Self-Directed IRAs Span Every Asset Class

IRAs Defined

Self-directed IRAs, or any individual retirement accounts (IRA), are just that – accounts in which an individual, without the assistance of an employer (like a 401k requires), invests money that will grow over time. The purpose is to provide a nest egg for retirement. An IRA can be invested in various assets, including stocks and bonds, index funds, and mutual funds.

But self-directed IRAs unlock a new level of opportunity traditional vehicles don’t: alternative assets.

U.S. News & World Report states, “A self-directed IRA can hold alternative assets such as real estate, private equity, precious metals and other commodities, and cryptocurrencies. They can’t hold investments in collectibles, life insurance, or real estate you live in.”

There are two types of IRAs: traditional and Roth.

Traditional and Roth IRAs

Traditional IRAs

The money put into a traditional IRA can be deducted from taxable income. For example, if you earn $100,000 annually and invest $10,000 in an IRA that same year, you would only pay taxes on $90,000. Furthermore, any future income earned from the IRA will be taxed once those funds are withdrawn; this is referred to as ‘tax-deferred growth.’

However, one caveat to know about traditional IRAs is that retirees are required to withdraw their money starting at a certain age. The age of mandatory withdrawal has shifted by a few years in the recent past, but “after age 59 ½ – you’ll pay tax on the gains as if they were ordinary income.” According to the IRS, retirees must begin taking “required minimum distributions” — annually — from their tax-deferred retirement accounts at age 73.

Roth IRAs

Unlike traditional IRAs, Roth IRAs do not provide an initial tax break. Instead, they require no additional taxes to be paid until after retirement, a process known as ‘tax-free growth.’ Roth IRAs do not mandate an age by which money must be removed from the account.

Complexities and Use of Self-Directed IRAs

Self-directed IRAs were conceptualized and enacted in 1974 through the Employee Retirement Income Securities Act (ERISA).

The legalities of self-directed IRAs are complex, and navigating them can confuse non-experts. Investors looking to strike out independently will need more than a dollar and a hunch.

For example, buying gold is a common way to use money in a self-directed IRA because of frequent radio advertisements. However, Boston-based Financial analyst Christopher Shepler told U.S. News & World Report, “The celebrity is not considering the questions of asset location and tax efficiency. Gold doesn’t pay interest or dividends, so depending on advice from a tax professional, not an actor, it could be better to hold an asset like gold outright rather than in a tax-deferred vehicle.”

While radio ads have made gold investing popular, a significantly impactful aspect of investing in gold assets with a self-direct IRA is that such an investment can only be made in IRS-approved gold, and it cannot be kept on the premises where you live, among many, many other caveats. It’s not as simple as investing and waiting for the ROI to pay off big.

That is why Christopher Shelper says, “A self-directed IRA is a sharp object meaning the user should read the safety manual before proceeding,”

Caveats and Rules

Self-Directed IRAs do not come without caveats. Investors must adhere to contribution limits. For 2025, the annual maximum is $7,000 in a single year for those under 50 and $8,000 for those over 50.

The general rule for IRAs, is that the retiree cannot touch their investment money until age 59½. If a retiree decides to take money out of a self-directed IRA before that age, they will pay 10% to the government as well as taxes on that income. There are some exceptions to this rule, including death or disability of the account holder, medical expenses not covered by insurance, paying an IRS levy, and others.

Self-Directed IRAs: Not a Game for the Unsophisticated Investor

Professional money managers typically direct both types of IRA accounts. In most cases, the financial institutions that manage IRAs limit the types of assets into which an IRA may be invested.

A self-directed IRA (SDIRA) allows you to invest in a broader array of assets. Generally speaking, those who use self-directed IRAs do so to invest in alternative investments.

An SDIRA allows investors to venture beyond the limited options offered by traditional IRAs, opening the door to alternative investments such as real estate, private equity, hedge funds, precious metals, and even cryptocurrencies. This flexibility is particularly attractive to individuals with expertise in specific markets who want to diversify their portfolios or pursue higher-yield opportunities. Unlike traditional accounts managed by professional money managers, SDIRAs place the responsibility of investment decisions squarely on the account holder. James A. Jones, founder of the Self-Directed IRA Investment Institute, points out, “A self-directed IRA is an IRA like any other under IRS Publication 590 in terms of annual contributions, required minimum distributions.” But, unlike traditional IRAs, self-directed IRAs are often invested in asset classes such as “private equity and debt, hedge funds, real estate, precious metals, real estate, and trust deeds.”

The highest risks in self-directed IRAs come from the investors themselves, who direct money toward unregulated, unstable, or unproven assets and, essentially, put all their retirement eggs into one basket.

Here are some key things to keep in mind as you explore self-directed IRAs and do your due diligence:

Self-Dealing Is Verboten

One cannot borrow against a self-directed IRA or put its assets up as collateral. Any investments you make cannot be tied to you personally.

IRS Code 4975 guides and defines ‘prohibited transactions’ and ‘prohibited people.’

• A ‘prohibited transaction’ involves buying, selling, leasing, exchanging, or receiving any use, benefit, or compensation directly or indirectly from an asset in an IRA.
• A ‘prohibited person’ is the IRA holder and spouse, parents and spouse, children and spouse, fiduciary, etc. This means one cannot purchase a guest house in the mountains and use it for vacation or rent it to family members, as this would be considered a prohibited transaction despite whether the price was paid at a fair value.

Fees to Consider

Even if an investor decides to forgo hiring a tax and/or legal advisor, either of which is costly, paying a custodian is not optional. A custodian, for the price, will only do a little more than send a paper statement of the account through the mail each month. For that service, investors can expect to pay fees to open the account, fees to maintain the account, a fee per asset or security held, and transaction fees – each of which is going to be significantly steeper than fees in other alternative investment vehicles.

Some typical costs of a self-directed IRA include:

•       Set-up: $0-$2,500 flat fee
•       Custodian: $20-$100 per year
•       Administration: 0%-2% per year
•       Trading: $0-$1,000 per trade

Beware of Scams

Because of the limited protection that custodians or trustees of self-directed IRAs can offer, scammers and fraudsters may be more likely to target these investments. The fraud may look like this:

•      Misrepresentations regarding custodial responsibilities — fraudsters may misrepresent the duties so the investment custodian believes their investments are legitimate.
•      Exploitation of tax-deferred account characteristics — the penalties that come with withdrawing money early may help scammers participate in the fraud for longer amounts of time.
•      Lack of information in alternative investments — unlike publicly traded securities, self-directed IRAs fly under the radar; a public accounting firm may not have access to them. This makes it easier for fraudulent activity to occur.

Takeaways for Starting a Self-Directed IRA

While different from traditional or Roth IRAs, self-directed IRAs have their own appeal. The investor should consider carefully the risks, rewards, and regulations.

Self-directed IRAs can be a good option for housing retirement money, but they have their own caveats and rules that must be obeyed. They are not without the threat of fraud, yet they still attract a high number of everyday investors. Why?

According to Kiplinger, “Nearly half of all Americans are at risk of a financially insecure retirement, up from one-third in 1983, according to a 2024 Senate committee report [and] longer lifespans mean Americans must save more money to live on throughout their sunset years. Self-Directed IRAs offer Americans a great opportunity to put their retirement savings to work beyond the standard target date funds that many 401(k)s favor… better access to these investments… gives investors another viable avenue to help grow their retirement savings and improve their overall financial wellness.”

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Why Green Investing?
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This article was originally published on April 9, 2019 and was updated on August 22, 2022.] 

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