Self-Directed IRAs

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on January 24, 2024

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What Are Self-Directed IRAs?

Definition and Overview

A self-directed Individual Retirement Account (IRA) is a type of retirement account that allows investors greater control over their investment choices compared to traditional IRAs.

These accounts permit investments in a broader range of assets, including alternative investments such as real estate, private equity, and precious metals.

Differences Between Self-Directed IRAs and Traditional IRAs

While both self-directed and traditional IRAs are tax-advantaged retirement accounts, the key difference lies in the available investment options.

Traditional IRAs typically limit investment choices to stocks, bonds, and mutual funds. In contrast, self-directed IRAs offer a more extensive array of investment opportunities.

Types of Self-Directed IRAs

Self-Directed Traditional IRA

A self-directed Traditional IRA functions similarly to a regular Traditional IRA but allows for a wider range of investment options. Contributions are tax-deductible, and taxes are deferred until withdrawals are made during retirement.

Self-Directed Roth IRA

Self-directed Roth IRAs operate like traditional Roth IRAs, with the primary distinction being the broader investment choices. Contributions are made with after-tax dollars, and qualified withdrawals during retirement are tax-free.

Self-Directed SEP IRA

A self-directed Simplified Employee Pension (SEP) IRA is designed for self-employed individuals and small business owners. It offers the same investment flexibility as other self-directed IRAs while allowing higher contribution limits.

Self-Directed SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is another option for small businesses and the self-employed. Self-directed SIMPLE IRAs provide the same investment freedom, with the added benefit of employer contributions.

Types of Self-Directed IRAs

Eligibility and Contribution Limits

Eligibility Requirements

Eligibility for self-directed IRAs depends on the specific account type. Generally, individuals must have earned income and be below certain income thresholds to contribute to a Traditional or Roth IRA. SEP and SIMPLE IRAs have specific requirements for business owners and employees.

Annual Contribution Limits

Contribution limits for self-directed IRAs are the same as their traditional counterparts. For 2024, the limit is $7,000 for individuals under age 50 and $8,000 for those aged 50 or older. SEP and SIMPLE IRAs have different limits based on income and employer contributions.

Catch-up Contributions

Individuals aged 50 or older can make additional catch-up contributions to their self-directed IRAs. The catch-up limit for Traditional and Roth IRAs is $1,000, while the limits for SEP and SIMPLE IRAs vary.

Rollovers and Transfers

Rollovers and transfers can be made between self-directed IRAs and other qualified retirement accounts, subject to specific rules and regulations.

Investment Options for Self-Directed IRAs

Real Estate

Investing in real estate through a self-directed IRA can include rental properties, commercial real estate, and land development projects.

Private Equity

Private equity investments involve purchasing shares in privately held companies. This can offer the potential for significant returns but may also entail higher risk.

Precious Metals

Self-directed IRAs can hold certain types of precious metals, such as gold and silver bullion or coins, as a long-term store of value and hedge against inflation.

Private Loans

Private loans, including mortgages and promissory notes, can be made through a self-directed IRA. This strategy can generate income through interest payments.


Some self-directed IRAs allow investments in cryptocurrencies, such as Bitcoin and Ethereum. This can offer potential for high returns but may also involve significant volatility and risk.

Other Alternative Investments

Additional alternative investments for self-directed IRAs include tax lien certificates, limited partnerships, and various other unique assets.

Rules and Regulations

Prohibited Transactions

Certain transactions are prohibited within a self-directed IRA, such as dealing with disqualified persons (e.g., the account holder, their spouse, or certain family members) or engaging in self-dealing.

Unrelated Business Taxable Income (UBTI)

Income generated from investments in active businesses, such as limited partnerships or an LLC, may be subject to unrelated business taxable income (UBTI) within a self-directed IRA.

Required Minimum Distributions (RMDs)

Traditional, SEP, and SIMPLE self-directed IRAs are subject to required minimum distributions (RMDs) starting at age 72. Roth IRAs do not have RMD requirements.

