Your smart and simple guide to Self Directed IRAs

Aman Saxena

Self Directed IRAs can be seen as the most diversified and independently-driven of individual retirement accounts.

And while these types of accounts come with additional opportunities to hold different kinds of investments, it also means that you will have to be willing to take on the risks that may come with a Self Directed IRA.

📝 Table of contents

IRAs are individual retirement accounts that are uniquely identified by the IRS to provide tax benefits to individuals or couples who save for retirement.

These benefits can come in the form of a Traditional IRA where your annual contributions are tax-deductible now, and you pay taxes on the income in retirement. Or in the form of a Roth IRA where your annual contributions are made with post-tax dollars and your withdrawals in retirement are tax-free.

There are additional types of IRA accounts like the SEP and SIMPLE plans which are employer supported plans and contributions. But when you are looking at opening or setting up an IRA, the option for opening a Self Directed IRA can be an option.

It goes without saying that consulting a tax advisor or retirement planning professional before making decisions for your retirement is highly recommended. Professional advisors can help you make the best decisions for you and your family depending on your lifestyle, cash flow needs now and in the future, estate planning and risk tolerance.

What is a Self-Directed IRA?

A Self Directed IRA, or SDIRA in short, is a form of retirement account that allows you to hold investments that are normally outside the scope of normal IRAs offered at most financial institutions.

Self Directed IRAs are typically set up as a Traditional or Roth IRA, but it operates differently than a run of the mill IRA. By opening an SDIRA, you are able to have more options for investing and more discernment over activities in the account than normal.

SDIRAs are required to be held by a custodian or trustee firm. But as insinuated by its name, Self Directed IRAs are actively managed by the owner of the account, which would be you. You will have to manage the risks, growth, losses and tax consequences from the investments made in a SDIRA.

🎯 Quick Take: Self-Directed IRA
  • Setup as a Traditional or Roth IRA
  • Allows IRA funds to be used for alternative investments
  • The owner is responsible for transactions and risks
  • Held by a custodian or trustee firm
  • Typically requires more engagement from the IRA owner
  • Has to comply with IRA contribution rules

How does a Self Directed IRA Work?

A Self Directed IRA can be set up as a Traditional IRA. That would mean that your contributions now would be tax-deductible and you would be required to take RMDs when you hit the requisite age. The income at that time would be taxed.

A Self Directed IRA can also be set up as a Roth IRA, but more on that in this section.

You will first have to identify a firm that specializes in SDIRAS. More often than not, your local bank or investment firm may not be able to provide a SDIRA to you as it may not have access to the varied types of investments.

A normal Traditional IRA can hold CDs, mutual funds, stocks, bonds and ETFs. But what Self-Directed IRAs provide is access to alternative investments, including investments in physical assets, which carry different risk and reward measures.

Because these are mainly considered alternative investments, it is important to identify a firm that is able to carry the type of investment you are looking for. Since the account is self directed, that also means that you will be in charge of executing on the investments you make, managing the paperwork, and communication.

Since it is still a retirement account, a SDIRA will still need to comply with IRS regulations and rules. That includes meeting the contribution deadlines and limits, as one would with a regular IRA.

Current IRA contribution limits are:

  • $6,000 if you are younger than 50 years old
  • $7,000 if you are 50 or older

And just like a normal IRA, your funds in your SDIRA can grow in these investments until you need them for retirement.

ℹ️ If you want to take distributions from your SDIRA, the standard IRA distribution rules apply.

How to set up a Self Directed IRA

First, make sure that a Self Directed IRA is the best way to go for you. Second, make sure that you are familiar enough with the type of investments and activity that an SDIRA needs to also stay on top of IRS rules and qualifications.

To open a Self Directed IRA you will need to find a custodian or trustee of your account. Some specific investment firms can play this role and be the passive custodian of your SDIRA. In this vein, the custodian or trustee holds your account but does not offer investment advice.

