Five Misconceptions About Self-Directed IRAs—And the Truth Behind Them

A self-directed IRA allows investors to hold a wide variety of alternative assets beyond the traditional stocks, bonds, and mutual funds. These can include real estate, private loans, precious metals, and more, all with the same tax advantages as other IRAs.

Despite the flexibility, many investors hesitate to open a self-directed IRA because of things they’ve heard from friends, forums, or outdated articles. While it’s important to understand the rules before getting started, some common concerns are based on misunderstanding rather than fact.

If you’ve been curious about a self-directed IRA but aren’t sure it’s the right fit, here are five misconceptions worth revisiting along with considerations to help you make a more informed decision.

1. Self-directed IRAs are too complicated

A self-directed IRA works differently than a brokerage IRA because you choose and direct the investments. That added control can sound like added complexity.

In practice, an experienced custodian can make the process much more manageable. From account setup and funding to investment documentation and required recordkeeping, a custodian’s role is to handle the administrative requirements so you can focus on evaluating opportunities that fit your interests.

What to consider: If you start with an asset type you already understand, such as a rental property or private note, you can potentially shorten the learning curve while gaining experience in the account.

2. Choosing your own investments means greater risk

Some investors worry that, without a broker screening options, they may be more exposed to unsuitable or fraudulent opportunities. Any investment carries some level of risk, and with a self-directed IRA, you take a more active role in managing that risk through due diligence.

You can choose investments in areas you know well and are experienced in to identify potential red flags. Reviewing documentation, asking questions, and verifying information are essential steps in any investment account, not just a self-directed IRA.

What to consider: Research! For example, you could make a checklist of key questions to ask before committing IRA funds, including how the investment is managed, how it generates returns, and what the exit options are. It is always a good idea to consult a financial professional or CPA.

3. A self-directed IRA locks up your retirement savings

Liquidity concerns often arise with assets like real estate or private equity. Investors may wonder how they’ll meet required minimum distributions (RMDs) or other cash needs.

You’re not limited to taking distributions from your self-directed IRA alone. RMDs can be met from any IRA you own, and some investors choose to use a more liquid account for withdrawals.

In some situations, you may also be able to sell part of an asset or take an in-kind distribution. For example, one SDIRA investor who owned a rental property used a partial in-kind distribution by transferring a small percentage of the property’s value into her name and combined it with rental income to meet her RMD without selling the property.

What to consider: Review your liquidity needs annually and consider holding at least one asset in your portfolio that can be converted to cash without significantly impacting your long-term plan.

4. The fees are too high

Self-directed IRAs have a different fee structure than conventional IRAs, but not all investors find them more expensive. While other accounts may charge a percentage of assets under management, self-directed IRA custodians might use flat fees that cover specialized recordkeeping, transaction processing, and reporting for alternative assets.

For example, an account below a certain balance might pay a lower annual maintenance fee, while larger accounts pay more. In addition to the annual fee, there may be one-time charges for things like opening the account, processing transactions, transferring assets, or special services such as expedited document handling.

What to consider: Compare the total annual costs of your current account with a self-directed IRA. Include both visible and less obvious charges to see the full picture.

5. You need a lot of money to get started

It’s true that some investments, like certain real estate purchases, require significant capital. But many investors start with much smaller amounts.

Some may begin with private loans, promissory notes, or fractional real estate investments. You can also partner your self-directed IRA with another IRA or with personal funds to access larger investment opportunities, following IRS rules closely.

In one case study, an investor used a self-directed IRA with a modest balance to participate in a real estate purchase by partnering with other accounts. This approach allowed the investor to gain exposure to the asset without needing the full purchase price upfront.

What to consider: If your account balance feels too small for your preferred investment, explore opportunities with lower minimums or partnership arrangements to build your portfolio over time.
Want to explore further?

Want to explore further?

Self-directed IRAs are not the right choice for everyone, but for investors who want greater choice, flexibility, and the ability to invest in areas they know well, they can be worth exploring. By understanding the facts and separating them from common misconceptions, you can decide if a self-directed IRA belongs in your retirement portfolio.

If you’d like to explore whether a self-directed IRA fits your goals, you can
schedule a call with an IRA Counselor. Our team can answer your questions, explain how the account works, and walk you through the account opening process.