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Self-Directed IRA (SDIRA): Everything You Need to Know

Self-Directed IRA (SDIRA): Everything You Need to Know

December 26, 2023589 view(s)

Are you considering ways to diversify your investments to save for retirement or a rainy day? Diversification is the key to successful investing.

With a self-directed IRA (SDIRA) you can choose a variety of assets beyond stocks, bonds, and commodities. This type of account follows the same rules as an IRA but allows you to invest in alternative assets that many brokerages don't handle.

If you're not familiar with alternative savings plans, you may wonder how a self-directed IRA can benefit your finances. We have the answers!

Here's a guide to everything you should know about self-directed IRAs. 

What Is an SDIRA?

A self-directed IRA is a variation of the Roth or traditional IRA. The SDIRA allows investors to hold non-traditional assets.

If you're wondering what is an IRA and how the SDIRA compares, there are differences. A typical IRA account is limited to stocks, bonds, certificates of deposit (CDs), and exchange-traded funds (ETFs). An SDIRA can hold a variety of unique or alternative assets such as rental properties, tax liens, precious metals, and more.

Many alternative assets tend to be illiquid and aren't typically traded on public exchanges.

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Understanding Self-Directed IRAs

An SDIRA can put you in control of your retirement savings plan. Although a custodian administers the account, you have control over your investments and assets as the account holder.


An SDIRA isn't subject to federal taxes. However, you're required to pay tax on contributions and withdrawals. Whether you pay taxes on an SDIRA depends on whether it's a traditional SDIRA or a Roth SDIRA.


The SDIRA is a savings account, so you don't want to withdraw early unless necessary. There's a 10% penalty tax for making a withdrawal from a traditional SDIRA before the age of 59 and a half. 

With a traditional SDIRA, the IRS requires you to start making withdrawals at the age of 73. The minimum withdrawal requirements depend on your account balance and personal life expectancy.

Contribution Limits

With an SDIRA, you have flexibility in investment options, but you're required to follow the contribution limit requirements set by the IRS. In 2023, you can contribute up to $6,500 each year if you're under the age of 50. 

If you're over 50 years old, you can contribute $7,500 per year. If you over-contribute, you must characterize the contribution, apply it to the next year, or file a return of excess contribution form. Failure to take action will leave you subject to penalties.

Traditional vs. Roth SDIRA

There are many options to choose from when it comes to retirement funds. Some choices include 401(k)s and 430(b)s to various IRAs. If you have chosen an SDIRA, you can choose between a traditional SDIRA and a Roth SDIRA.

These retirement accounts differ in their eligibility and tax requirements, distribution rules, and contribution regulations. If you choose a traditional IRA, you get an upfront tax break.

When you withdraw from your SDIRA, you must pay taxes on withdrawals. With a Roth IRA, your contributions are taxed before withdrawal, and you can grow your savings tax-free.

Anyone can open a traditional IRA. However, there are stricter requirements for a Roth IRA. Your annual income must be less than $135,000 as a single tax filer or less than $228,000 if you're filing jointly.

There are no minimum distribution requirements for a Roth IRA and you can withdraw money at any time, penalty-free.


What Are My Investment Options With an SDIRA?

Do you feel limited by the investment options associated with retirement accounts? If so, an SDIRA may be a great choice. You still have the option for standard investments, and you can choose more unique assets as well.

There are a variety of investment choices available for SDIRA. However, there are IRS restrictions. You cannot invest in certain assets, including life insurance, S corporation stock, jewelry, rare coins, and stamps.  

Although there are some limitations, an SDIRA opens the door to new investments. One option is starting a precious metal IRA for gold, silver, platinum, or palladium.

Businesses and SDIRAs

A simplified employee pension (SEP) allows employers to contribute to their employees' IRAs. Any size business can also open a SEP SDIRA.

A savings incentive plan for employees called SIMPLE is for small businesses with 100 or fewer employees. Employers can match employee contributions to SDIRAs dollar for dollar for up to 3% of an employee's compensation.

Additional Options

Under certain circumstances, you could be eligible for a health savings account (HSA) or Coverdell education savings account (CESA). Although people usually use HSAs to pay out-of-pocket medical services, they can boost your retirement savings too. CESAs can accumulate tax-free contributions.

