The Basics of Self-Directed IRAs

Disclosure: This article is written for entertainment purposes only and should not be construed as financial or any other type of professional advice.

Recently a reader wrote to ask me whether the fees and complexity of a self-directed IRA were worth the trouble. My knowledge of these types of accounts and their investments is limited. But the topic intrigued me enough to investigate and share the basics.

What are self-directed IRAs?

I first heard the self-directed IRA term back in the 1980s. At that time, “self-directed” referenced the ability of the individual investor to choose his or her own investments. Traditional banks and brokerage firms offered and marketed this self-directed feature as distinct from prevailing retirement accounts managed by an entity other than the investor. For example, a pension is other-directed whereas an IRA could be self-directed or managed by a financial institution on behalf of its clients much like robo-advisors work now.

Today, “self-directed” carries a different meaning among retirement investors. A self-directed IRA is one in which the investor can choose among a broader universe of investments, such as real estate and private placement securities, rather than narrower ones associated with the traditional offerings of stocks, bonds, mutual funds, ETFs, and certificates of deposit (CDs).

Whether self-directed or not, all IRAs require a custodian or trustee to administer activities in the account, according to the SEC’s Office of Investor Education and Advocacy. Most custodians are banks and broker-dealers (e.g., Bank of America or TD Ameritrade) that restrict holdings to stocks, bonds, etc. If I’m interested in nontraditional investments for my IRA, I must find a custodian or trustee that allows me to hold other types of assets.

Note that the custodian or trustee does NOT typically endorse self-directed IRA investments. Investors, not custodians, are responsible for due diligence associated with an investment. The North American Securities Administrators Association (NASAA) separates fact from fiction regarding custodial accountabilities in this article on third-party entities that administer self-directed IRAs.

What investments are allowed in a self-directed IRA?

The types of investments I can make in a self-directed IRA may include real estate (such as rental properties) and private placement securities (private investments in businesses). They may also include tax lien certificates, promissory notes, precious metals, and marketplace loans. See this article at MarketWatch to learn more.

There’s not a list of approved investments on the IRS site. But there is information on what’s not allowed. IRAs can’t hold investments in the following items:

  • collectibles, such as art, antiques, gems, coins, or alcoholic beverages (presumably vintage wine or whiskey)
  • some precious metals
  • life insurance

Further, there are certain transactions that are prohibited. For example, a fiduciary can’t use retirement plan income or assets for his or her own interest.

I first heard about this type of investing when an acquaintance (also a CPA with legal experience) told me about an arrangement he masterminded for his father in which he placed rental properties inside a retirement account. The set-up allowed his dad to sell properties without incurring capital gains taxes on every transaction (though, presumably, he’d pay taxes when he made withdrawals in retirement).

Personal finance blogger Jackie Beck mentioned buying a rental property with her IRA. She chose this route because she had money inside her IRA to make the purchase. This method solved the problem of funding but created other problems. For example, she has to follow strict IRS rules when paying contractors to make repairs rather than handling certain activities herself.

So, just like with stocks and bonds, there are tax-related and other reasons to hold investments in a regular taxable account or conventional IRA and reasons to hold investments inside a self-directed IRA.

What fees might you pay with a self-directed IRA?

Fees can be higher with self-directed IRAs as investment holdings and activities may be more complex to handle. For example, Millennium Trust Company lists these fees:

  • one-time set-up fee: $50
  • annual account fee: $100

For more information on the types of fees you may incur with a self-directed IRA and methods of minimizing those fees, see this article on self-directed IRA fees at

What are the signs of fraudulent self-directed IRA investments?

The SEC gives examples of the tactics employed by fraudsters in conning people to invest in their schemes. These include:

  • actively soliciting an investment offer that involves the use of a self-directed IRA, including the use of free lunch investment seminars
  • promising returns that are guaranteed, can’t miss, or lucrative
  • stating that investments are safe and risk-free
  • offering exclusive opportunities for investment
  • claiming or suggesting that a custodian has investigated and validated investments

Con artists may be more likely to promote fraudulent investments in self-directed IRAs because a) many people have more money in their IRAs than regular brokerage accounts and b) investors may not need their money for a long time, lessening their concern about an investment’s value and liquidity. Even if an investment isn’t fraudulent, it may or may not be suitable for me.

What questions should I ask about a self-directed IRA investment?

Drawing on the wisdom of Financial Industry Regulatory Authority (FINRA) and John Wasik at Forbes, here are some questions I might ask about self-directed IRA investments (and private placements in particular):

  • What are the credentials of the person selling me the investment? (I can use FINRA’s Broker Check to research credentials.)
  • How liquid is the investment? How long must I hold the investment before I can liquidate it? Can I quickly and easily cash in the investment?
  • How is the investment valued? How often is this valuation revisited and updated? What must happen for the valuation to change?
  • Will I receive regular distributions or must I sell the investment to generate cash?
  • What risk factors are associated with this investment? What needs to happen for the investment to deliver returns? What could cause the investment to lose money?
  • How does this investment fit within my overall investment portfolio?
  • Is the investment being sold on a conditional or contingency basis? That is, do the sellers need to raise a minimum amount before going forward with the investment?

For private placement securities, ask to see a Form D filed with the SEC.

Self-directed IRA investments may be a viable choice for investors who are wealthy (some investments require investors to be accredited with a net worth over $1 million), dislike traditional investment vehicles or seek alternatives to complement traditional investments, can handle the compliance issues (see article on tax compliance), and don’t mind uncertainty associated with the valuation and liquidity of unconventional investments. For the average investor, special self-directed IRA investments may carry risks and complexity that may not be acceptable.

Do you have a self-directed IRA? How have its investments worked for you?

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