Can I Set Up A Self Directed IRA Myself

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 11 minute read

There are many advantages to opening an IRA for retirement savings. With a regular Individual Retirement Account (IRA), you can deduct your contribution from your taxable income, whereas with a Roth IRA, your contributions grow tax-free and you don’t pay taxes when you withdraw the money in retirement.

However, because they are managed by brokerage firms, IRAs can only own paper assets such as stocks, bonds, ETFs, and mutual funds. 

This begs the question, What if you wish to invest in alternative assets through your IRA? for more experienced savers and individuals with a more experimental bent? There’s the individual retirement account, which you can direct yourself.

What Exactly Is a Self-Directed IRA (SDIRA)?

You can invest in anything you like with a self-directed IRA, not just stocks and bonds traded on public markets. The contribution limitations ($6,000 in 2022, $7,000 for taxpayers over 50) and tax advantages are identical to those of a regular or Roth IRA.

However, there are a plethora of requirements, limitations, and restrictions associated with self-directed IRAs. The first is that you need a third party a trustee or custodian to manage your IRA for you.

Real estate professionals with substantial investment capital who are wanting to maximize their tax advantages while producing above-average returns typically utilize self-directed IRAs.

Franchises, cryptocurrencies, precious metals, private equity, and unconventional assets like crowdfunded real estate can all be purchased with funds from an SDIRA.

The Operation of a Self-Directed IRA

As compared to traditional IRAs, the rules and mechanisms of SDIRAs are more involved. Keep these distinctions in mind as you evaluate your IRA choices to find the one that works best for you.

SDIRA vs. a traditional IRA

Like taxable brokerage accounts, ordinary IRAs are invested in through an investor’s preferred investment advisor. To open an SDIRA, however, you must use the services of a custodian or trust business. 

They won’t help you with your investments or conduct due research, but they will help you file your taxes in accordance with the law. This includes submitting 1099-R and Form 5498 to the IRS.

They also have a fee for their assistance. The typical yearly cost is between $50 and $300. On the other hand, most brokerage houses provide regular IRA accounts at no cost to you. However, you are restricted to making only those investments that are allowed on their brokerage platform.

Contrasting traditional and Roth SDIRAs

Both standard and Roth SEP IRAs can be opened through a broker, just as regular IRAs. The tax advantages they provide are identical to those of their more conventional counterparts. 

While contributions to a traditional SDIRA are tax-deductible this year, you’ll have to pay taxes when you withdraw the money in retirement, a Roth SDIRA contribution isn’t deductible this year but grows tax-free.

The age at which you must begin taking money out of your traditional SRIA is the same as that for RMDs in general: 72. There is no age at which you must begin withdrawing funds from your Roth IRA. Unless you are very close to retirement age, a Roth IRA is almost always the superior deal.

Conflicting Investments

However, there are restrictions on investments you can make with a self-directed IRA just like there are with a traditional IRA. 

A self-directed individual retirement account (SDIRA) cannot be used to purchase any of the following:

  1. Term Life Coverage. A whole life insurance policy, universal life insurance policy, or variable universal life insurance policy cannot be held within a traditional, Roth, or SEP IRA, notwithstanding the IRS’s allowance of annuities. Qualified plans’ life insurance is subject to the same criteria, with the exception of very modest amounts of coverage, as outlined in the Incidental Benefit Rule. Contrary to the widespread use of life insurance as a funding mechanism for nonqualified plans, qualified defined-contribution plans like IRAs are subject to the aforementioned limitations.
  2. Speculative Dealing with Derivatives. Futures and options contracts on securities or commodities are examples of financial derivatives. The IRS prohibits any trade or position with unlimited or undefined risk, such as selling naked calls, even though many of the more aggressive self-directed IRA custodians allow their usage. They believe the such high risk is unsuitable for a retirement account’s purpose of providing stability in later life.
  3. Things of historical or cultural significance can be collected. Your electric train set from when your grandfather was a kid won’t work in an IRA, and neither will that valuable family heirloom. No IRA will allow you to title in the name of the account; furniture, wine, fine art, stamps, precious stones, porcelain and pottery, silver- and tableware, jewelry, comic books, baseball cards, and other collectibles.
    In other words, your own home. Neither your primary dwelling nor a vacation home nor a bachelor pad in the city should be held under an individual retirement account.
  4. Privately owned rental properties are likewise off-limits. Possession of undeveloped land or other forms of real estate may be acceptable, but personal residences are not. Buying a primary or secondary residence, or an investment property from which you would gain any financial benefit, using IRA money is prohibited. Also, if you’re in the business of managing rental or investment properties, investing through your own SDIRA would be a bad idea.
  5. Particular Coins. No gold, silver, platinum, or other precious metal coinage may be held in an Individual Retirement Account. For inclusion in an Individual Retirement Account (IRA), a coin’s face value must be higher than its collector’s value. 

