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A self-directed IRA, or SDIRA, is a type of individual retirement account that allows the account holder to invest in securities other than stocks, bonds, and mutual funds: e.g., real estate, private equity, precious metals, and other alternative assets.
Nonetheless, self-directed IRAs are still subject to basic IRA rules, like annual contribution limits and withdrawal restrictions. SDIRAs are available as regular tax-deferred IRAs as well as Roth IRAs.
The main difference is that a custodian administers a self-directed IRA, but the account holder manages their investments and assumes the risk in doing so.
Key Points
• A self-directed IRA (SDIRA) allows individuals to buy, sell, and hold alternative assets, including real estate, cryptocurrency, and precious metals, which conventional IRAs don’t permit.
• Nonetheless, SDIRAs are subject to ordinary IRA withdrawal rules, tax structures, and annual contribution limits.
• Account holders of SDIRAs research and manage their investments independently, thus increasing their responsibility and potential risk exposure.
• While SDIRAs may offer potential returns, they also carry higher fees and risks, particularly due to the illiquidity of many alternative investments.
• Opening a SDIRA requires finding an approved custodian, selecting investments, completing transactions through a reputable dealer, and planning for less liquid transactions.
What Is a Self-Directed IRA (SDIRA)?
Self-directed IRAs and self-directed Roth IRAs allow account holders to buy and sell a wider variety of investments than regular traditional IRAs and Roth IRAs. Experienced investors who are familiar with sophisticated or risky investments may be more comfortable managing a SDIRA, compared with less experienced investors.
While a custodian or a trustee administers the SDIRA, the account holder typically manages the portfolio themselves, taking on the risk and responsibility for researching investments and due diligence. Because these accounts are not as heavily regulated, they may see a higher incidence of fraud.
These accounts may also come with higher fees than regular IRAs, which can cut into the size of the investor’s retirement nest egg over time.
What Assets Can You Put in a Self-Directed IRA or a Self-Directed Roth IRA?
Individuals can hold a number of unique alternative investments in their SDIRA, including but not limited to:
• Cryptocurrency
• Mineral, oil, and gas rights
• Water rights
• LLC membership interest
• Tax liens
• Foreign currency
• Startups through crowdfunding platforms
Recommended: Types of Alternative Investments
Types of SDIRAs
There are specific kinds of SDIRAs customized for certain types of retirement savers looking for certain types of investments.
Self-directed SEP IRAs
Simplified Employee Pension IRAs (SEP IRAs) are for small business owners or those who are self-employed, and who can make contributions that are tax deductible for themselves and any eligible employees they might have. Using a self-directed SEP IRA gives them the flexibility to invest in alternative investments.
Self-directed SIMPLE IRAs
A Savings Incentive Match Plan IRA (or SIMPLE IRA) is a tax-deferred retirement plan for employers and employees of small businesses. Both the employer and the employees can make contributions to this plan. It allows for some alternative kinds of investments.
Self-directed Precious Metal IRAs
Similarly, there are self-directed IRAs for those who would like to invest in precious metals like gold. However, be aware that some precious metal IRAs may charge higher fees than the market price for precious metals.
Recommended: SIMPLE IRA vs Traditional
How Do Self-Directed IRAs Work?
Aside from their ability to hold alternative investments, SDIRAs work much like their conventional IRA counterparts. SDIRAs are tax-advantaged retirement accounts, and they can come in two flavors: traditional SDIRAs and Roth SDIRAs. But investors learning toward an online IRA generally need to find a qualified custodian to set up a SDIRA.
Traditional IRA Contributions and Withdrawal Rules
IRA contributions to traditional accounts are considered pre-tax, which reduces investors’ taxable income. For tax year 2025, individuals can contribute up to $7,000 in total across accounts. Those age 50 and up can make an extra $1,000 catch-up contribution for a total of $8,000. Investments inside the account grow tax-deferred, and withdrawals are taxed as income.
It’s important to pay close attention to self-directed IRA rules, particularly rules for IRA withdrawals. Account holders who make withdrawals before age 59 ½ may owe taxes and a possible 10% early withdrawal penalty. Traditional SDIRA account holders must begin making required minimum distributions (RMDs) after age 73.
Roth IRA Contributions and Withdrawal Rules
Roth SDIRAs have the same contribution limits as traditional SDIRAs. However, retirement savers contribute to Roths with after-tax dollars. Investments inside the account grow tax-free, and withdrawals after age 59 ½ aren’t subject to income tax.
Roth accounts are also not subject to RMD rules. As long as an individual has had the account for at least five years (according to the five-year rule), they can withdraw Roth contributions at any time without penalty, though earnings may be subject to tax if withdrawn before age 59 ½.
There are also rules restricting who can contribute to a Roth IRA, based on their income. In 2025, Roth eligibility starts to phase out at $150,000 for single filers, and $236,000 for those who are married and filing jointly.
Individuals can maintain both traditional and Roth IRA accounts, however, contribution limits are cumulative across accounts, and cannot exceed $7,000, or $8,000 for those 50 and over for tax year 2025.
Pros and Cons of Self-Directed IRAs
Self-directed IRAs offer unique perks for the right investor. However, those interested must weigh those benefits against potential drawbacks.
