Is a Self-Directed IRA Right for You?

Daniel Penzing
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A Way to Hold Alternative Assets in Your Retirement Account

One of the greatest advantages of a self-directed IRA is the ability to hold alternative investments in the account.

IRA rules allow you to invest in almost any type of investment. Not only does this help you diversify your retirement portfolio, but it allows you to bring returns from more of those investments into your current income stream. This means that you can earn the returns from an alternative investment and still save on taxes.

Real estate, precious metals and other tangible assets are all eligible investments. The breadth of eligibility extends even beyond that. The IRS has listed a full list of eligible investments so that you can decide whether your preferred investment falls under the umbrella of what you can hold in your IRA.

Savings Bonds, Life Insurance, and Viatical Settlements are also eligible if certain requirements are met.

There are some exceptions to this as well. Any investment that is considered to be a prohibited transaction is not eligible in a self directed IRA. Also ineligible are collectibles (art, antiques, gems, stamps, etc.) and life insurance.

However, the self-directed IRA is still a great innovation, allowing you to do things with retirement savings that weren’t previously possible. And the investment potential for IRA holders is only expected to expand in the future as the law continues to evolve to accommodate both current and future investor needs.

The “Pros” of Alternative Investing

Investing your retirement funds can seem downright boring when compared to some of the more exciting methods of investing, like stock and hedge funds.

If, however, you aren’t a gambler and aren’t looking to make a quick buck, there is another option you should know about: the self-directed IRA. This type of retirement account allows you to get a lot more bang for your buck when investing your money. So if you’re thinking about using that extra cash in your IRA to make alternative investments, here’s what you need to know.

What is a Self-Directed IRA?

A self-directed IRA (Individual Retirement Account) is an IRA that is supported by an investment strategy that allows you to invest money into alternative assets.

You may have heard of this method of investing before, especially if you’re one of the wily few who decided to opt out of the mainstream retirement plan that came with your job.

Many employers offer a choice between a 401k or traditional IRA, but not everyone likes those options. Because of this choice, many employers offer their employees the option of a self-directed IRA.

The “Cons” of Alternative Investing

Alternative investments are sometimes referred to as non-traditional investments because they are located outside the market. Not all alternative investments are the same. Some are located in traditional markets but employ different strategies to achieve superior returns. ¦

Many alternative investments emphasize the diversification value they offer. While some investors want solid growth and dependable stability, others aren’t concerned so much about their investments as they are about having a higher degree of security. Generally, alternative investments do not move in the same direction as stocks and bonds and thus offer a better chance of stability.

Because alternative investments tend to be more volatile than traditional investments, it is important to understand that they do not come with the same degree of liquidity. For example, even ones labeled as liquid may have a 30 or 60 day waiting period before you can actually obtain your money. Another example is that many alternatives are tax inefficient. ¦

Two Broad Rules to Qualify

To open a self-directed IRA, follow these basic rules. Any of the following investments are valid, but to avoid audit issues and taxes, you need to keep the number of qualifying assets low. Here is a list of assets you qualify for –

Intellectual Property

So there are many safe investments, but you also need to decide how you will be doing your transactions. We will talk more about the 'how' later, but you need to decide if you are buying one of your chosen investments outright or if you will be using leverage. This distinction is critical.

A Few No-Nos From the IRS

One of the great things about using a self-directed IRA is the fact that there are few IRS restrictions as to what you can invest your money in. Not following those restrictions is how people end up losing their IRA’s and retirement money. So, here are a few things you should absolutely skip:

Loaning money to yourself: If you want to loan money to your self-directed IRA, you must do so from a regulated financial institution such as a bank. Otherwise, the transaction is prohibited by the IRS and can cause the entire account to be disqualified.

Buying life insurance: Life insurance investments are not eligible for IRAs.

Taking a loan from your IRA: IRA accounts (except for Roth IRAs) must be owned by the account holder. That means you can’t take out a loan from your self-directed IRA.

Buying collectables: Collectibles are exempt from IRA investments, but collectibles are defined as: art, rugs, gems, antiques, metals, stamps, coins (no paper money), alcoholic beverages, and any other tangible or intangible item that can’t be bought or sold on a financial market with monetary value, with two exceptions: coin collections and certain antiques (see the IRS Code).

Transferring Funds to Your SDIRA

The first step to creating your own Self-Directed IRA is selecting a custodian. Just as you should not rollover your existing IRA to a self-directed IRA, you do not want to transfer your existing IRA assets to another financial institution. If the custodian you select accepts rollovers from another financial institution, be sure to ask if the custodian will accept the assets of another self-directed IRA. In other words, you want to take possession and control of your assets when you transfer to a Self-Directed IRA account.

If you had an account at a bank, for example, a wire transfer would be your best bet for moving funds to your self-directed IRA. If you previously held an account with a broker, they may charge you a fee for transferring securities into your new account, but the process is still relatively simple. In most cases, your broker will send the funds to the custodian directly. From there, the custodian will create the account and transfer the funds over.

Buying Investment Assets With Your SDIRA

Some financial advisors may push you towards trusts, annuities, or other investment vehicles that are built solely for retirement accounts. After all, it gives them a self-directed ira fees or commissions to help turn your money into their money. Over the years, I’ve always been a bit leery of these vehicles. They are often expensive to set up and maintain and I never thought they were the right setting for my retirement funds. That is one of the main reasons why self-directed IRAs are a good fit for me.

A self-directed IRA is similar to a traditional IRA or a roth IRA. You can open an account with almost any financial institution, including banks, brokerages, and credit unions. Once the account is open, you can invest the money into almost any investment you like, including real estate, private companies, and other ownership interests. A small number of self-directed IRA options are available, but the most common are:

Checkbook IRA

Checkbook IRA is a self-directed IRA that allows you to buy investment assets directly and use a checkbook provided by the institution to pay real estate and operating expenses. Other than that, you are responsible for paying the bills and taxes … just like you do it in your personal life.


Building wealth is the dream of every single person on this planet. We all want to live a lavish and extravagant life, and although some of us may have a huge advantage over others, all of us have the same dream. But only few of us actually manage to turn that dream into a reality.


Because most of us fail to do one very important thing – saving money.

We spend all our hard-earned money on materialistic stuff, on meaningless extras and we forget about our goals. We forget about our retirement, about our kids’ college tuition and about everything else we have been dreaming of for years.

And that’s exactly why we’re in this economic crisis.