However, the IRS does have a list of caveats, which includes:

  • American Eagle coins that have never been in circulation
  • Proofs of American Eagle coins
  • American Buffalo coins
  • Canadian Maple Leaf coins
  • Australian Gold Philharmonic coins

You also can’t rent out your house from your IRA to your own kids or your parents, take out a loan from your IRA or do commerce with any lineal descendant or ascendant, according to the rules.

The advantages and disadvantages of Self-Directed IRAs

These more nimble IRAs come with their own advantages and disadvantages. Before you take on the added obligations and expenses, make sure you understand both properly.


Self-directed IRAs offer a variety of benefits above and beyond those offered by traditional IRAs. These advantages of SDIRAs should be kept in mind as you consider this flexible tax-deferred account option.

  1. Flexibility. The beauty of a self-directed IRA is that it allows you to put your money nearly anywhere you like. SDIRAs is a great retirement savings option for professionals who realize they can achieve higher and more stable returns by investing in their area of expertise. After example, if you can count on a 15% annual return on your real estate assets, you might be reluctant to risk the uncertainty and typical 10% long-term returns of the stock market.
  2. Power Rests with the Manager. When you put your money into a company’s stock or bond, you do so with the greatest of intentions. A sex scandal involving the CEO could lead to the company’s demise, or it could continue to expand. As the CEO of your own SDIRA, you get to decide how it’s used. You get to pick your own investments and handle their administration. Let’s pretend you use your SDIRA to purchase a four-unit rental property. You have the option of making repairs or updating the building to increase rentals, generate more equity, and increase the property’s value. You have the option of working with a property manager, rigorously vetting tenants to ensure on-time rent payments and minimal wear and tear, and even purchasing rent default insurance to hedge against the possibility of rents not being collected.
  3. Financial Discretion. All financial transactions in a standard SDIRA must be approved by the custodian, which can be a laborious process. However, many account holders form a limited liability company (LLC) and instruct the custodian to invest in it. In this way, as the LLC’s owner, you won’t have to deal with the custodian’s intrusive questions and concerns on a daily basis as you go about your investment business. Rent and maintenance fees, for example, might be paid and received independently.
  4. Earnings Potentially on the Rise. If you have specialized knowledge and investment expertise, you can put it to use in an SDIRA to generate better results than you would with a standard brokerage account. While the property is often used as an illustration, it is hardly ever the only one. For those who have established themselves in the franchise sector, an SDIRA can be used to launch a new franchise as an investment vehicle. If you’re in the business of vetting private equity funds, your returns will almost certainly exceed those of an index fund.
  5. Securing one’s possessions. In the event of a lawsuit, judgment, collection, or bankruptcy, your self-directed IRA assets are protected to a greater extent than other types of assets. As an example, federal tax liens offer minimal protection despite the fact that the standards for dealing with creditors in one state may be different from those in another. However, a self-directed individual retirement account (SDIRA) provides one of the strongest barriers available for safeguarding financial assets. You can shield up to $1 million in your SDIRA from creditors under the Bankruptcy Abuse Prevention and Consumer Protection Act.


Self-directed IRAs have many benefits, but they also have some drawbacks. Carefully examine the following drawbacks before rushing out to start an SDIRA, and consult an investing expert to help you assess the merits and cons.

