Self-Directed IRA (SDIRA)

A self-directed individual retirement account (SDIRA) is an individual retirement account (IRA) in which the investor is in charge of making all the investment decisions. The self-directed IRA provides the investor with greater opportunity for asset diversification outside of the traditional stocks, bonds, and mutual funds. Self-directed IRAs can invest in real estate, private market securities and more. All securities and investments are held in an account administered by a custodian or trustee. These accounts can be opened at a number of brokers and Investopedia has created a list of the best brokers for IRAs for those interested in getting started with a SDIRA. 

A self-directed IRA is a type of traditional or Roth IRA. A SDIRA is used to save for retirement and is structured to facilitate withdrawals at a specified age. Self-directed IRAs differ from traditional and Roth IRAs only by the assets they hold. Designed for do it yourself investors they allow the owner to invest in a much broader array of securities than with a traditional or Roth IRA.

A SDIRA is managed by the plan owner and can function as a very broad investment portfolio. Its portfolio options are much broader than basic eligible securities for traditional and Roth IRAs offered by brokerage firms. As such, it requires greater initiative and due diligence by the plan owner.

Investors seeking a SDIRA will not find them at traditional brokerage firms who also serve as the custodian for basic investment holdings. Because of the broader and more complex diversification of SDIRAs, investors seeking them must typically look to companies that specialize in them. These companies are willing to serve as the custodian for the SDIRA investment assets. Some SDIRA companies still impose constraints on the holdings of the fund so it is important to ensure that the account allows the preferred mix of assets the investor is seeking. Some SDIRAs may specialize in specific alternative assets such as private equity or private debt.

It is the responsibility of the investor to comply with all Internal Revenue Service (IRS) regulations for IRAs. Because a SDIRA allows for such a broad portfolio, its holdings have greater risk of breaching IRS regulations and therefore require greater caution from investors, specifically when investing in real estate. SDIRAs have the same eligibility and contribution rules applied to all IRAs. Where SDIRAs must be cautious is in the personal use of assets held in the portfolio. The IRS does not allow IRA investments to be used for any personal use until the targeted withdrawal date. This can specifically pertain to real estate held in a portfolio and does not allow the investor to invest in real estate for personal use. The IRS also requires that IRA assets be held by a qualified SDIRA trustee or custodian.

SDIRA investors have much broader investment options for investing in SDIRAs. SDIRAs can include nearly any type of investment. They can accommodate private placements, private securities, real estate, limited partnerships, precious metals, commodities, crowdfunding investments and more. Life insurance is not permitted in a SDIRA.

You will not see self-directed IRAs advertised with traditional and Roth IRAs at mainstream brokerage firms. Investors seeking a self-directed IRA will typically need to open an account with a specialized firm that offers qualified SDIRA custody services. These firms will hold assets in a SDIRA for the plan owner and help to monitor it to ensure it complies with IRS tax regulations. Primarily, SDIRA custodians leave the investment decisions to the SDIRA owner and allow the investor to build a comprehensive portfolio that includes nearly any type of investment in the market.

Self-directed.org provides a comprehensive list of SDIRA custodians available for investors. Since the range of service offerings can vary by SDIRA custodian, fees typically vary as well. SDIRAs usually require an annual custodian fee. Fees also add up for investors with customized services. SDIRA custodians are willing to provide a range of customized services for a fee. Some examples of fees charged by SDIRAs include the following: one-time establishment fee, first-year annual fee, annual renewal fee and fees for investment bill paying.