You can set up a self-directed plan such as a traditional IRA (tax-deductible contributions) or Roth (tax-exempt withdrawals). An IRA depositary, such as a bank, brokerage firm, or other financial institution, must establish and manage their SDIRA. Fortunately, the process for opening a self-directed IRA isn't too complicated. You'll need to visit one of the major Roth IRA providers to open an account, and you'll also need to make sure that the depositary you choose supports self-managed accounts and allows you to hold any specific alternative investments you want.
Start by opening a self-directed IRA with a custodian. A self-directed IRA is like a typical IRA in almost every way, with the main difference being what you can invest. As mentioned earlier, the main advantages of a self-directed Roth IRA are that you have control over the account's investments and have many more investment options than you would have with a standard Roth IRA. If a normal IRA seems more appropriate to you, here's a comparison between the brokers we've selected as the top IRA account providers.
Given the complexity of self-managed IRAs, you may want a financial advisor with experience managing investment transactions for self-directed IRAs to help you make investments with due diligence. If you spend a single night in a rental property purchased with IRA funds, your entire self-directed IRA will no longer be considered an IRA starting the first day of that year. A self-directed IRA is a traditional or Roth type of IRA, meaning that it allows you to save for retirement with tax advantages and has the same IRA contribution limits. Holders of self-directed Roth IRAs have the ability to purchase investment properties through their IRA.
While self-directed IRAs may make sense for some savvy investors, they come with greater risks and disadvantages than standard IRAs. A self-directed Roth IRA is a type of retirement account that receives the same tax-advantaged treatment as a regular Roth IRA. Generally speaking, you can't hold unapproved assets in your IRA, borrow money from an IRA, sell properties to an IRA, use an IRA as collateral for a loan, or use an IRA to buy property for personal use. A common ruse is to say that the IRA depositary has examined or approves the underlying investment, when, as the SEC points out, custodians generally do not assess “the quality or legitimacy of any investment in the self-directed IRA or its promoters.” Self-directed IRAs allow you to invest in a wide variety of investments, but those assets are often illiquid, meaning that if you're faced with an unexpected emergency, you may have difficulty getting money out of your IRA.
The different custodians offer self-managed IRA accounts that can own gold bars, silver bars or even cryptocurrencies such as Bitcoin. A self-directed IRA can invest in assets that go far beyond the traditional stocks, bonds, funds and more that are available at one of the leading online brokerage agencies, and that's the main advantage for investors looking to use a self-directed IRA. Advocates of self-managed IRAs claim that their ability to invest outside the mainstream improves their diversification, but a self-directed IRA can just as easily lack diversity as any other retirement account. You can choose to open a self-directed IRA like a traditional IRA or a Roth IRA, with the same pre-tax and after-tax contribution rules.