Top 15 Self-Directed IRA Questions & Answers (FAQ)

Self-directed IRAs offer a powerful way to diversify your retirement portfolio beyond the traditional stock market.

With the ability to invest in alternative assets like real estate, precious metals, and private businesses, SDIRAs give investors more control and flexibility than conventional retirement accounts.

Whether exploring new options or searching for the best self-directed Roth IRA or traditional IRA to suit your goals, this retirement vehicle can lead to greater financial growth and freedom. But with that freedom comes added responsibility and likely a lot of questions.

If you’re new to this retirement strategy or simply want to learn more, these common questions can help you understand how self-directed IRAs work, what you can (and can’t) invest in, along with tips to help you stay compliant with IRS rules.

1. What is a self-directed IRA?

A self-directed IRA (SDIRA) is an individual retirement account that gives you greater control over how your money is invested.

Unlike Traditional IRAs, which limit investment options to common assets like stocks, bonds, and mutual funds, SDIRAs let you invest in a broad range of alternative assets, including real estate, private equity, precious metals, and cryptocurrency.

While SDIRAs offer more flexibility, they aren’t managed accounts and therefore require account holders to take on more responsibility and account management activities. Though you cannot only open an SDIRA with an IRS-approved custodian, you’re responsible for selecting and vetting the investments you make.

2. What can I invest in with an SDIRA?

In addition to traditional stocks, bonds, and mutual funds, you can invest in many alternative assets, such as:

• Real estate, including residential, commercial, or raw land
• Private lending, such as promissory notes or mortgage loans
• Precious metals, like gold, silver, and platinum, that meet IRS standards
• Cryptocurrency, such as Bitcoin or Ethereum
• Private equity, including startups or privately held businesses
• Tax liens and deeds

These options allow for greater diversification and potential for higher returns, but they also come with added complexity and risk. Before making any investment, be sure to perform due diligence and work with a knowledgeable custodian.

3. What can’t I invest in with an SDIRA?

The IRS forbids SDIRA accountholders from investing in collectibles, like art, stamps, coins, alcoholic beverages, and antiques. Additionally, you cannot invest in life insurance or S-corporation stocks.

It’s also important to understand that certain types of transactions are prohibited, even if the asset itself is allowed.

You cannot invest in assets that directly benefit you or a disqualified person, such as a spouse, parent, child, or any entity those individuals control.

For example, you can’t purchase a rental property and then stay in it yourself, nor can you lend money to your child from your SDIRA. These types of self-dealing transactions can disqualify your entire account and trigger taxes and penalties, so it’s essential to stay compliant.

4. Can I roll over my Traditional or Roth IRA into a self-directed IRA?

Yes, you can transfer your Traditional IRA to a self-directed IRA, or your Roth IRA to a self-directed Roth IRA. The rollover process can be very simple, but you must go through the steps to make sure you can transfer your account successfully. As far as IRA rollovers, you should have no trouble.

5. Do you have to have an IRA custodian?

Yes, the IRS mandates that a certified IRA custodian must handle a self-directed IRA. Though you must have one, you can choose your own custodian. You can select a custodian based on your specific needs and their experience with the assets you want to invest in. Choosing the right custodian is just as important as picking the right assets.

6. Can my custodian help me make investment decisions?

Custodians cannot act as financial advisors, nor get involved in your investment decisions or otherwise offer advice.

Still, even though a custodian can’t offer advice, it’s still important to choose one who has experience working with the asset class you choose.

Their knowledge of your assets and industry requirements can help ensure that your account remains compliant and that you meet administrative requirements based on the asset(s) of your choice. They can also help you avoid investment pitfalls.

7. What are the rules and restrictions for self-directed IRA investing?

Self-directed IRAs offer more investment flexibility than traditional accounts, but they come with strict IRS rules you must follow to keep your account in good standing.

Prohibited transactions include:

• No self-dealing. You can’t use your SDIRA to directly benefit yourself or a disqualified person (like a spouse, parent, child, or business you own). For example, you can’t buy a vacation home with your SDIRA and then stay in it—even for one night!
• No personal contributions to IRA-owned assets. You can’t pay for repairs, maintenance, or upgrades out of pocket. All expenses must be paid by the IRA, and all income must go back into the IRA.
• Avoid prohibited investments. As specified above, certain assets, including collectibles (like art, wine, or stamps), life insurance policies, and S-corporation shares, are off-limits.
• Follow proper recordkeeping. Your SDIRA must be held by an IRS-approved custodian, who will handle reporting and ensure tax compliance, but it’s your responsibility to avoid prohibited transactions.

