Self-Directed IRA (SDIRA)

Key takeaways

• A self-directed IRA (SDIRA) lets you hold a wider range of investments than typical IRAs, including real estate, private equity, promissory notes, precious metals, and certain cryptocurrencies.
• SDIRAs are subject to the same tax structure as traditional and Roth IRAs, but they carry additional rules (prohibited transactions, disqualified persons) and higher fraud and complexity risks.
• Choose a reputable custodian, understand fees and recordkeeping requirements, and consult outside advisors if you’re unfamiliar with alternative assets.

What is an SDIRA?

A self-directed IRA is an individual retirement account held by a custodian that permits investments beyond standard stocks, bonds, mutual funds, and ETFs. Legally it functions like a traditional or Roth IRA, but it gives the account owner direct control to invest in alternative assets that many brokerages do not offer.

Custodians for SDIRAs handle account administration and required reporting but typically do not provide investment advice. That places responsibility for due diligence, valuation, and compliance squarely on the account owner.

Types of SDIRAs

An SDIRA can be structured as:
* Traditional SDIRA — funded with pre-tax contributions; growth is tax-deferred and withdrawals are taxable.
* Roth SDIRA — funded with after-tax dollars; qualified withdrawals are tax-free.

Contribution limits and distribution rules follow the same legal framework as conventional IRAs.

What you can and cannot invest in

Common alternative assets permitted in SDIRAs:
* Real estate (investment property held by the IRA)
* Private placements and private equity
* Promissory notes and loans
* Physical precious metals that meet IRS requirements
* Cryptocurrency (via custodial solutions that allow it)
* Real estate investment trusts and real estate funds

Prohibited or restricted assets and actions include:
* Collectibles (art, antiques, gems, most coins) and life insurance contracts
* Using the IRA as collateral or borrowing from the account
* Selling property to your IRA or buying property for personal use
* Transactions with disqualified persons (see next section)

Disqualified persons and prohibited transactions

To prevent self-dealing, the IRS designates “disqualified persons” who cannot transact with the IRA. Typical examples:
* The IRA owner
* The owner’s spouse, ancestors, children, and descendants of children
* Fiduciaries, managers, and certain service providers connected to the account

Prohibited transactions include selling or leasing property between the IRA and a disqualified person, lending IRA funds to disqualified persons, and using IRA assets for personal benefit. Violations can trigger severe tax consequences that may treat the IRA as fully distributed.

Taxes, penalties, and contribution limits

SDIRAs follow standard IRA tax rules:
* Contribution limits are the same as for other IRAs. Check current IRS guidance for the most recent limits.
* Early withdrawals (generally before age 59½) may incur income taxes plus a 10% penalty unless an exception applies.
* Roth SDIRA qualified distributions require meeting the five-year rule and age/other conditions.

Failing to follow SDIRA-specific rules (prohibited transactions, disallowed assets, improper personal use) can lead the IRS to disqualify the account and assess taxes and penalties as if the full account balance were distributed.

Risks to consider

• Higher fraud and liquidity risk compared with publicly traded securities.
• Greater operational complexity — valuation, recordkeeping, and transaction processing can be more burdensome.
• Custodial fees for alternative assets are typically higher and can include transaction, asset-holding, and setup fees.
• Custodians generally cannot give investment advice, so investors must perform independent due diligence.

How to get started

1. Define the types of alternative assets you want to hold and your reason for using an SDIRA.
2. Research custodians that specialize in self-directed accounts and support your desired asset classes.
3. Compare fee schedules, account services, and customer support reputation.
4. Open an account and fund it by contribution, rollover, or transfer from another qualified plan.
5. Execute investments through the custodian’s process and maintain thorough records and valuations.
6. Consider hiring independent legal, tax, and investment advisors experienced with alternative retirement assets.

Choosing a custodian

Not all financial institutions offer SDIRAs. When evaluating custodians, check:
* Experience and specialization in the asset classes you want
* Clear, transparent fee schedules
* Quality of customer service and turnaround times for transactions
* Track record and client reviews

Bottom line

SDIRAs expand retirement investing into alternative assets that can enhance diversification and return potential, but they also introduce added complexity, unique tax traps, and elevated fraud risk. They are best suited for experienced or well-advised investors who understand the rules governing disqualified persons, prohibited transactions, reporting requirements, and ongoing valuation and custody needs.