What Is a Self-Directed IRA (SDIRA)? Rules, Investments, and FAQs

What Is a Self-Directed IRA (SDIRA)?

A self-directed individual retirement account (SDIRA) is a type of individual retirement account (IRA) that can hold a variety of alternative investments normally prohibited from regular IRAs. Although the account is administered by a custodian or trustee, it’s directly managed by the account holder, which is why it’s called self-directed.

Available as either a traditional IRA (to which you make tax-deductible contributions) or a Roth IRA (from which you take tax-free distributions), self-directed IRAs are best suited for savvy investors who already understand alternative investments and want to diversify in a tax-advantaged account.

Key Takeaways

  • A self-directed individual retirement account (SDIRA) is a variation on a traditional or Roth individual retirement account (IRA).
  • You can hold a variety of alternative investments, including real estate, in self-directed IRAs that you can’t in regular IRAs.
  • Self-directed IRAs are generally only available through specialized firms that offer SDIRA custody services.
  • Custodians can’t give financial or investment advice for SDIRAs, which means that any research, due diligence, and management of assets rests solely with the account holder.
  • There are other risks associated with SDIRAs, including fees and the possibility of fraud.

Understanding a Self-Directed IRA (SDIRA)

The main difference between an SDIRA and other IRAs are the types of investments that you can hold in the account. In general, regular IRAs are limited to common securities like stocks, bonds, certificates of deposit (CDs), and mutual or exchange-traded funds (ETFs).

But SDIRAs allow the owner to invest in a much broader array of assets. With an SDIRA, you can hold precious metals, commodities, private placements, limited partnerships, tax lien certificates, real estate, and other sorts of alternative investments.

As such, an SDIRA requires greater initiative and due diligence by the account owner.

How to Open an SDIRA

With most IRA providers, you can only open a regular IRA (traditional or Roth) and can only invest in the usual suspects: stocks, bonds, and mutual funds/ETFs. If you want to open a self-directed IRA, you’ll need a qualified IRA custodian that specializes in that type of account.

Not every SDIRA custodian offers the same range of investments. So, if you’re interested in a specific asset, such as gold bullion, make sure it’s part of a potential custodian’s offerings.

Remember that SDIRAs are self-directed, which means that custodians aren’t allowed to give financial advice. As such, traditional brokerages, banks, and investment companies usually don’t offer them to their clients. This means that you need to do your own homework. If you need help picking or managing your investments, you should plan on working with a financial advisor.

The Self Directed IRA website offers a list of Internal Revenue Service (IRS)-qualified account custodians.

Traditional vs. Roth SDIRA

Self-directed IRAs can be set up as traditional or Roth IRAs. But keep in mind that the two account types have different tax treatments, eligibility requirements, contribution guidelines, and distribution rules.

A key difference between a traditional and a Roth IRA is when you pay the taxes. With traditional IRAs, you get an up-front tax break, but you pay taxes on your contributions and earnings as you withdraw them during retirement. When you contribute to a Roth IRA, you don’t get a tax break, but your contributions and earnings grow tax free, and qualified distributions are tax free as well.

Of course, there are other differences to consider. Here’s a quick rundown:

  • Income limits: There are no income limits for traditional IRAs, but you must make less than a certain amount to open or contribute to a Roth.
  • Required minimum distributions (RMDs): You must start taking RMDs at age 72 if you have a traditional IRA. Roth IRAs have no RMDs during your lifetime.
  • Early withdrawals: With Roth IRAs, you can withdraw your contributions (but not your earnings) at any time, for any reason, with no tax or penalty. Withdrawals are tax- and penalty-free after age 59½, provided that the account is at least five years old. With traditional IRAs, withdrawals are penalty free starting at age 59½. Remember, you have to pay taxes on traditional IRA withdrawals.

These same rules apply to whichever version of an SDIRA you have.

SDIRAs also have to abide by the general IRA annual contribution limits. For 2022, that’s $6,000 per year, or $7,000 if you’re age 50 or older, rising to $6,500 ($7,500 if you're 50 or older) in 2023.

