Self-Directed IRA

What is a Self-Directed IRA?

A self-directed individual retirement account (IRA) is like any other IRA you may be familiar with. The term “self-directed” refers to the fact that you’re in the driver’s seat. Rather than relying solely on fund managers or financial advisors, you can make your own investment decisions, conduct due diligence, and choose assets you believe will perform well. This level of control is appealing to those who want a hands-on approach to their retirement saving.

With a self-directed IRA, your investment options are expanded to include alternatives to the traditional stock and mutual fund investments many accounts are limited to. Instead of naming what you can invest in, the IRS only lists a handful of items that are not permitted in an IRA. Aside from that list, the sky’s the limit – provided you follow IRS guidelines for the account.

Why don’t more IRA companies offer self-directed IRAs or other self-directed accounts?

This type of account can only be held by qualified custodians who are equipped to handle the unique recordkeeping requirements that come with this type of account, due to the guidelines governing retirement accounts.

Schedule an appointment with an IRA counselor to learn more about what makes a self-directed IRA different, and see if the account makes sense for you.

Advantages of a Self-Directed IRA

Greater Control and Flexibility

Tired of leaving your entire life savings at the mercy of the unpredictable stock market? Self-directed accounts enable you to choose your own investments, which allow you to invest in assets you know, understand, and may even be able to see. Your retirement account is no longer beholden to world events that could change your livelihood in an instant.

More Investment Options

With a self-directed IRA, your investment options are nearly endless, giving you the option to truly diversify into an array of alternatives to traditional assets. Clients have invested their retirement accounts into real estate, private equity, notes, precious metals, cryptocurrency, and more.

Potential for Higher Returns

Diversifying your retirement account could enable you to reach your financial goals faster than if you limited it to traditional investments. Several alternative asset classes have outperformed the S&P 500 over the past 20 years.¹ Alternative investments have also been increasing in popularity among the ultra-wealthy and institutional endowments.²

Tax Benefits

Sick of paying taxes on your investments? An Equity Trust self-directed account provides you with the opportunity for tax-free or tax-deferred profits.

Estate Planning Benefits

Certain self-directed accounts allow the beneficiaries to receive the account’s assets after the account owner’s passing with little to no tax. You can leave a legacy for those you love and care about.

Impact of taxes on your savings over time

Saving in a taxable account vs. Traditional and Roth IRAs. Hypothetical 8-percent return over 25 years.

NOT ALL IRA COMPANIES ARE EQUAL

While there are several IRA companies that will enable you to open a self-directed IRA, they don’t all face the same level of regulatory scrutiny and don’t offer the same value.

Learn more about the difference between the types of IRA companies.

CHARACTERSTICS OF A TOP CUSTODIAN

Here are things to keep in mind as you evaluate potential custodians. Ask the IRA company about each of these aspects:

Investment Options: Does the custodian enable you to hold a broad range of assets in your portfolio?

Regulation: Is the company regulated by a state or federal entity?

Years in Business: Does the company have a track record of being there for it’s clients?

Client Support: Will someone answer the phone if you call the company with a question?

Fees: Are the fees fair for what’s provided? Does the company charge by account value or flat fee? Does the company charge for each transaction?

Investor Education: Are you able to find resources to help you understand some of the more complex aspects of self-directed investing?

Reviews or Testimonials: Don’t just take it from the company – see if you can find reviews from actual clients.

EQUITY TRUST: A LEADING SELF-DIRECTED IRA CUSTODIAN

Don’t entrust just any IRA custodian with your financial future. Named Best Overall Self-Directed IRA Company from 2020-2024 by Investopedia, Equity Trust is your best choice:

Nearly limitless investments, one account

Traditional financial institutions limit your IRA to traditional investments. With Equity Trust, you can truly diversify into a range of options including real estate, private entities, cryptocurrency, precious metals, and more, in addition to stocks, bonds, and mutual funds — all in one account.

The power to help you succeed

Our size, expertise, and technology help us ensure that we’re there when you need us most. With 500+ associates focused on processing 2.5M+ transactions each year, we work diligently to enhance your experience.

Your direction, our support

Our knowledgeable, client-focused associates are here to provide dedicated, personalized service, from opening your account to assisting you with investment transactions. You can lean on our 50+ years of experience in the financial services industry.
Talk to a knowledgeable IRA Counselor.

Access to opportunities to match your goals

Don’t have an investment in mind? Most custodians establish your account and leave you on your own to figure it out. Our Investment District online marketplace enables you to find potential investment opportunities with the click of a button, and our WealthBridge portal connects your account instantly to integrated investment providers for fast, easy investing.

Common Misconceptions About Self-Directed IRAs

Some investors are too intimidated by self-directed IRAs to get started. Knowing how the account works and what to expect can ease a lot of hesitation.