Benefits of Self-Directed IRAs
• Tax advantages
As noted above, self-directed IRAs offer the same tax advantages as ordinary IRA accounts (along with the same rules and restrictions).
• Diversification
A SDIRA also allows investors to branch out into different types of investments to which they might otherwise not have access. This allows investors to seek out potentially higher returns and diversify their portfolios beyond the offerings in traditional IRAs.
Alternative investments have the potential to offer higher returns than investors might achieve with conventional stock market investments. However, these opportunities come at the price of higher risk.
• Potential risk management
Also, investors’ ability to hold a broader spectrum of investments that may help them manage risks, such as inflation risk or longevity risk (the chance an investor will run out of money before they die). For example, some SDIRAs allow investors to hold gold, a traditional hedge against inflation.
Drawbacks of Self-Directed IRAs
While there are some advantages to using SDIRAs, these must be weighed against their disadvantages.
• Liquidity
For starters, investments like stocks and shares of ETFs are highly liquid. Investors who need their money quickly can sell them in a relatively short period of time, usually a matter of days.
However, some of the investments available in SDIRAs are illiquid. For example, real estate and real assets like precious metals may take quite a bit of time to sell. Individuals who need to sell these assets quickly may find themselves in a situation in which they must accept less than they believe the asset is worth.
• Cost
SDIRAs may also carry higher fees. Individuals who hold regular IRA accounts may not have to pay management or investment fees. However, SDIRA holders may have to pay fees associated with holding the account and with the purchase and maintenance of certain assets.
• Risks
Finally, SDIRAs place a lot of responsibility in the hands of their account holders. Investors must research investments themselves and perform due diligence to make sure that whatever they’re buying is legitimate and matches their risk tolerance.
What’s more, investors must make sure the assets they hold meet IRS rules. Running afoul of these rules can be costly, in some cases causing investors to pay taxes and penalties.
Here’s a look at the pros and cons of SDIRAs at a glance:
| Pros | Cons |
|---|---|
| Tax-advantaged growth. Contributions to traditional accounts are tax deductible. Investments grow tax-deferred in traditional accounts and tax-free in Roth accounts. | Not liquid. Selling alternative investments may be slow and difficult. |
| Same contribution limits as regular IRAs. In 2024 and 2025, individuals can contribute up to $7,000 a year, or $8,000 for those aged 50 and up. | Higher fees. Individuals may be on the hook for account fees and fees associated with alternative investments. |
| Potential for higher returns. Alternative investments may offer higher returns than those available in the stock market. | Increased responsibility. Investors must research investments carefully themselves and ensure they stay within rules for approved IRA investments. |
| Diversification. SDIRAs offer investors the ability to invest in assets beyond the stock and bond markets. | Higher risk. Alternative investments tend to be riskier than more traditional investments. |
4 Steps to Opening a Self-Directed IRA
Investors who want to open an SDIRA will need to take the following steps:
1. Find a custodian or trustee.
This can be a bank, trust company, or another IRS-approved entity. You’ll need to follow their requirements for opening an IRA account. Some SDIRAs specialize in certain asset classes, so look for a custodian that allows you to invest in the asset classes in which you’re interested.
2. Choose investments.
Decide which investments you want to hold in your SDIRA. Perform necessary research and due diligence.
3. Complete the transaction.
Find a reputable dealer from which your custodian can purchase the assets, and ask them to complete the sale.
4. Plan withdrawals carefully.
Because alternative assets have less liquidity than other types of investments, you may need to plan sales well in advance of needing retirement income or meeting any required minimum distributions.
The Takeaway
There are advantages and disadvantages to self-directed IRAs. Benefits include the fact that you can make alternative types of investments you might not otherwise be able to. That could help you diversify your portfolio and potentially increase your returns.
However, there are drawbacks to SDIRAs, including higher risk because alternative investments tend to be riskier, and potentially higher fees for maintenance of investments in the plan, plus account fees.
If you’re opening your first IRA account, you’re likely best served with a traditional or Roth IRA. Because of the risk and responsibility involved in using an SDIRA, only experienced investors should consider these accounts.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
Are self-directed IRAs a good idea?
There are advantages and disadvantages to self-directed IRAs. Benefits include the fact that you can make alternative types of investments you might not otherwise be able to. That could help you diversify your portfolio and potentially increase your returns.
However, there are drawbacks to SDIRAs, including higher risk because alternative investments tend to be riskier, and potentially higher fees for maintenance of investments in the plan and account fees. In addition, investors need to research the investments themselves and follow the IRS rules carefully to make sure they comply. Finally, many alternative investments are not liquid, which means they could take longer and be more difficult to sell.
Can you set up a self-directed IRA yourself?
To set up a self-directed IRA, find a custodian or trustee such as a bank or trust company to open an account, research and choose your investments, find a reputable dealer for the investments you’d like to make, and have your custodian complete the transactions.
How much money can you put in a self-directed IRA?
For tax year 2025, you can contribute up to $7,000 to a traditional or Roth self-directed IRA, plus an additional $1,000 if you’re 50 or older.
Photo credit: iStock/Andres Victorero
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