Self-Directed IRA (SDIRA) in 2024: Benefits, Fees & FAQs

A self-directed IRA (SDIRA) in 2024 offers many benefits to investors saving for retirement. Learn more about what an SDIRA is and the fees and requirements it entails. Is an SDIRA right for you?

One way to build wealth to support yourself in retirement and build generational wealth for your children is to contribute to an Individual Retirement Account (IRA). The more your account grows, the better for yourself and your heirs. However, standard IRAs restrict the types of investments you can choose, potentially limiting growth. A self-directed IRA (SDIRA) can open the door to other alternative investments. Learn more about SDIRAs in 2024: Benefits, Fees & FAQs.

What is a Self-Directed IRA (SDIRA)?

When you choose an SDIRA, you gain more control over your investment choices, especially compared to standard IRAs. You can invest in many types of alternative investments with an SDIRA, including:

• Real estate and fractional real estate
• Private Equity
• Precious metals
• Cryptocurrency
• Promissory notes
• Tax lien certificates
• Partnerships and LLCs

SDIRAs offer flexibility in investment choices that regular IRAs lack. If you are an experienced investor who wants more control over retirement investments and is comfortable with the additional responsibilities and risks involved, read more about this exciting retirement investment opportunity here.

What is the Difference Between a Self-Directed IRA and a Regular IRA?

The main difference between an SDIRA and a regular IRA lies in the types of investments allowed and the level of control the account holder has over these investments.

• Investment options: Regular IRAs offer a limited range of investment options, such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). SDIRAs allow a broader range of investments, including real estate, private equity, cryptocurrency and precious metals.
• Management and control: Regular IRAs are usually managed by financial institutions like banks or brokerage firms, which offer a preselected menu of investment options. With an SDIRA, a custodian is involved, but the account holder has more control over their investment choices and can make decisions based on their own research and preferences.
• Fees: Regular IRAs often have lower fees because of the more standardized nature of the investments. With their more specialized features, SDIRAs often have higher fees.
• Level of responsibility for the account holder: The financial institution handling a regular IRA is responsible for ensuring compliance with IRS regulations and conducting due diligence on investments. The SDIRA account holder is responsible for conducting due diligence on investments, ensuring compliance with IRS regulations and avoiding prohibited transactions.

How to Open an SDIRA

It’s a little bit harder to find a brokerage that offers SDIRAs, but the range of choice is widening as these types of retirement plans gain popularity. Examples include Equity Trust, Midland IRA and Entrust Group.

To open an SDIRA, follow these steps:

1. Choose an SDIRA custodian, taking fees, investment options, reputation and customer support into account.
2. Complete the account application, designate a beneficiary and sign the required documents and agreements.
3. Fund your SDIRA either by transferring funds from an existing retirement account, such as a 401(k) or traditional IRA or with contributions from earned income, subject to annual contribution limits.
4. Select your investments from alternative investments like real estate, private company stock, precious metals and promissory notes.
5. Keep accurate records of your investments, transactions and account statements and be sure your investments comply with IRS regulations to avoid prohibited transactions and penalties.
6. Monitor your investments and adjust as needed, ensuring you stay informed about changes in tax laws or regulations that may impact your SDIRA.

Traditional vs. Roth SDIRA

As with regular IRAs, you can contribute to traditional or Roth SDIRAs. Traditional and Roth plans differ in the tax treatment of contributions, withdrawals and eligibility requirements. Contributions are tax-deductible in the year they are made in a traditional plan, which can lower your taxable income that year. In a Roth plan, contributions are made with after-tax dollars and are not tax-deductible. However, qualified withdrawals in retirement are tax-free.

