How a Self-Directed IRA Works
A self-directed individual retirement account (IRA) is a regular traditional or Roth IRA whose custodian allows a wider range of holdings, so you pick the assets and carry the risk if a deal breaks the rules. The tax treatment matches a regular IRA.
What changes is the list of assets the custodian will hold and how much of the research falls on you.
What a Self-Directed IRA Is
A self-directed IRA is a regular IRA held by a custodian that allows a wider range of holdings than a standard menu. The owner picks each asset and carries the due-diligence and prohibited-transaction risk that comes with it. The word self-directed describes the custodian's menu, and it does not create a separate kind of tax account.
The tax treatment follows the IRA type underneath. A self-directed traditional IRA uses traditional IRA tax rules, and a self-directed Roth IRA uses Roth rules. If you have not picked between those two yet, our Roth IRA vs. traditional IRA comparison lays out the tradeoff.
Contribution limits change every year, so we keep the current figures in one place. Find them in our IRA contribution limits guide. To project what steady contributions could grow to, use our Roth IRA calculator.
Non-Public Assets the Account Can Hold
A self-directed IRA can hold assets that do not trade on a public exchange, such as real estate, stock in a private company, and notes. Each of those is a choice you make and research yourself, because the owner carries the due-diligence risk.
The primary source for what an IRA may hold is the IRS retirement plan investments FAQs. Read those FAQs before you sign a purchase agreement.
Collectibles generally are not permitted IRA investments, and the IRS lists limited exceptions on its collectibles page.
The IRS says prohibited-transaction risk is higher when an IRA holds nonpublicly traded assets.
Self-Directed IRA Custodian Duties
A self-directed IRA custodian holds the account and allows a wider range of holdings. Self-directed describes that wider menu.
Because the owner carries the due-diligence and prohibited-transaction risk, treat the custodian's acceptance of an asset as permission to hold it and nothing more. Researching the asset, the price you pay, and who else is involved stays your job.
Ask any custodian three things in writing before you open an account: which asset types it accepts, who values each asset, and what it charges per year in dollars. Ask each custodian for its fee schedule in dollars, and plan around those written amounts.
If you want professional help, read our guide on how to choose a financial advisor.
Prohibited Transactions and Disqualified Persons
A prohibited transaction is an improper use of an IRA by the owner, a beneficiary, or a disqualified person, according to the IRS. Disqualified persons include your fiduciary and members of your family: your spouse, your ancestors, your lineal descendants, and any spouse of a lineal descendant.
In everyday terms, the family list covers your spouse, your parents and grandparents, your children and grandchildren, and the spouses of your children and grandchildren. Any of them, along with you and your fiduciary, can be a party to a prohibited transaction.
The IRS gives four examples. Borrowing money from the IRA is one. Selling property to the IRA is another.
Using the IRA as security for a loan is also prohibited. So is buying property for personal use with IRA funds.
A disqualified person who takes part in a prohibited transaction must pay a tax, according to the IRS. IRS Publication 560 also says a prohibited transaction can cause the account to stop qualifying as an IRA. Publication 560 states that for simplified employee pension (SEP) IRAs, so confirm the consequence for your own account type in IRS Publication 590-B.
If your self-directed account is a SEP IRA, our SEP IRA vs. solo 401(k) comparison explains how that account type works.
The Collectibles Rule
Collectibles generally are not permitted IRA investments, and the IRS generally treats buying one with IRA money as a distribution. The IRS page on investments in collectibles in individually directed accounts lists limited exceptions.
Read them on that IRS page before you buy any item that could count as a collectible.
Risk in Nonpublic and Directly Controlled Assets
The IRS says the risk of a prohibited transaction is higher when an IRA holds nonpublicly traded assets or assets the owner directly controls.
Real estate, private company stock, and notes are all nonpublic assets. An account built around them sits in the group the IRS flags as higher risk.
Direct control is the second condition in that IRS statement. If you directly control an asset the IRA holds, the IRS says that also raises the risk.
