Self-directed IRAs offer considerable flexibility for investing in a wide range of alternative assets, including real estate, private loans, and cryptocurrencies. These accounts allow you to hedge against market volatility by diversifying beyond traditional stocks and bonds, and investing in assets with which you are more familiar.

However, the flexibility and freedom allotted by SDIRAs come with a trade-off: Due diligence. As the account owner, you are responsible for vetting potential investments, monitoring your account, and collaborating with your custodian and financial experts to ensure compliance.

Use this guide to make informed decisions and unlock the full potential of your self-directed retirement strategy.

Before You Invest: Tips for Self-Directed Due Diligence

Read these bullets developed by the Retirement Industry Trust Association to help you perform due diligence, vet potential investments, and minimize your risk.

• Analyze risks. Many assets, including real estate and promissory notes, fall outside the FDIC insurance coverage. Furthermore, entities such as your custodian or government oversight bodies typically do not offer guarantees or endorsements for alternative assets.
• Review your investment goals. Ensure that the investment in question aligns with your retirement objectives. This includes analyzing asset liquidity and the time required to realize a potential return on investment.
• Consult a professional. Obtaining a second opinion from an expert can help you assess investment opportunities more effectively and reduce risks. Experts can include financial advisors, accountants, lawyers, or industry experts.
• Know the red flags of fraud. Although fraud can take many forms, certain instances may serve as red flags. These include guaranteed returns, statements that are simply too good to be true, or high-pressure sales efforts that force you to act immediately.
• Leverage available resources, including the following:
  • SEC (investor.gov): Offers tools to check investment advisor credentials and uncover fraud warnings.
  • NASAA (nasaa.org): Connects you to state regulators and alerts about scams or unregistered offerings.
  • FINRA (saveandinvest.org): Provides education on avoiding fraud and researching brokers or firms.

Download the Complete Investor Checklist

After You Invest: Monitoring Your SDIRA

Due diligence doesn’t just end when you transact your money for an asset. By monitoring your asset’s performance and any changes in the market, you can compound your earnings and avoid potential penalties.

• Review statements regularly. Carefully examine account statements and promptly address any discrepancies or unfamiliar transactions.​
• Understand custodian roles. Remember, your custodian maintains your account and provides information, but isn’t responsible for investment performance.
• Report suspicious activity. If something appears to be off, please report it to your custodian and the appropriate state or federal authorities.

How to Get More Out of Self-Directing

In addition to proper due diligence, we recommend several steps for all SDIRA holders to maximize the benefits of their account.

Maximize Contributions

Maxing out your contributions each year allows you to take full advantage of tax-deferred or tax-free growth, depending on whether your account is traditional or Roth.

For 2025, the annual contribution limit is $7,000 (or $8,000 if you’re age 50 or older). However, keep in mind that Roth IRAs have an additional layer of rules that may reduce your maximum contribution depending on your tax-filing status and income.

Evaluate Compound Interest Investments

Compound interest investments can significantly boost long-term returns by reinvesting earned income back into the principal. This means you earn interest on both your initial investment and the accumulated returns over time.

Look for SDIRA-eligible investments, such as real estate notes or dividend-generating assets, that offer recurring returns. These returns can be reinvested and compounded for exponential growth over the life of your retirement account.

Open an LLC

Creating an IRA-owned LLC gives you “checkbook control,” allowing you to act as the manager of the LLC and write checks directly for investments without going through your custodian. This structure can streamline transactions like buying property or funding private loans. However, it must be set up correctly to avoid prohibited transactions and maintain compliance with IRS rules.

Avoid Penalties and Maintain Compliance

With more control comes greater responsibility. Self-directed IRAs are subject to strict IRS rules around “prohibited transactions” and “disqualified persons.” Violating these rules — even unintentionally — can result in your IRA losing its tax-advantaged status.

To stay compliant, always consult with professionals before making investments, keep detailed records, and ensure that neither you nor a disqualified person benefits directly from the assets held in your account.

Speak with a Financial Advisor

Even experienced investors can benefit from working with a financial advisor who understands self-directed IRAs and alternative assets. A knowledgeable advisor can help you build a diversified portfolio, assess risk, and structure investments to support your long-term goals.

A financial advisor can also help you avoid costly mistakes, such as triggering penalties or investing in assets that may not align with your retirement goals or timeline.

FAQs

How can I perform due diligence on an investment for my SDIRA?

To perform due diligence, thoroughly research investment opportunities, understand the associated risks, verify the credentials of involved parties, and consult with trusted professionals and experts.

What are the benefits of using an LLC with a self-directed IRA?

Using an LLC with your self-directed IRA will give you checkbook control, allowing you to execute investment opportunities without going through your custodian. This can make it easier to take advantage of timely deals, manage recurring expenses (such as property management fees), and minimize transactional fees.

How do I stay compliant and avoid tax penalties with a self-directed IRA?

To maintain compliance with SDIRA laws and requirements, stay informed about IRS rules, avoid prohibited transactions, and regularly work with financial experts or tax advisors who can help you navigate rules and regulations.