Failing to follow these rules can lead to severe penalties, including disqualification of your IRA and immediate taxation.

Always consult a qualified custodian or tax professional before making complex investment decisions.

8. Are SDIRAs for anyone?

While self-directed IRAs are available to anyone eligible for a standard IRA account, they are not for everyone.

SDIRAs require a great deal of research, personal knowledge, and patience to succeed. There is no room for guesswork when it comes to investing or restrictions, and there are a lot of pitfalls that can be devastating for your savings. However, if you put in the time, you could see long-term rewards for your efforts.

9.  Can I invest in my personal business, company, or deal?

No, self-dealing is strictly prohibited. Much like purchasing a home with your IRA for personal use, or performing maintenance on an IRA-owned property, investing in a personal business is not allowed. You, nor any disqualified individual, can benefit from your IRA until after you reach retirement age.

10. Who are considered disqualified individuals?

According to the IRS, disqualified individuals include parents, grandparents, spouses, children, your children’s spouses, grandchildren, and their spouses as well as custodians or fiduciaries. The list also includes companies owned by 50% by the IRA owner, officers, or directors of a disqualified company, or 10% more partners.

11. What are UBIT and UDFI?

UBIT (Unrelated Business Income Tax) and UDFI (Unrelated Debt-Financed Income) are special taxes that can apply to income earned within a self-directed IRA under certain conditions.

• UBIT is triggered when your SDIRA earns income from a business or trade that is not related to the IRA’s tax-exempt purpose. For example, if your IRA invests in an active business (like a restaurant or retail operation), the income from that business could be subject to UBIT.
• UDFI applies when your SDIRA uses borrowed funds (typically through a non-recourse loan) to acquire an investment, such as real estate. In this case, a portion of the income that’s tied to the debt-financed portion of the asset may be taxed.

While UBIT and UDFI don’t disqualify your account, they can reduce the tax benefits of using an SDIRA. Always consult a tax advisor before pursuing debt-leveraged or business-related investments through your account.

12. Can I borrow money from my SDIRA?

Yes, you can borrow money via a non-recourse loan. Your IRA owns this loan and is really a borrower’s loan. Should you default, you only need to surrender your collateral. However, the collateral cannot be the IRA itself or any personal collateral.

Of course, the goal is to pay off the loan and increase your retirement fund. However, it should be noted that this loan makes your account subject to UDFI.

13. If I invest in real estate and want to flip a house, can I work on it myself?

No, you cannot personally work on a property owned by your self-directed IRA. This includes performing renovations, repairs, maintenance, or even managing the property.

Doing so would be considered a prohibited transaction under IRS rules, specifically a form of self-dealing, where you or another disqualified person (like a spouse, parent, or child) directly benefits from the IRA investment.

Even small actions like mowing the lawn, painting, or hiring contractors directly (instead of through the IRA) can violate IRS rules. All work must be arranged and paid for through the IRA itself, with no personal involvement.

Tip: To stay compliant, treat your SDIRA-owned real estate like a separate business. Use a third-party property manager, keep expenses and income flowing only through the IRA, and never personally touch or use the property.

14. What are some downsides to self-directed IRAs?

Self-directed IRAS can be a great deal of work, especially if you aren’t prepared to handle all the aspects of your retirement account. There is much room for error if you don’t perform your due diligence.

Additionally, these accounts may not be as regulated as Traditional or Roth IRAs from a bank trust. Also, many of the assets available through an SDIRA aren’t as liquid as others; if they fail, it can be challenging to get rid of them.

Tip: To avoid costly mistakes, work with professionals such as an experienced SDIRA custodian, a tax advisor, or an attorney familiar with alternative assets. Stay organized, keep detailed records, and research every investment thoroughly before committing. SDIRAs reward knowledge and diligence, so treat your account like a business rather than a passive savings vehicle.

15. Do I have complete control over my SDIRA?

Yes, you generally have complete control over your own SDIRA. While your custodian oversees your account, you still make the decisions. All the choices are yours, from the assets to the amount of money you put into them.

As the account owner, you get to select your custodian, how you want to save, how you want to build your portfolio, and who will benefit from your account. If you want to take charge of your retirement, this is the best choice for you.

Selecting The Best Account For You

Selecting the best retirement for you can be a challenge, especially if you want to get started saving right away.

There are many pros and cons to a self-directed IRA; it comes down to whether it is the right choice for you.

Consider speaking with your financial advisor to decide whether an SDIRA is the best course of action for saving for your golden years. Take control of your retirement by contacting a trusted SDIRA custodian today.