Updated: Sep 05, 2023

Self-Directed IRAs: Save for Retirement with Alternatives Investments

Learn how self-direct IRAs work for holding alternative assets and investments in a tax-advantaged retirement account. Find out about eligible investments.
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When it comes to individual retirement accounts (IRAs), most people know about the traditional and Roth versions.


They've probably never heard of a self-directed IRA (SDIRA).

It's another option for people who want to set aside assets for retirement. The biggest difference is that SDIRAs are designed to hold alternative investments.

Here’s what you need to know about these eligible investments, including pros and cons to determine whether a self-directed IRA makes sense for you.

Traditional SDIRA vs. a Roth SDIRA

When opening regular individual retirement accounts, you can choose between:

  • A traditional account (contributions are tax-deductible in the year you make contributions)
  • A Roth IRA (you pay taxes now and enjoy tax-free withdrawals in retirement).

The same options are also available when you open a self-directed IRA.

A self-directed individual retirement account is essentially the same as a traditional or Roth IRA. All three plans provide a savings vehicle for retirement.

Also, all plans allow you to contribute up to a certain amount each year.

The main difference between a self-directed IRA and regular IRAs are the types of investments you own in the account.

When you open a traditional or a Roth IRA, you'll hold common assets in these accounts.

These include:

  • stocks
  • bonds
  • mutual funds
  • savings accounts
  • exchange-traded funds (EFTs)
  • money market accounts
  • certificate of deposits (CDs)

Regular IRAs are restricted to the above securities. So they don’t allow alternative investments.

But what if you’re a savvy investor looking to explore other options for building a bigger, more secure retirement future?

If so, you might want to add other investments to your portfolio. This is where a self-directed IRA comes into play.

Qualifying investments

A self-directed IRA gives you an opportunity to hold other investments in your account. These investments might include:

  • real estate
  • precious metals
  • private equity investments
  • partnerships
  • hedge funds
  • tax liens
  • trust deeds (and more)

Similar to regular IRAs, a traditional self-directed IRA grows tax-deferred. Meanwhile, a self-directed Roth IRA has tax-free withdrawals in retirement.

But while both self-directed accounts have tax advantages, one thing that remains the same is the contribution limit for both types of self-directed IRAs.

For the year 2023, you can contribute up to $6,500 per year, or up to $7,500 per year if you’re age 50 or older.

Given the wide option of potential investments, a self-directed IRA can be an excellent way to propel your retirement savings and invest in areas you’re passionate about.

Where Can You Open a Self-Directed IRA?

Keep in mind:

Opening a self-directed individual retirement account is slightly different from opening a regular IRA.

With a Roth or a traditional IRA, you can set up one through your bank, an online broker, or a mutual fund provider. Basically, any large financial institution.

Unfortunately, you can’t just go anywhere to open a self-directed IRA. 

These are a unique, specific type of retirement account. So some financial providers don’t offer it as a retirement option.


You must use an IRA custodian approved by the Internal Revenue Service (IRS).

You can check with your bank or current brokerage firm to see if it’s approved to set up self-directed IRAs.

Finding a firm or bank that offers self-directed IRAs can be challenging. Some financial services and institutions don’t want the hassle of dealing with alternative investments.

Once you find a firm, though, your custodian will guide you through each phase of opening and funding your account.

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The Costs Involved

The cost of a self-directed IRA varies greatly depending on the bank or firm.

Fees don’t appear to be overly expensive, though.

For example, a firm or bank might charge a one-time initial account setup fee of $50. And then charge annual renewal fees ranging from $75 to $300.

For this reason, it’s important to shop around and compare custodian fees.

Ask for a breakdown of all account fees, and make sure you understand what you’re paying.


1. You’re in complete control of your investments

A self-directed IRA is just that—self-directed. Therefore, you’re in control of your investments and you choose what type of assets to own in the IRA.

So if you’re passionate and knowledgeable in real estate, there’s the option to own rental property or real estate notes.

You can allocate your money to one type of investment. Or spread it among different investments.

2. Your assets are protected

Similar to a Roth and traditional IRA, funds in a self-directed retirement account also enjoy asset protection. If you file bankruptcy in the future, you don’t have to worry about losing your nest egg.

Plus, in the event of your death, funds in your self-directed IRA can pass on to your spouse, your children, or your grandchildren.

3. Earn potentially higher returns

Some alternative investments see higher returns. This is compared to common securities like bonds, stocks, and certificate of deposits.

This can result in significant growth of your account, setting you up for a comfortable retirement.


1. You must do your own homework and research

If you set up a traditional or Roth IRA, a financial advisor can offer guidance and help you navigate your choices. This isn’t the case with a self-directed IRA.

Because you’re in complete control of your investments, your custodian cannot give any type of financial advice or guidance.

They can make changes to your account per your request. But as far as picking or suggesting assets to own in your account, you have to decide this on your own.

So it’s important to do your due diligence. Educate yourself on alternative investments before including them in your self-directed IRA.

2. Less liquidity

If you own a traditional or Roth IRA, you can easily pull funds from either account during a financial hardship.

Although you might pay income tax and an early withdrawal penalty on these funds.

You can also access funds in your self-directed IRA. Just know that depending on the type of assets in your account, it can be difficult to liquidate investments in an emergency.

This might be the case if your account includes assets like real estate or partnerships.

3. The IRS prohibits some transactions

Self-directed IRAs prohibit certain transactions. And if you conduct a prohibited transaction, you could face penalties and taxes.

The IRS determines a prohibited transaction. This can include using funds in this account to buy real estate for yourself. You also can’t buy real estate for another disqualified person.

Disqualified persons include yourself, a spouse, an advisor, or anyone in your direct lineage. This includes a parent, sibling, grandparent, etc.

Additionally, you can’t loan money to yourself or a disqualified person from the account.

You’re also prohibited from purchasing equity shares in a company you own or a company owned by a disqualified person.

Whether you intentionally or unintentionally conduct a prohibited transaction, there are consequences of this action. You could possibly lose your tax-deferred protection.

You could end up paying income taxes, a 10 percent early withdrawal penalty, and other fines for not reporting the distribution.

Keep in mind:

Self-directed IRAs don’t allow some types of investments.

Ineligible investments include:

  • life insurance policies
  • art
  • antiques
  • stamps
  • coins
  • certain other collectibles

Consult your custodian for information on prohibited investments.

When Does It Make Sense to Use a Self-Directed IRA?

A self-directed IRA makes sense if you’re looking for investments that can produce higher returns, and if you’re okay with the lack of liquidity.

This type of account also makes sense if you’re comfortable with the responsibility of choosing assets without any guidance from a financial advisor.

On the other hand:

If you're a new investor or someone who relies heavily on third-party assistance, it might be better to open a regular IRA through a bank or brokerage firm.

Final Word

Investing now can help secure your nest egg for the future. Between a 401(k) and an individual retirement account, you can grow your retirement savings to a healthy point.

It’s important, though, to explore all your options.

Only then can you decide which retirement savings is right for you.

Self-directed IRAs can hold a variety of alternative investments and potentially create a stronger retirement fund.

But since you’re solely responsible for the management of assets in your account, only open an account if you’re knowledgeable of different types of investments.