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Self-directed IRAs

A type of retirement account that lets you invest in real estate, private companies and more.

Self-directed IRAs (SDIRAs) are similar to regular IRAs. The main difference is which assets you invest your money in. This can be an advantage or a huge risk if you’re not sure whether the alternative investment options are right for you.

Understanding self-directed IRAs

With regular IRAs, you can invest in stocks, funds, bonds and similar instruments. A self-directed IRA opens up new investment opportunities, including real estate, livestock or private companies. The only investment options that aren’t allowed are life insurance, most collectibles and S corporation shares.

Even though you can invest in alternative assets, some transactions will charge fees and your account will lose its retirement status if you fail to follow the rules.

Also, you can’t open an SDIRA with any broker. You need to find a custodian, which is a company that will handle your transactions and hold your assets until you retire. On top of that, there are many fees that you’ll likely pay.

As for tax implications, a self-directed IRA can be Roth or traditional, meaning you can use the same potential tax benefits as regular IRAs.

Self-directed IRAs vs. regular IRAs

Although incredibly similar, self-directed IRAs differ from regular IRAs in four main aspects:

Self-directed IRARegular IRA
Investments availableReal estate, livestock, precious metals, commodities and private companiesStocks, mutual funds, ETFs and bonds
Where to openA custodian and some brokersA brokerage firm
Return and riskReturns can be attractive if you’re knowledgeable about a certain asset class –– but the risk is higher than a regular IRARisk tends to be low, but returns are more modest. Choose your own investments or let a robo-advisor choose for you
FeesHefty fees include annual maintenance fees, one-time account opening fees, asset processing fees and moreFees are generally low and some can be waived

Benefits of self-directed IRAs

SDIRAs offer two benefits over standard retirement accounts:

  • Diversification. Invest in assets well beyond the stock market.
  • Potentially higher returns. Take advantage of your expertise in a particular field — say real estate — and enjoy higher returns than what you could earn with a standard IRA.

Risks of self-directed IRAs

Despite having the benefit of higher diversification than regular IRAs and the opportunity to earn a higher return on investment, SDIRAs aren’t without drawbacks.

  • You must do your own due diligence. SDIRAs are often high-risk investment options and your custodian isn’t a financial advisor. This means it’s up to you to find the right investment.
  • Lack of liquidity. Sell your stocks and ETFs with a tap of a button. But other assets you own through SDIRAs may be hard to liquidate.
  • Limited fraud protection. When investing in stocks, you know what you’re buying, and you’re protected by your broker and relevant agencies. But investing in alternative assets offers a higher risk of fraud, mainly because the custodian’s only job is to hold and administer your assets –– not evaluate the legitimacy of your investments.

Self-directed IRAs can be expensive

SDIRA fees are one of the biggest downsides of this type of investment. Expect to pay:

  • $200 to $500 annual maintenance fee (sometimes per asset). Standard IRAs may cost up to $50 annually, but a lot of brokerage firms offer $0 fees.
  • $50 one-time new account establishment fee. Standard IRAs typically don’t have this fee, but SDIRAs can cost around $50 just to set up your account.
  • $30 to $250 asset processing fee. Another fee that’s nonexistent with standard IRAs but costs between $30 and $250 depending on the asset for purchase, liquidation, registration or any kind of transfer.
  • $30 to $250 other fees. There are many other fees you could be charged, including expedited transaction fees, re-registration of assets, account termination fees and more.

Note: Practice your own due diligence when comparing SDIRA custodians to ensure you’re paying fewer fees.

Not all transactions are allowed

Some transactions are prohibited by the IRS. You may end up paying up to 100% tax and lose your retirement account status if you proceed with these transactions. Here’s what you’re not allowed to do with your self-directed IRA:

  • Buy collectibles, such as art, antiques, gems, coins, alcoholic beverages and specific precious metals.
  • Invest in S-corporations.
  • Buy life insurance.
  • Sell, exchange or lease property between your SDIRA and a disqualified person.*
  • Extend credit or provide a cash loan between your SDIRA and a disqualified person.
  • Furnish goods, provide services or facilities between your SDIRA and a disqualified person. For example, you can’t improve, maintain or repair a property you own with your SDIRA.
  • Transfer your SDIRA income or assets to — or use them by or for the benefit of a — disqualified person. For example, you can’t rent your SDIRA property to your child.

Disqualified persons include:

  • The account owner.
  • Your IRA beneficiary.
  • Your spouse.
  • Your immediate blood relatives and their spouses.
  • Plan service providers and fiduciaries including advisors, custodians and administrators.
  • An entity in which you own at least 50% of the voting stock.
  • An officer, director or a shareholder or partner with 10% or more invested.

2 ways to open a self-directed IRA

To open a self-directed IRA, you have to go through a:

  1. Brokerage. Typical brokerage firms rarely offer SDIRAs. There are a few exceptions to this rule, including Charles Schwab and TD Ameritrade.
  2. Custodian. These are typically banks and trust companies. But before you apply, check whether they offer SDIRAs and compare the fees because these vary between companies.

Compare retirement accounts

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Name Product Annual fee Available asset types
SoFi Invest
A free way to invest in most equities.
Vanguard Personal Advisor
$20 per year
Stocks, Mutual funds, ETFs
Financial advice powered by relationships, not commissions.
TD Ameritrade
$0 per year
Stocks,Bonds,Options,Mutual funds,ETFs,Currencies,CDs,Futures,Forex
TD Ameritrade features $0 commission for online stock trades. Online options fees are $0.65/contract.
Tradestation Crypto IRA
$0 per month
Stocks, Bonds, Options, Mutual funds, ETFs, Cryptocurrency
Tradestation's IRAs offer exposure to stocks and options as well as Bitcoin, Ethereum, Litecoin, Bitcoin Cash and USDC.
$1 per month

Invest your spare change. Anyone can grow wealth.

Compare up to 4 providers

Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

Self-directed IRAs can be useful for those who want to diversify their retirement portfolio and who can take advantage of the new assets. Keep in mind, SDIRAs are more expensive than standard IRAs.

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