A self-directed IRA (SDIRA) is a type of individual retirement account that lets you invest in a much broader range of assets than a typical brokerage-held IRA — including real estate, private businesses, precious metals, and other alternative investments, in addition to the stocks, bonds, and mutual funds a conventional IRA custodian offers.
If you’re new to the concept and trying to understand the basics before deciding whether one fits your retirement strategy, here’s what to know.
This post is general and educational. It is not tax, legal, or investment advice. Consult a qualified CPA, financial advisor, and SDIRA custodian before opening or funding a self-directed IRA.
How a Self-Directed IRA Differs From a Regular IRA
Structurally, an SDIRA is the same type of account as a traditional or Roth IRA — it carries the same contribution limits and tax treatment rules set by the IRS. What’s different is the custodian. Most conventional IRAs are held at brokerage firms that only allow investment in publicly traded securities. SDIRA custodians specialize in administering accounts that hold alternative assets, including real estate, and simply don’t restrict your investment choices the way a conventional brokerage does.
What You Can Invest In With an SDIRA
Common SDIRA investments include:
- Real estate (residential rental, commercial, raw land)
- Private company equity and private lending/notes
- Precious metals meeting IRS purity requirements
- Certain other alternative assets permitted under IRS rules
The IRS does prohibit a specific set of transactions and asset types — collectibles, life insurance, and transactions with “disqualified persons” (yourself, your spouse, and certain family members, among others) chief among them. Getting this wrong can trigger serious tax consequences, which is why working with an experienced custodian and advisor matters more with an SDIRA than with a conventional account.
How to Set Up a Self-Directed IRA
The general process looks like this:
- Choose an SDIRA custodian. Not every custodian supports every asset type — some specialize specifically in real estate, others in a broader range of alternatives. Compare fee structures carefully, since SDIRA custodians often charge differently than conventional brokerages (account fees, asset-based fees, and transaction fees are all common models).
- Open the account. This is similar to opening any IRA — you’ll complete account paperwork with your chosen custodian.
- Fund the account. Either through a new contribution (subject to annual IRS limits), a rollover from an existing 401(k) or other retirement account, or a transfer from an existing IRA.
- Direct your custodian to make investments on the account’s behalf. Because you can’t personally hold title to SDIRA-owned assets, the custodian executes transactions and holds title in the account’s name.
Where to Open a Self-Directed IRA
A number of specialized custodians operate in this space, and the right choice often depends on which asset types you plan to invest in and how hands-on you want to be. If real estate is your primary interest, working with both an experienced SDIRA custodian and a broker who understands SDIRA-specific real estate rules — like prohibited transaction risk and unrelated business income tax (UBIT) considerations on leveraged property — matters more than picking based on fees alone.
Using an SDIRA for Real Estate
If real estate is the reason you’re considering an SDIRA in the first place, the mechanics of actually holding and managing real estate inside the account carry their own specific rules — including how the property must be titled, how expenses and income flow through the account, and what activities count as prohibited transactions. We cover this in depth on our Self-Directed IRA Real Estate page, which is the more detailed follow-up to this overview.
SDIRA vs. Other Retirement Real Estate Strategies
An SDIRA isn’t the only way to hold real estate as part of a retirement strategy. If you’re comparing options, our retirement property investment page covers the broader landscape, including how a Delaware Statutory Trust (DST) can serve a similar passive-income goal through a 1031 exchange rather than an IRA structure.
Frequently Asked Questions
What is a self-directed IRA in simple terms? It’s an IRA that allows a broader range of investments — including real estate and other alternative assets — than a typical brokerage-held IRA, administered by a specialized custodian rather than a conventional brokerage.
How much does it cost to set up a self-directed IRA? Costs vary by custodian and typically include account setup fees, annual account fees, and sometimes asset-based or transaction fees. Compare fee structures across a few custodians before choosing, since they vary meaningfully.
Can I manage the investments in my SDIRA myself? You direct the investment decisions, but the custodian executes transactions and holds legal title, since you can’t personally hold SDIRA-owned assets in your own name. “Self-directed” refers to your investment choice authority, not day-to-day account administration.
What happens if I make a prohibited transaction in my SDIRA? Prohibited transactions can disqualify the entire IRA, triggering immediate taxation of the full account value plus potential penalties. This is one of the most important reasons to work with an experienced SDIRA custodian and advisor, particularly for real estate investments.
Can I use an SDIRA to buy commercial real estate? Yes — commercial real estate is a common SDIRA investment. See our Self-Directed IRA Real Estate page for the real-estate-specific rules and considerations.
