What is a self-directed IRA?
An IRA (Individual Retirement Account) is used to save for retirement and to facilitate withdrawals after a certain age. A self-directed IRA (SDIRA) is an account that gives you complete control over your investment choices. Designed for DIY investors, they allow the owner to invest in a much broader range of investment types than a traditional or Roth IRA. Unlike other IRAs, you’re not limited to stocks, bonds, or mutual funds. Self-directed IRAs can invest in real estate, private market securities and more, although the IRS still forbids some types of investments including collectibles and life insurance.
Investments of an SDIRA are held in an account administered by a custodian or trustee. The account itself is managed by the plan owner and can function as a very broad investment portfolio. Therefore, it requires greater initiative and due diligence on the part of the plan owner; the custodian doesn’t vet the investments you undertake. That’s where the “self-directed” part comes in. It’s your responsibility to conduct the due diligence on the securities and other assets you buy.
Once you find a custodian, you’ll open an account and contribute money to it, just as you would with any other IRA. One potential blunder to avoid is neglecting the “no self-dealing” rule, which prohibits you from borrowing money from your IRA, selling property to it, and other interactions. Your role must be entirely passive. Think of your IRA as owning and operating the assets within it. In other words, your IRA, rather than you, must pay someone else to do the work.