Is a Self-Directed IRA Right for Me?

self-directed IRA

Self-directed IRAs are becoming more popular because they allow investors to have more control over their assets and more investment options than traditional IRAs. 

As the name implies, a self-directed IRA is a type of IRA (Roth or Traditional) in which YOU direct the investments

They are ideal for investors wanting to diversify their assets outside of normal stocks, bonds, or mutual funds – and, instead, invest in assets with a higher growth potential. 

While they are an excellent retirement vehicle, there are rules and risks associated with self-directed IRAs. And, as a result, they are not right for every investor. 

Keep reading to see if a self-directed IRA is right for your retirement savings goals and objectives.

What Types of Investments Can I Put in a Self-Directed IRA? 

A self-directed IRA allows you to invest into assets not allowed in most traditional IRAs, such as investing in real estate, crypto, gold, commodities, tax liens, limited partnerships, and other alternative investments.

Investments that are NOT allowed in self-directed IRAs include collectables, such as works of art, antiques, rugs, any alcoholic beverages, and anything else the IRS says is a collectible. 

The IRS also prohibits investing in life insurance in your IRA. 

Self-Directed IRA Rules 

Before you open a self-directed IRA, it’s imperative you understand the rules. Breaking these may result in making your whole IRA taxable

#1 Contribution Limits 

Self-directed IRAs can be either a Roth IRA or a Traditional IRA. They have the same contribution limits of IRAs. It’s up to YOU to keep track of how much you’re investing each year. If you go over the limit, you will have to remove the additional payment ASAP. 

#2 Prohibited Transactions 

If assets or transactions are prohibited, the entire account is now distributed and fully taxable. 

Some transactions are NOT allowed in self-directed IRAs. These include: 

  • Lending or giving money to a disqualified person.
  • Transferring assets from the IRA to a disqualified person.
  • Selling assets you already own personally to the IRA.

⇒ What the IRS calls a prohibited transaction can IMMEDIATELY make your whole IRA taxable! 

#3 Cannot Work with a Disqualified Person

The IRS says you cannot use a self-directed IRA to benefit you personally or your beneficiaries

For example, you cannot take the income of one of your investments and place it into your personal bank account. It must go into the self-directed IRA.

Some other disqualified people, according to the IRS, are relatives, businesses which you receive payments from, family members, and entities owned by any disqualified person.

The Downside of Owning a Self-Directed IRA

#1 Higher Fees Than Other Accounts. 

Your fees in a self-directed IRA can be substantially higher than fees in accounts held in other IRAs. Some of these fees can include setup fees, maintenance fees, annual holding fees, custodial fees, and many other fees. These can be very high and eat into your potential gains. 

For example, I saw a self-directed crypto IRA that was charging 15% setup fees of your initial investment. If you invested $100,000, your initial setup fee would be $15,000. 

How long would it take for you to earn just this fee back, let alone all the other fees?

#2 No Financial Advice. 

With self-directed IRAs, your custodians will not give investment advice. 

This means your custodian cannot, and will not, give you investment advice on whatever you may be investing in. 

You will see them make disclosures in documents and on their websites that they are not giving investment advice and you are choosing to invest at your own will. 

If you have a financial advisor, most likely he or she will not offer advice on a self-directed IRA because it opens the advisor up to liabilities on investments that he or she did not advise on. 

Fraud is common in these types of investments, and most advisors would not want to tie their reputation or their firm’s reputation on this. 


Let me repeat this: YOU must do everything with a self-directed IRA – from setting up your account, researching investments, making the trades, monitoring the trades, understanding the rules, and keeping the account compliant in the eyes of the IRS. 

Who Is a Self-Directed IRA Right For? 

  • You love investing.
  • You like researching your investments.
  • You want more control over your investments.
  • You want the potential for increased returns.
  • You want to hedge your investments against volatility or economic conditions.

Who Is a Self-Directed IRA NOT Right For?

  • You have little or no investment experience.
  • You don’t pay attention to details.
  • You are after a quick buck (short-term gain).
  • You don’t have time to do the research on the rules and keep up on them.

Questions to Consider 

Here are some questions to ask yourself BEFORE opening a self-directed IRA. Sit down and write out your answers.  

  • Do you feel that you have the investment expertise to do this on your own?
  • Do you pay attention to details?
  • Can you research investments?
  • Do you know how to place trades?
  • Have you read the compliance rules regarding self-directed IRAs?

As with all investment vehicles, we recommend DYOR, or do your own research, prior to opening one. Make sure it’s the absolute right fit for you before making a move. 

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