  1. Problems in the bureaucracy. To get started, you’ll need to choose a custodian that is approved by the IRS to manage your assets. Compared to starting an IRA through a broker and purchasing a few index funds, it increases the level of complexity in your IRA investments. For instance, your SDIRA custodian may ask you a lot of in-depth questions and require them to countersign all contracts you sign. That could put you at a competitive disadvantage by slowing down your business transactions.
  2. Cost. Custodians don’t work for free out of the goodness of their hearts. Be wary of hidden charges, such as those for setting up an account, maintaining an account, and even making a transaction. Fees may accrue whenever a real estate investor conducts a financial transaction, including the issuance of an earnest money deposit, settlement, and the payment of a mortgage, HOA dues, utility bills, and so on.
  3. It’s a Complicated System of Regulation. Your investments in a self-directed IRA may be disallowed if they don’t pass the IRS’s rigorous scrutiny. In that case, your SDIRA funds will be subject to taxes and penalties, which can build up quickly. To illustrate, you can’t indirectly benefit from your SDIRA assets by, say, relocating into the basement apartment of a rental property owned by your SDIRA. Any real estate held in an SDIRA must be held in a separate entity from the owner’s name, such as an SDIRA-specific limited liability company (LLC). Your SDIRA is the only account from which contributions and withdrawals can be made, therefore all of your money should go there instead. And that is the way it is.
  4. Experiencing Difficulties with Financing. The assets in a self-directed IRA can be purchased in part with the help of financing. On the other hand, the SDIRA’s tax benefits do not apply to that part of the asset. Let’s pretend you’re investing $200,000 in a rental property and you want to use your SDIRA for a down payment of $50,000. Tax breaks apply to just 25% of the asset; the remaining 75% is taxed at the normal rate. The same is true for any type of business loan, like one used to launch a franchise.
  5. Real Estate Has Little Room for Growth. Many people with experience in the real estate market are drawn to self-directed IRAs as a way to benefit from their knowledge. However, there are other tax benefits that come standard with owning real estate, reducing the utility of an SDIRA. By way of illustration, a 1031 exchange allows real estate investors to postpone paying capital gains taxes on the sale of an asset. Including paper costs like depreciation, investors can write off anything they wish.
  6. The inability to buy sizable assets is exacerbated by low contribution limits. Real estate and franchises, two of the most popular investments for self-directed IRAs, may be quite pricey. However, the contribution limits for SDIRAs are the same as those for traditional IRAs; in 2022, the limit for most taxpayers is $6,000. At that rate, how long would it take to save enough for a down payment?
  7. Conflicts arise from diversification. It is more challenging to diversify when dealing with large, expensive assets because of the high cost of each individual asset. In contrast, investing in an index fund is a simple way to diversify $100 over hundreds of firms.
  8. Increased Organizational Capacity Is Necessary. Not a single person ever opens an SDIRA with the intention of investing entirely without any involvement on their part, like with a Robo-advisor. Work is needed to make alternative investments that motivate people to establish SDIRAs. Problematic tenants, routine upkeep, vacancies, applicant screening, and hostile neighbors are just some of the issues that landlords must address. Franchisees are responsible for establishing a fully functional firm, from advertising and employee management to accounting and stock control. You’re not just investing; you’re starting a business.

Do You Need a Self-Directed IRA?

The quick answer is that SDIRAs are ideal for seasoned investors or investment pros who have their sights set on a particular kind of alternative investment. Most Americans find that the extra hassle and complexity of a self-directed IRA isn’t worth the extra money. 

The majority of people would be better suited to forming a traditional IRA, perhaps with the help of a Robo-advisor, to automate their investment decisions and asset allocation in accordance with their age, retirement goals, and risk tolerance.

However, due to the tax benefits of an SDIRA, competent investors, such as seasoned real estate investors, who can produce consistently high returns on their investments, can expedite those gains. 

However, it is recommended that you begin with a traditional IRA and only consider transferring funds to an SDIRA once you have proven success with alternative investments.

Bottom Line

Personally, I can get the allure of putting your IRA funds to work in a field in which you already have experience. Yet I fight that impulse for various reasons. First, I think everyone should have some stock in their portfolio. 

You may love real estate and achieve amazing profits from it, but that doesn’t mean you should neglect every other asset type. You’ll have low liquidity and diversity, and you’ll be susceptible to shocks in the real estate market if you do this.

Why not just use a standard IRA if you plan on using stock investments to create wealth over time? You save yourself a plethora of difficulties and fees by avoiding the SDIRA and leaving your IRA to equities.

More importantly, you already benefit from numerous tax breaks associated with owning real estate. Considering that I don’t get any of the same built-in tax benefits when investing in stocks, I’d just as soon take use of an IRA.

My stock portfolio and retirement savings are both managed automatically so I don’t have to give them any thought. This is convenient for me because the work involved in my real estate investments is much greater than that involved in managing an SDIRA.

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