Self-directed IRA
Published on October 07, 2024
by Aya Takriti, EA
Aya Takriti, an IRS Enrolled Agent with 11 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in the Middle East. Aya speaks fluent Arabic and English and the odd word of German and Spanish if you catch her on a good day.
Table of Contents
What is a self-directed IRA?
A self-directed IRA (SDIRA) is an individual retirement account (IRA) that allows you to take charge and manage your investment pool within the account.
Other types of IRAs are generally limited to typical investments like stocks, bonds, mutual funds, or exchange-traded funds (ETFs). Shifting to a self-directed IRA rather than an ordinary IRA can be a good idea if you want to diversify your account and earn higher investment returns.
What’s the difference between an ordinary IRA and a self-directed IRA?
An ordinary IRA, such as a traditional or Roth IRA, offers a select number of investment options managed by financial institutions, making it generally easier to manage.
A self-directed IRA allows alternative investment options typically not included in retirement accounts for more financial opportunities. However, the account holder is required to manage the SDIRA alone, making it more complex.
What other investments are allowed in a self-directed IRA?
Various investment options are available for SDIRAs like:
- Real estate: Residential, commercial, or rental property.
- Privately held promissory notes: Interest income from a note.
- Private equity/entities: Early-stage, high-risk ventures.
- Precious metals: Gold or silver.
- Digital assets: Cryptocurrency or non-fungible tokens (NFT).
It is important to note that the account holder should manage and evaluate alternative investment options without any help from the account’s custodian.
How do I open a self-directed IRA?
Here’s a general guide to opening a self-directed IRA:
- Find a qualified custodian: Your custodian can be a bank, credit union, or other financial institution that offers a self-directed IRA and nontraditional assets. Their primary purpose is to hold and administer the account’s investments.
- Open the account: With your chosen custodian, you can submit their requirements and complete their form to open your self-directed IRA.
- Fund your account: You can fund your account annually or transfer funds from an existing IRA or other retirement accounts.
- Choose your investments: Research and include other investment options in your account. Your custodian can help you administer these transactions.
- Manage and monitor your account: Diligently track and evaluate your investments and adjust when needed. Ensure compliance with the IRS rules for each investment option.
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What are the risks of opening a self-directed IRA?
Here are the factors to watch out for in considering a self-directed IRA:
- Lack of information: Some alternative investments only disclose limited information in their financial statements and reports. When information is completely available, it may not be audited by public accounting firms.
- Lack of legal and regulatory protection: Custodians do not conduct an evaluation of the legitimacy or quality of alternative investments and do not verify the accuracy of financial information regarding an investment.
- Risk of fraud: This may come in the form of fraud custodians or fraudulent investments through legitimate custodians.
- Liquidity issues: For investments like real estate, precious metals, or promissory notes, a transaction is needed before distributions can be made, which can take time and effort.
- Complex tax rules: Alternative investments are not subject to standard tax rules for other IRAs. Each type of investment follows a different taxing standard that could complicate tax filing. Failure to follow these rules may result in unintended tax consequences.
How do I avoid fraud in opening a self-directed IRA?
Here are some steps to protect you and your investments:
- Stay informed: Utilize resources from regulatory departments like the Securities and Exchange Commission (SEC) on common fraud schemes and how to avoid them.
- Consult professionals: You can work with an independent financial advisor experienced in your chosen investment and SDIRAs to align with the legitimacy of the investment.
- Avoid unsolicited offers: Be weary of unsolicited investment opportunities, especially those promoting SDIRAs.
When can I contribute to my self-directed IRA?
The IRS allows annual contributions to the account. In addition, account owners aged 50 and older can make catch-up contributions of up to US$1,000.
Maximum annual amount (USD) |
Year |
US$7,000 |
2024 |
US$6,500 |
2023 |
How do I withdraw from my self-directed IRA?
The rules for distribution for ordinary IRA types also apply to self-directed IRAs.
Traditional SDIRA vs. Roth SDIRA
For traditional SDIRA, you must begin taking yearly required minimum distributions (RMDs) at 72 or 73 for those who turn 72 after December 31, 2022.
With Roth SDIRA, you must be 59½ or older and have had the account for at least five years. Withdrawing from Roth SDIRA is tax-free and penalty-free.
When you begin making withdrawals without meeting the requirements, you can be subject to regular income tax and a 10% penalty.
Where do I get financial advice for my self-directed IRA?
When considering opening a self-directed IRA, it is essential to remember that you should make all the financial evaluations and decisions regarding alternative investments based on your knowledge.
SDIRA custodians cannot provide investment advice or evaluate and verify investments for you. SDIRA requires greater initiative and due diligence by the account owner as to why it is best suited for savvy investors who already understand alternative investments and want to diversify their accounts.
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