COMPLEXITY

Misconception: Self-directed IRAs may involve more paperwork and steps than investing outside of an IRA.

Truth: The right IRA custodian can help make this process easier. Custodians like Equity Trust can guide you through each step of the process, from account onboarding to investment liaisons. Set up a call with an IRA Counselor to start now.

RISK

Misconception: When you’re in charge of finding your own investments, it’s hard to know where to go to find resources to help combat fraud.

Truth: It’s important to conduct due diligence on any potential investment for your IRA. If you don’t know where to start, there are trustworthy resources that can guide you through the exploration process. See the Fraud Awareness Resource Center.

LACK OF LIQUIDITY

Misconception: If all of my retirement funds are tied up in an investment such as real estate or precious metals, I will have no cash to withdraw as retirement income.

Truth: There are several ways to ensure you have the income you need or are required to withdraw. If you have multiple retirement accounts, your required minimum distribution can be taken from any account. So if you have another retirement account with a more liquid asset, you can take your required withdrawal from there. You could also sell a portion of your investment for more liquidity.

HIGH FEES

Misconception: I’d pay much more in fees with a self-directed IRA than I would with an IRA or 401(k) at a traditional brokerage.

Truth: Most people don’t realize just how much they’re paying for their retirement account. If you look closely at your statements, you may discover fees are eating away at your account balance. With a self-directed IRA custodian, your fees cover the unique record keeping that’s required for holding alternative investments in a retirement account, as well as other services.

Understand what you’re paying for with your self-directed IRA custodian and make sure the fee structure works for what you plan to do.

NOT ENOUGH MONEY

Misconception: Many investors believe they need a large balance in their retirement account to be able to invest in alternatives such as real estate.

Truth: There are several ways to have smaller IRAs work for investors. For example, you can partner your IRA funds with other IRA or non-IRA funds to make a purchase. Many investors also start out with small-dollar investments, such as loaning money, and build up their account until they have enough for a larger investment.

Learn more about partnering multiple accounts to bolster your buying power.

Self-Directed IRA Rules

Before you get started, make sure you know the IRA rules so you don’t risk getting a penalty or losing the tax-advantaged status of your account.

RULES TO KNOW

Prohibited Transactions: The IRS defines a prohibited transaction as: “any improper use of your IRA account or annuity by you, your beneficiary, or any disqualified person.”

Disqualified Persons: Your IRA cannot transact with certain people including “your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant),” according to the IRS.

Indirect Benefits: The purpose of the IRA is to provide for your retirement in the future. It is considered an “indirect benefit” if your IRA is engaged in transactions that, in some way, can benefit you personally today.

Permitted Investments: The IRS does not provide guidance on what is permitted, but dictates only what is NOT permitted. Examples of prohibited IRA investments include collectibles (such as artwork, stamps, rugs, antiques, and gems), certain coins, and life insurance. See IRS Publication 590 for more information about prohibited investments.

UBIT (Unrelated Business Income Tax): If your IRA owns interest in an asset that produces unrelated business taxable income (UBTI), your IRA may be subject to an unrelated business income tax (UBIT) pursuant to Section 511 of the Internal Revenue Code.

Contribution and Withdrawal Rules: Retirement accounts have maximum contribution amounts for each year. Accounts also have a minimum age at which you can withdraw funds, and some require you to withdraw funds after you reach a certain age.

Take a deeper dive into self-directed IRA rules.

FUNDING OPTIONS

There are three main ways to fund a self-directed account:

Rollover: A distribution from an existing account, such as a 401(k), 403(b), 457, Thrift Savings Plan, which is then redeposited, or “rolled over” into a like-tax-environment account.

Transfer: Moving an account, such as an IRA, from one financial institution to another. Transferring funds from one custodian to another is a nontaxable event – provided the account types are the same tax environment. Learn more about the difference between rollovers and transfers.

Roth Conversion: Roth IRAs may be funded through a Roth conversion, which involves converting funds and/or assets from a tax-deferred account (such as a Traditional IRA, SEP IRA, SIMPLE IRA, 401(k) or other tax-deferred plan) to a Roth IRA.

A Roth conversion is a taxable event: When you convert from a tax-deferred account to an after-tax Roth IRA, the amount of the conversion is added to your ordinary income in the year of the conversion and subject to ordinary income tax. It’s important to consult with a CPA, tax attorney, or other financial professional when considering a Roth conversion.

Out-of-Pocket Contribution: Assuming you qualify, you can contribute to your self-directed IRA from your personal checking or savings account, or with a credit card payment. This funding method is subject to annual maximum contribution limits set by the IRS each year. See the current contribution limits.