Early Withdrawal Penalties

Withdrawals made before age 59½ from a self-directed IRA may be subject to a 10% early withdrawal penalty and additional taxes, depending on the account type and circumstances.

Tax Implications and Benefits

Tax implications for self-directed IRAs depend on the specific account type. Traditional and SEP IRAs offer tax-deductible contributions and tax-deferred growth, while Roth and SIMPLE IRAs provide different tax benefits.

Choosing a Self-Directed IRA Custodian

Role of a Custodian

A custodian is a financial institution responsible for holding and administering the assets within a self-directed IRA. They ensure compliance with IRS rules and regulations.

Factors to Consider When Selecting a Custodian

When choosing a self-directed IRA custodian, consider factors such as fees, customer service, investment options, and the institution's reputation and experience in the industry.

Comparing Fees and Services

Different custodians may charge varying fees for account maintenance, transactions, and other services. Compare fees and service offerings when selecting a custodian.

Commonly Used Custodians

Some popular self-directed IRA custodians include Equity Trust, Entrust Group, and Pensco Trust Company. Research and compare multiple custodians before making a decision.

Setting up a Self-Directed IRA

Steps to Establish a Self-Directed IRA

  1. Choose a self-directed IRA custodian.

  2. Complete the account application and provide the required documentation.

  3. Fund the account through contributions, transfers, or rollovers.

  4. Select and manage investments in compliance with IRS rules and regulations.

Funding the Account

Funding a self-directed IRA can be done through regular contributions, transfers from other Individual Retirement Account (IRA), or rollovers from qualified retirement plans.

Selecting and Managing Investments

Once the account is funded, choose investments that align with your financial goals and risk tolerance. Regularly monitor and manage investments to optimize performance and maintain diversification.

Recordkeeping and Reporting

Maintain accurate records of all transactions and provide required reports to the IRS and custodian to ensure compliance.

Risks and Challenges

Lack of Diversification

Investing heavily in alternative assets may result in a lack of diversification, increasing the overall risk of the portfolio.

Liquidity Concerns

Some alternative investments, such as real estate and private equity, may have limited liquidity, making it more difficult to sell or access funds when needed.

Due Diligence Requirements

Investors are responsible for conducting thorough due diligence on all investments within a self-directed IRA to minimize risks and avoid potential scams or fraud.

Potential for Fraud or Scams

Due to the complex nature of alternative investments, self-directed IRAs can be more susceptible to fraud or scams. Be cautious and conduct thorough research before investing.

Risks and Challenges of Self-Directed IRAs

Strategies for Success

Diversifying Investments

Ensure a well-diversified portfolio by investing in a mix of traditional and alternative assets. This strategy can help manage risk and potentially enhance returns.

Research and Due Diligence

Conduct thorough research and due diligence on all investment opportunities within a self-directed IRA to minimize risk and make informed decisions.

Seeking Professional Advice

Consult with financial advisors, tax professionals, or attorneys to ensure compliance with regulations and receive guidance on investment strategies tailored to your specific goals and risk tolerance.

Staying Up to Date With Regulatory Changes

Monitor changes in laws and regulations related to self-directed IRAs to maintain compliance and adapt investment strategies as needed.

Strategies for Success in Self-Directed IRAs


Self-directed IRAs offer investors the opportunity to diversify their retirement portfolios with a broader range of investment options, including alternative assets. While these accounts can provide potential for higher returns, they also come with unique risks and challenges.

The potential benefits of self-directed IRAs include greater diversification, access to unique investment opportunities, and the potential for higher returns. However, these accounts also involve risks such as lack of diversification, liquidity concerns, and the need for extensive due diligence.

Before opening a self-directed IRA, weigh the potential benefits and risks, and consider your investment goals, risk tolerance, and expertise. Consult with professionals, research custodians, and stay informed about regulatory changes to make the most of this unique investment vehicle.

Self-Directed IRAs FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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