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What Is A Self-directed IRA, and Is It Right For You?

Posted February 25, 2022

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Whether you’ve been investing money into your IRA for years, taking advantage of your company’s match program, or saving pennies in jars, you are likely saving for retirement in more ways than one. Although we cannot tell you exactly how much money you will need to retire, there are ways to come up with an approximate amount.

In doing so, you may begin to ask what else you can do to help you reach your retirement savings goal in X amount of years. One thing you could consider is a self-directed IRA.

What Is A Self-directed IRA (SDIRA)?

Like a traditional IRA, a self-directed IRA is an individual retirement account that holds investments. Unlike a traditional IRA, an SDIRA can have precious metals, commodities, real estate, undeveloped or raw land, promissory notes, tax lien certificates, cryptocurrency, water rights, mineral rights, and livestock.

SDIRAs allow you to hold unique investments, but the IRS does forbid certain assets within an SDIRA. For instance, you cannot have life insurance, S corporation stocks, any investment that constitutes a prohibited transaction or collectibles. A wide variety of items fall under the collectibles category, such as antiques, artwork, alcoholic beverages, baseball cards, memorabilia, jewelry, stamps, and rare coins. This is because an IRA is for retirement purposes; having actual use of that asset today would negate the retirement account aspect of the account.

How Do You Set Up A Self-Directed IRA?

To set up a self-directed IRA, you will need help from someone often referred to as a custodian or trustee. You will work with this person to select your investments, research the best course of action, purchase the asset and carry out the desired transaction.

It is important to note that custodians cannot give financial advice. With no financial advice from the custodian, the due diligence portion will be entirely up to you. We recommend that you work with a financial advisor specializing in this area to make the best choices and not break any of the IRS’s rules throughout this process.

What Are the Benefits of a Self-Directed IRA?

Self-directed IRAs can offer many benefits and help you save for retirement. Some of those benefits include flexibility in your investments and built-in tax breaks. Additionally, having an SDIRA does not mean that you cannot hold more traditional investment accounts like a Roth IRA. Instead, the SDIRA allows you to diversify your portfolio, invest in your passions, and choose investment strategies that may have a higher earning potential as the years go on.

Although there are significant benefits to this type of investment, major risks are also associated with an SDIRA.

What Are the Risks of a Self-Directed IRA?

Remember those forbidden investments we mentioned earlier? It’s essential to keep those in mind when investing in an SDIRA. There are also a ton of other rules associated with SDIRAs; If you break any rule, then it could invalidate the entire IRA causing a massive taxable distribution and associated penalties.

You probably think it would be helpful if you had someone to remind you of these rules and help you make wise choices within your SDIRA, and you’d be right. You establish an SDIRA with a custodian who cannot give financial advice. This is where it is crucial to have a financial advisor who acts in your best interest at all times. We recommend you interview fee-only advisors that specialize in these unique investment vehicles. You can find these advisors through the XY Planning Network, and the National Association of Personal Financial Advisors. These are two fee-only planning associations where members tend to develop specialized niches, like SDIRAs.

Having a financial advisor to help you navigate the risks of SDIRAs will also come in helpful when you encounter the complex fee structure. With an SDIRA, you will typically be charged a one-time establishment fee, a first-year annual fee, an annual renewal fee, and fees for investment bill paying.

Another reason an SDIRA is risky, and it is crucial to work with the right advisor, is to create an exit plan. Selling stocks, bonds, and mutual funds is easy, but it can take more time and effort to find the right buyer when you own an apartment building.

Finally, one of the most significant risks with SDIRAs is fraud. According to the Securities and Exchange Commission (SEC), SDIRA custodians do not confirm “the quality or legitimacy of any investment in the self-directed IRA or its promoters.” The lack of oversight means that you will not be purchasing regulated securities, which increases the risk of ownership.

Traditional vs. Roth Self-Directed IRA

You have the freedom to set up your Self-directed IRA as a traditional IRA or a Roth IRA. When making this decision, consider different tax treatments, eligibility requirements, contribution guidelines, and distribution rules.

With a traditional self-directed IRA, you will have a tax break up front. However, when withdrawing your savings during retirement, you will have to pay taxes on your earnings and contributions. On the other hand, if you choose to open a Roth SDIRA, you won’t receive the tax break up front, but the withdraws you make during retirement will be tax-free.

Is an Self-Directed IRA Right For You?

It’s important to think through the advantages, disadvantages, risks, and rewards of a Self-directed IRA account. Because of its complexity, the due diligence required, and the types of transactions you would be making, SDIRAs are often better suited for aggressive investors or individuals within a specific niche, like someone with a career in real estate.

Whether you are still deciding if an SDIRA is right for you or if you have set up your account with a custodian and are looking for a financial advisor to help you along the way, there are a lot of fee-only specialists in this area. As a fiduciary, if you would like to talk through the details of if a self-directed IRA is appropriate for your financial situation, we would be happy to have that conversation. Helping people make the right decisions at the right time and ultimately develop a strategy to help you save for retirement is what drives us as advisors.


Thayer Financial, L.L.C. (“Thayer Financial”) is a registered investment adviser offering advisory services in the State of North Carolina and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This website’s presence on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Thayer Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or according to an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Thayer Financial, L.L.C., unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.


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