After you have an account, you can start the funding process. Some options for funding include:

  • Transferring your assets to another custodian
  • Out-of-Pocket contribution
  • Rollover distribution from another retirement account into an SDIRA
  • Roth Conversion 

Choosing Investments

An SDIRA opens up your investment options. Some options for investing include but aren't limited to:

  • Buying gold and precious metals
  • Private Equity
  • Real estate
  • Cryptocurrency

After you choose your investment, your custodian will purchase it for you. They pay expenses with your SDIRA and put any resulting income back into the account.

Choosing a Self-Directed IRA Custodian

Choosing the right custodian is an important part of setting up your SDIRA. Choosing the wrong custodian could lead to significant losses.

Here are a few questions to ask before choosing an SDIRA custodian.

  • What are the investment options?
  • Does the state or federal government regulate the company?
  • How many years has the company been in business?
  • What kind of client support is available?
  • What are the fees?
  • What sort of investor education is offered? 

Before choosing a custodian, check reviews on the company website and online. Read what former clients have to say about the company's performance and customer service.

Ask about their experiences with SDIRAs. They should be willing to share their experiences and results and answer any questions you may have.

Once you have an account set up, you can begin to fund it with the allowable assets of your choice. Do your research to find a trustworthy company with the proper accreditation.

They should have a track record of success and a solid reputation in the financial industry. 

The Benefits of Self-Directed IRAs

Many investors love the flexibility and investment options associated with SDIRAs. Some of the advantages include:

More Diversification

A diverse portfolio is ideal during times of economic uncertainty. Relying solely on one investment type is risky.

SDIRAs offer more investment options and more opportunities to diversify your assets.

Higher Potential Returns

Alternative assets can help you earn higher returns than traditional assets. There is a greater opportunity for higher returns.

Flexibility With Investments 

An SDIRA allows for a wider variety of investment options. A few of the many assets you can choose include:

  • Real estate
  • Intellectual property
  • Farmland, horses, and livestock
  • Promissory notes
  • Partnerships
  • Precious metals
  • Cryptocurrencies

Legal Protection

An SDIRA comes with tax benefits. Depending on the account you choose, you can enjoy tax-deferred or tax-free contributions and withdrawals. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act protects SDIRA holders.

Even if you need to file for bankruptcy at some point, it won't affect your SDIRA assets.

SDIRA Rules and Regulations 

An SDIRA offers great flexibility in investment options, but there are rules in place for how you can use the account. A few of these rules include:

  • You cannot purchase or invest in prohibited assets
  • The SDIRA can't co-mingle assets with its owner or disqualified persons
  • Some transactions are prohibited

Prohibited assets include collectibles, S corporations, and life insurance.

Disqualified persons include:

  • Account owner
  • Account member's family
  • Entity 50% owned by an officer, director, or disqualified person
  • A 10% or more shareholder of a disqualified entity

Prohibited transactions include:

  • Sale or lease of property
  • Furnishing goods and services
  • Lending money
  • Asset use between SDIRA and a disqualified person

A disqualified person cannot receive benefits from a third-party transaction with the SDIRA.

Is a Self-Directed IRA Right for Me?

Self-directed IRAs can be good investment options if you're interested in a non-traditional retirement account. To make it work, it's important to follow the rules and choose a custodian who will ensure compliance.

The penalties for simple mistakes are stiff and can result in extensive tax penalties.

Can I Move My 401(k) Into an SDIRA?

Most employers don't allow their employees to move assets out of their 401(k) plans while they are working for the company. After employees leave the company, they are free to roll over a 401(k) into an SDIRA. 

After you turn 59 1/2, you're also eligible to move your traditional 401(k) contributions to an SDIRA.

Self-Directed IRA (SDIRA) Everything You Need to Know

The Investing Benefits of a Self-Directed IRA

If you're thinking about diversifying your investments and are interested in some alternative assets, a self-directed IRA may be a good option. This retirement savings plan allows you to choose your own investments.

If you're wondering how to buy gold or how to add precious metals to your investment portfolio, we'd love to assist you. Whether you have purchased precious metals in the past or are a first-time buyer, the U.S. Gold Bureau's precious metals specialists can guide you step-by-step through the buying process.

Before you go, be sure to sign up for our free investor guide.

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