Investing in an SDIRA

Self-directed Roth IRAs open up a large universe of potential investments. In addition to the standard investments (stocks, bonds, cash, money market funds, and mutual funds), you can hold assets that aren’t typically part of a retirement portfolio.

For example, you can buy investment real estate to hold in your SDIRA account. You can also hold partnerships and tax liens—even a franchise business.

The Internal Revenue Service (IRS) forbids a few specified investments in SDIRAs, whether it’s the Roth or traditional version. For example, you can’t hold life insurance, S corporation stocks, any investment that constitutes a prohibited transaction (such as one that involves self-dealing), and collectibles.

Collectibles include a wide range of items, among them antiques, artwork, alcoholic beverages, baseball cards, memorabilia, jewelry, stamps, and rare coins (note that this affects the kind of gold that a self-directed Roth IRA can hold).

Check with a financial advisor to be sure you aren’t inadvertently violating any of the SDIRA rules.

SDIRA Risks

SDIRAs have lots of benefits. But there are a few things to watch out for:

  • Prohibited transactions. If you break a rule, the entire account could be considered distributed to you. And you’ll be on the hook for all of the taxes, plus a penalty. Make sure you understand and follow the rules for the specific assets that you hold in the account.
  • Due diligence. Again, SDIRA custodians can’t offer financial advice. You’re on your own. Make sure you do your homework, and find a good financial advisor if you need help.
  • Fees. SDIRAs have a complicated fee structure. Typical charges include a one-time establishment fee, a first-year annual fee, an annual renewal fee, and fees for investment bill paying. These costs add up and can certainly cut into your earnings.
  • Your exit plan. It’s easy to get out of stocks, bonds, and mutual funds. Just place a sell order with your broker, and the market takes care of the rest. Not so with some SDIRA investments. For example, if you own an apartment building, it will take some time to find the right buyer. That can be especially problematic if you have a traditional SDIRA and need to start taking distributions.
  • Fraud. Even though SDIRA custodians can’t offer financial advice, they will make certain investments available. The U.S. Securities and Exchange Commission (SEC) notes that SDIRA custodians don’t typically evaluate “the quality or legitimacy of any investment in the self-directed IRA or its promoters.”

What Is a Self-Directed Individual Retirement Account (SDIRA)?

A self-directed individual retirement account (SDIRA) is a type of individual retirement account (IRA) that can hold investments that a typical IRA cannot, such as precious metals, commodities, and real estate. SDIRAs have the same contribution limits as traditional and Roth IRAs: $6,000 per year, or $7,000 for those age 50 or older, for 2022 (and $6,500, $7,500 if you're 50 or older, in 2023).

How Do You Set Up an SDIRA?

Per the Internal Revenue Service (IRS), all retirement assets, including those in SDIRAs, must be held by a qualified custodian. The custodian—which could be a bank, credit union, or other financial institution—administers the SDIRA, holds the account’s investments for safekeeping, and ensures that the SDIRA complies with IRS rules.

While you can open an IRA or SDIRA at virtually any bank or financial institution, most of the “big box” custodians don’t offer alternative investments, such as real estate, precious metals, and cryptocurrencies. Therefore, it’s essential to find an SDIRA custodian that offers the nontraditional assets in which you are interested. Keep in mind that these firms can’t offer investment advice, meaning investment research is your responsibility.


Who Offers SDIRAs?

You can open an SDIRA at virtually any bank or financial institution. However, if you want to invest in nontraditional assets (e.g., real estate and precious metals), you must find a firm that specializes in alternative assets. Of course, you should perform your due diligence before opening an account—and seek a financial advisor’s help to ensure that an SDIRA is right for you.

Article Sources
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  1. Internal Revenue Service. “Approved Nonbank Trustees and Custodians.”

  2. Internal Revenue Service. “Traditional and Roth IRAs.”

  3. Internal Revenue Service. “Amount of Roth IRA Contributions That You Can Make for 2022.”

  4. Internal Revenue Service. “Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs).”

  5. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

  6. Internal Revenue Service. “IRA FAQs.”

  7. U.S. Securities and Exchange Commission. “Investor Alert: Self-Directed IRAs and the Risk of Fraud.”

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