The Basics of Self Directed IRAs

The Basics of Self Directed IRAs

A self directed individual retirement account (IRA) allows individuals to make investment decisions on behalf of their own retirement plan. A self directed IRA can invest in not just stocks, bonds or mutual funds, but also real estate, loans / notes, commodities, private companies, deeds and tax liens, as well as many other alternative and non-traditional types of investments. For investors wishing to diversify their exposure to traditional stock and bond investments, self directed IRAs provide a unique way to generate returns and diversify risk in their retirement portfolio.

What can an individual invest in via their self directed IRA? Basically, any investment allowed by IRS rules. The most common self directed IRA investments are real estate, notes, precious metals like gold, private company partnerships, LLCs & stock.  Most investors have never heard of self directed IRAs before. It is estimated that of the $7.3 trillion worth of value held by Americans in IRAs that about 2%, or $130 billion, is held in self directed IRAs. Larger wire houses, brokerages and national banks that service most retirement plans do not find it profitable enough to administer self directed IRAs and the real estate, notes, commodities and other “alternative” assets these accounts typically hold.

Self directed IRAs—just like traditional IRAs—are required to be held with a custodian. While most people have heard of big wire house and brokerage custodians like Charles Schwab and Fidelity who focus on traditional IRA investments, few people know about companies like self directed IRA custodians like Pensco, Guidant Financial or  Equity Trust.

The custodian an investor selects to hold his/her investments will handle almost all of the paperwork, tax filings, title, ownership documentation and all of the other seemingly mundane “back office” paperwork (just like traditional wire house custodians do).  After factoring in the typical fees charged by self directed IRA custodians, we believe that the administration costs to be higher than a traditional IRA and the IRS reporting on self directed IRA’s non-traditional assets to be a little more complicated. In spite of these higher costs and increased complexity, we also believe that if done correctly, self directed IRAs are worth it.

Account Types

There are two main types of accounts, the regular custodial account and the LLC account.

Investment Options

Self directed IRAs allow investors to choose from among several interesting alternatives.

Self Directed IRA Rules

The rules governing self-directed IRAs are set forth in the Internal Revenue Code (IRC), and the specific code governing IRA accounts is IRS Publication 590. If you enter into a ‘Prohibited Transaction,’ what the IRS calls transactions you are not allowed to do in your IRA account, you will be subject to costly additional taxes and penalties.

What An IRA Cannot Invest In

Self Directed IRAs are prohibited from investing in certain types of investments as well as

certain types of prohibited transactions.


Familiairze yourself with all the do’s and don’ts of self directed IRAs.

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