What is a self directed IRA?
A self directed IRA is a type of IRA account that allows for investments in non-traditional assets like real estate, tax liens, private notes and so on. In addition to non-traditional investments, self directed IRA plans also allow for traditional investments like stocks, bonds and mutual funds. The investment options inside these accounts are only limited by the account holder’s imagination, and a few prohibited transaction rules set forth by the government of course.
How they work
Self directed IRAs—just like traditional IRAs—are required to be held with a custodian. While most people of heard of big custodial firms like Charles Schwab and Fidelity (who focus on traditional IRA investments), few have heard about companies like Pensco and Equity Trust—two of the larger self directed IRA custodians. There are a growing number of these custodial firms, though, who are building their businesses around non-traditional IRA investments. As the industry continues to grow, so do the options for investors. To learn more about custodians, and to read about many of the custodial companies, visit our self directed IRA custodian section.
As an investor, the custodian you choose to hold your investments will handle most of the paperwork, tax filings and so on—just like with a traditional custodian. It will cost more at a custodial firm, though. The reporting on non-traditional assets can be a little more complicated, so be prepared to pay for that. Calculating the value of a stock is as simple as pulling up a stock quote, whereas calculating the value of a piece of real estate is a little more challenging. Self directed IRA investors should also expect a little more effort on their part when it comes to dealing with paperwork, but that is the cost of investment freedom.
How one invests with their self directed IRA will vary greatly depending on the type of account the investor has.
There are two main types of accounts, the regular custodial account, and the LLC account. The self directed IRA LLC is a more recent adaptation of the self directed IRA, and allows for even more freedom for investors. In the LLC model, investments are bought and sold in the name of an LLC (which is owned by the IRA), rather than investments being bought and sold directly in the name of the IRA—which is the case with the traditional custodial model. For a more complete breakdown of each type of self directed IRA, please visit our sections about investing with a self directed IRA LLC, and investing with a custodian.
The beauty of self directed IRAs is that they allow investors to choose from an almost unlimited number of investments. An investor can choose to buy stocks and bonds, right alongside a vacant lot in Costa Rica and stock in a new startup business. Just about any investment opportunity is on the table—so long as it isn’t strictly prohibited as part of ERISA. Visit our self directed IRA rules section to learn more about these prohibited transactions.