much does it cost to open a Self-Directed IRA? A: Fees vary by custodian and typically include account setup fees, annual account fees, and transaction fees for each investment. 

Q: Can my IRA partner with me personally on an investment? A: Generally no—this typically creates prohibited transactions. Certain structures may work, but require careful legal planning. 

Q: What happens if I accidentally engage in a prohibited transaction? A: The IRS may treat the entire IRA as distributed, triggering taxes and potentially penalties. Consult a tax professional immediately if you suspect a prohibited transaction. 

Q: Do I need a special type of LLC to invest my IRA? A: Not for the IRA to invest in an LLC as a member. The “checkbook control” structure requires specific setup, but many IRA investments in LLCs don’t require this. 

Q: Can I take my RMD “in kind” by transferring property out of my IRA? A: Yes, but the fair market value of the property counts as your distribution and is taxable. 

Q: How do I value assets in my Self-Directed IRA? A: Methods vary by asset type—appraisals for real estate, statements from companies for private equity, market prices for cryptocurrency. Your custodian can guide you on appropriate valuation methods.