ℹ️ There are prohibited transactions with SDIRAs, including family members directly benefiting from your investments. Check with the IRS on disqualified individuals and prohibited transactions.

Keep in mind that a custodian can also charge a custodian fee for holding the account, and factor that into your costs calculations.

Different custodians or trustees may require different paperwork from you for opening an account. So check with the firm that looks right for you, and be ready with your income documents, personal information and ways you will fund the account.

Investments in a Self Directed IRA

The types of investments that are open to Self-Directed IRAs can include, but not limited to:

  • Real estate
  • Cryptocurrency
  • Precious Metals
  • Undeveloped land
  • Promissory notes
  • Tax lien certificates
  • Water rights

Items like collectibles, jewellery, artwork or antiques are not allowed to be invested in in a Self Directed IRA.

The choosing of investments within an SDIRA are left up to you as the owner of the account. So it is your responsibility to research, validate due diligence and evaluate the risk assessments of the vehicles you are to invest in.

ℹ️ SDIRA custodians are not allowed to give you financial advice, so you are responsible for the risks and rewards for your account.

Not all investments are available at all custodian or trustee firms that allow SDIRAs. So if there is something specific you want to invest in, you will have to identify the right type of firm that can provide you access to the investment you are looking for.

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Self Directed Roth IRAs

A Self Directed Roth IRA is an option for individuals that meet the requirements for a Roth IRA, including the specific income limits.

You can only invest in a Roth IRA if on your taxes you make less than or equal to the maximum Modified Adjusted Gross Income.

You file as:Max Modified AGI
A Married Couple filing jointly$205,999
Married but filing separately and not living with your spouse$138,999
Qualifying widower$205,999

If you qualify, you can then fund your Roth IRA using after-tax dollars. The contribution limits stand the same as those in a Traditional IRA.

The benefits of a Roth IRA is that your withdrawals in retirement then stand tax free as you have already paid taxes on the funds. This can be especially helpful if you are expecting a high tax rate in the future, including in retirement.

Another benefit of Roth IRAs is that you are not required to take the RMDs at any age and can continue to grow your assets.

Benefits of a Self Directed IRA

One of the major benefits of having a Self Directed IRA is the room for possible growth through the alternative investments available.

Self Directed IRAs can also add diversification to your larger asset portfolio.

Owners of SDIRAs are also given additional control over their investments and can make changes to their investment allocation as they see fit and as long as they comply with the rules.

Self Directed IRAs are best fit for those who have a risk tolerance that is in line with the alternative investments, have clarity on the risk and return tradeoffs of these investments and are willing to be actively involved in management of the assets.

ℹ️ A SDIRA may be a good fit for those that want to be actively involved in their IRA investment asset allocation and management.

Risks with a Self Directed IRA

There are risks associated with opening and managing a Self Directed IRA. This includes:

  • Prohibited transactions: the IRS has put in place prohibited transactions so that the owner or the owner’s family members can’t directly benefit from the investments made in the account themselves. For instance, you can’t invest in your own company or your family member’s company through your SDIRA.
  • Fees: The custodian of your account may carry custodial fees and the alternative investments may have their own fee structure that is different from standard investments.
  • Liquidity Issues: Due to the nature of investments like water rights, land deals or real estate, you are likely to have less access to cash or liquid assets through your SDIRA. It is best to identify a different type of retirement account if you would like easier access to liquidity.
  • Reporting: You will have to bear responsibility for the IRS tax reporting and filing for SDIRA specific forms.
  • Disqualified individuals: SDIRAs can not purchase investments from or sell to people who are considered a disqualified individual. This includes relations such as a spouse, children, grandchildren but also the custodian on the account, your attorney, CPA or financial advisor.
  • Lack of advice: the Self Directed IRA route can be a lonely one as your custodian is not able to provide you advice or consul. Keep that in mind as you will have to take the financial decisions on behalf of the account.

Self Directed IRAs can carry substantive risks and it is recommended to speak to a financial advisor before entering into a SDIRA.


This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

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