Keep a written record of every payment into and out of the account. For each one, ask whether you, your fiduciary, or a family member on the disqualified list gets a personal benefit. If the answer is yes, stop the payment before it goes through.
A Due-Diligence Checklist Before You Open an Account
Do five things before any money moves into a self-directed IRA:
- Get the custodian's legal name and the signed account agreement in writing.
- Ask for every fee as a dollar amount for one year, covering account fees and any charge per asset or per transaction.
- Get the full investment documents for each asset, such as the deed, the note, or the company's operating agreement, before you sign.
- Walk away from any offer that promises a guaranteed return.
- Read the IRS retirement plan investments FAQs before you commit.
If the money will come from an old workplace plan, read our rollover IRA vs. traditional IRA comparison before you move it.
Who a Self-Directed IRA Fits
A self-directed IRA fits you if you want to hold a specific non-public asset, such as a rental property or private company stock, and you accept the due-diligence and prohibited-transaction risk that comes with it. If you have no specific non-public asset in mind, stay with a standard IRA. The tax treatment is the same, and you skip the valuation and documentation work described above.
Skip a self-directed IRA if you plan to use the asset yourself or do business with family through the account. Buying property for personal use with IRA funds and selling property to the IRA are both IRS examples of prohibited transactions. Your spouse, ancestors, and lineal descendants are all disqualified persons.
Our answer moves from no to yes when two things are in place: a written plan that keeps you and every disqualified person away from personal use of the asset, and a custodian that answers the valuation and fee questions in writing.
Your next step is to read the IRS retirement plan investments FAQs before you contact a self-directed IRA custodian.
Frequently asked questions
What can a self directed IRA invest in?
A self-directed IRA can invest in assets that do not trade on a public exchange, such as real estate, private company stock, and notes, if the custodian accepts them. Collectibles generally are not permitted, and the IRS lists limited exceptions on its collectibles page. For what an IRA may hold, read the IRS retirement plan investments FAQs.
How are self directed IRAs taxed?
A self-directed IRA is taxed like the IRA type underneath it. A self-directed traditional IRA follows traditional IRA rules, and a self-directed Roth IRA follows Roth rules. Two IRS rules add tax exposure: a disqualified person who takes part in a prohibited transaction must pay a tax, and buying a collectible with IRA money is generally treated as a distribution.
What is a self directed IRA custodian?
A self-directed IRA custodian holds the account and allows a wider range of holdings than a standard IRA menu. You still carry the due-diligence and prohibited-transaction risk for every asset it holds. Ask who values each asset and what the custodian charges in dollars per year before you open the account.
What companies offer self directed IRA?
Self-directed IRAs are offered by custodians whose menus include non-public assets, so verify any custodian yourself. Pick a custodian only after it answers, in writing, which asset types it accepts, who values each asset, and what every fee costs in dollars per year.
What does self directed IRA mean?
Self-directed means the custodian allows a wider range of holdings and you choose the assets yourself. The account is still a regular traditional or Roth IRA with the same tax treatment. The owner carries the due-diligence and prohibited-transaction risk.
Who counts as a disqualified person for a self-directed IRA?
Disqualified persons include your fiduciary and members of your family, according to the IRS. The family list covers your spouse, your ancestors, your lineal descendants, and any spouse of a lineal descendant. In everyday terms, that means your parents, grandparents, children, grandchildren, and the spouses of your children and grandchildren.
Can I live in a property my self-directed IRA owns?
No. Buying property for personal use with IRA funds is one of the IRS examples of a prohibited transaction. The IRS also says a prohibited transaction can cause an account to lose its IRA status, so confirm the consequence for your account type in IRS Publication 590-B.
Can my self-directed IRA lend me money?
No. Borrowing money from your IRA is an IRS example of a prohibited transaction, and so is using the IRA as security for a loan. A disqualified person who takes part in a prohibited transaction must pay a tax, according to the IRS.
Sources
We prioritize primary sources for rules, formulas, rates, limits, and definitions. See our calculator methodology and editorial policy.