Self-Directed IRA Basics
Short answer. A self-directed IRA lets you hold assets like precious metals, real estate, or private investments. The custodian does not vet them for you.
What It Is
A self-directed IRA is a standard IRA held with a custodian that allows alternative assets. A gold IRA is one type. See gold IRAs.
What Can Be Held
- Eligible precious metals
- Real estate
- Private notes and some private investments
Life insurance and collectibles are generally not allowed.
Rules And Risks
- Prohibited transactions. Dealing with yourself or certain relatives (disqualified persons) can disqualify the account.
- Custodians don't vet investments or give advice, which makes fraud a real risk. Regulators have warned about it.
- Complexity and fees exceed those of a conventional IRA.
Types Of Custodians
Not every IRA provider allows alternative assets. Self-directed custodians specialize in holding them and typically charge more than a mainstream brokerage. They hold and report; they do not recommend or vet what you buy.
Common Alternative Assets And Their Issues
| Asset | Common issue |
|---|---|
| Precious metals | Spreads, storage, and eligibility rules |
| Real estate | Prohibited transactions, taxes on certain income, and illiquidity |
| Private notes and companies | Valuation, fraud risk, and little liquidity |
Due Diligence Checklist
- Confirm the custodian's fees in writing.
- Verify the investment is real and exists as described.
- Check the seller's track record independently.
- Understand how you will exit the investment.
- Ask a tax professional about rules that apply to that asset.
Fraud Warnings
Because custodians generally do not investigate investments, fraudsters target self-directed IRAs. Regulators have published alerts about it. Be cautious of promised returns, pressure, and investments you cannot verify. See gold IRA red flags.
Sources And Further Reading
How Self-Directed Custodians Charge
| Model | How it works | Watch for |
|---|---|---|
| Flat annual fee | One amount a year regardless of balance | Weighs more on small accounts |
| Asset-based fee | A percentage of what you hold | Grows as the account grows |
| Per-transaction fees | A fee for each purchase or sale | Adds up if you trade often |
| Setup fee | A one-time charge to open the account | Sometimes waived |
Prohibited Transactions With Examples
A self-directed IRA must deal at arm's length. Typical violations include buying an asset from yourself or a close relative, selling an asset to the IRA, using IRA property personally, and lending money between yourself and the IRA. The penalty for breaking these rules can be severe, so check each purchase with the custodian and a tax professional.
Who Self-Directed IRAs Suit
People who understand the assets they want to hold, are willing to do their own research, and can tolerate illiquidity. They are a poor fit for anyone who wants simplicity or who feels pressured by a seller.
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Frequently Asked Questions
Is A Self-Directed IRA Riskier?
It can be, because you take on more due diligence and complexity.
Do I Need A Special IRA To Hold Gold?
Yes. You need a self-directed IRA with a custodian that allows precious metals.
Does A Self-Directed IRA Offer Better Returns?
No. It offers more choice, which can help or hurt. The account type itself has no return advantage.