Self-Directed IRA Rules

You need to follow the rules and regulations related to your SDIRA. One of the most important rules concerns prohibited transactions. Examples of prohibited SDIRA transactions include:

• Self-dealing: An IRA transaction involving the sale, exchange or rental of SDIRA assets with a disqualified person — basically anyone who is an immediate relative of the SDIRA holder or the IRA holder themselves. For example, you couldn’t use your SDIRA to buy stock in a company run by you, your child or your spouse. If you buy real estate with SDIRA funds, it can’t be used for personal residence.
• Lending: Using SDRA funds to extend credit, lend money to or otherwise make financial arrangements with a disqualified person.
• Exchange of services: The exchange of goods and services for financial consideration between the SDIRA and any disqualified person. An example of this is the SDIRA holder who had a plumbing company doing a copper repipe on a piece of real estate owned by the SDIRA holder (or the SDIRA holder hiring an immediate relative to perform these services).
• Financial benefit: Using SDIRA assets to benefit or enrich a disqualified person financially. An example of this would be selling a rental property in your IRA but diverting the funds into your personal bank account instead of back into the IRA.

Any distributions or withdrawals you make from your SDIRA must be reported to the federal government. In a traditional IRA, the manager of your fund is responsible for making these reports accurate. In an SDIRA, you are responsible for reporting on distributions and withdrawals. 

Self-Directed IRA Investment Options

SDIRAs offer a broader range of investment options compared to traditional IRAs, so you can diversify your portfolio beyond standard stocks, bonds and mutual funds. Here are some popular investment options for SDIRAs.

• Real estate: Investors can use SDIRAs to purchase residential, commercial or rental properties. Real estate investments can generate rental income and appreciate in value over time, offering potential long-term gains.
• Private equity: SDIRAs can be used to invest in private companies, including startups or established businesses. These kinds of investments allow for potentially high returns if the companies grow or are acquired, though they carry higher risks from the illiquidity and volatility of private investments.
• Precious metals: Investors can buy and hold physical precious metals such as gold, silver, platinum and palladium. These assets can act as a hedge against inflation and economic instability, preserving value during market downturns.
• Cryptocurrencies: SDIRAs can include investments in digital currencies like Bitcoin, Ethereum and other cryptocurrencies, which offer high growth potential but are highly volatile and speculative.
• Promissory notes: This option involves lending money to individuals or businesses in exchange for a promissory note outlining the repayment terms with interest. It can provide a steady stream of income through interest payments.
• Tax lien certificates: Investors can purchase tax lien certificates from municipalities. These certificates represent unpaid property taxes and entitle the investor to collect the owed amount plus interest, potentially leading to the acquisition of the property if taxes remain unpaid.

The Advantages of a Self-Directed IRA

SDIRAs offer potential benefits beyond those of regular IRAs.

Pros

• Diverse investment options
• Greater personal control
• Potential for higher returns
• Hedge against inflation
• Tax advantages

For many Americans, the bulk of their investing money resides in tax-advantaged retirement accounts, so the flexibility and diversification that an SDIRA provides are appealing.

The Risks of a Self-Directed IRA

It’s important to acknowledge the risks inherent in an SDIRA. The SEC itself encourages caution, writing that it “believes that the extent of the problem associated with SDIRAs is far greater than currently reported through enforcement actions and other mechanisms for gathering such information.” This type of retirement account is more complex and risky than regular IRAs.

Cons

• Complexity
• Higher fees
• Regulatory risk
• Illiquidity
• Valuation challenges
• Custodian requirements
• Increased risk
• Limited expertise
• Prohibited transactions
• Increased risk of fraud

SDIRAs offer diversification and potentially higher returns, but they come with increased complexity, costs, potential for fraud and risk.

Thinking Outside the Box: Opening a Self-Directed IRA (SDIRA) in 2024

SDIRAs aren’t for everyone, but they could be right for you. It’s exciting to think that you could use the money in your retirement accounts to invest in things like cryptocurrency, real estate or precious metals. If you consider yourself a less conventional person who is comfortable taking higher risks in investing, an SDIRA with its opportunities to choose alternative investments may fit the bill. Check out Benzinga’s list of the best SDIRAs.

Frequently Asked Questions