If you have not started planning your retirement, the years can disappear before you know it.
When I coach investors, my message is simple. If you want real control over your retirement, you need a strategy that can grow faster than traditional accounts.
I use self-directed IRAs because they give me control. They also allow me to invest in real assets that I understand. If you want to build wealth faster and protect your money from inflation, you should know how a self-directed IRA (SDIRA) works. Investors like Peter Thiel have used SDIRAs to significantly boost his wealth and portfolio.
I have managed over 1.4 billion dollars in financial transactions. I have flipped more than 450 homes and over 2,000 apartment units. This experience taught me how powerful the self-directed IRA structure can be. It also taught me how fast wealth compounds when taxes do not take the first cut.
Below is a simple breakdown of how SDIRAs work and why I recommend them.
What Is a Self-Directed IRA
A self-directed IRA is a retirement account that lets you “self direct” your investments in alternative assets. Traditional IRAs limit you to stocks, bonds, mutual funds, ETFs, and annuities. An SDIRA opens your investment menu to assets with higher growth potential.
Examples include:
- Real estate
- Raw land
- Rental properties
- Tax liens and deeds
- Water, oil, gas, and mineral rights
- Private companies
- Limited partnerships
- Precious metals that meet IRS standards
- Cryptocurrency
- Crowdfunded investments
A custodian holds the account, but you make every investment decision. You perform the due diligence. You manage the strategy. You choose the assets. That level of control is why these accounts create wealth for investors who know what they are doing.
And if you’re still a fan of stocks and ETFs, you can also invest in them while saving amazing amounts of cash on capital gains taxes.
Pros and Cons of an SDIRA
A self-directed IRA is an exceptional choice for someone seeking diversification of assets.
For many people facing retirement, investing in alternative assets using an SDIRA is viewed as a shield against inflation and volatility. Here’s a glance at the advantages of SDIRAs:
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- Flexibility: Self-directed IRAs provide a much broader scope of asset classes compared to traditional IRAs. Diversification beyond stocks, bonds, and mutual funds can help a portfolio to remain resilient against downturns. In addition, investors can dip their toes into exciting markets with everything from gold to cryptocurrency staking on the menu with SDIRAs.
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- Potential for Higher Returns: SDIRAs are especially attractive to investors looking for assets with higher-than-average investment returns. On the flip side, an SDIRA can also be a powerful tool for investment, such as raising capital for real estate using dormant retirement funds.
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- Control: The account holder ultimately controls the destiny of an SDIRA. Many investors enjoy using their specialized knowledge regarding specific asset classes to make custom investment decisions. In fact, an SDIRA makes it possible to invest in hobbies and passions!
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- Tax Benefits: IRAs are amazing tax-free investments to build wealth to keep up with inflation without forfeiting most of it to the IRS.
Cons
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- Full Control: The success of an SDIRA depends entirely on the judgment of the account holder. The pressure is really on when it comes to making smart investment choices.
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- Loss of Liquidity: While it’s exciting to be able to invest in alternative assets, unloading them can take time and effort. Unlike traditional assets that can be sold off with the press of a button whenever the market is open, alternative investments can take years to sell, and some might never find buyers.
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- Fees: Fees can be slightly higher with SDIRAs. While the general cost to set up an SDIRA is reasonable, some custodial firms charge a lot for administration.
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- Complexity: A self-directed IRA comes with a long list of rules and prohibited transactions regarding your own assets. For example, real estate investments made through an IRA cannot be touched for personal use. The simple act of fixing a broken toilet in a property you own through an IRA could result in IRS penalties, interest charges, and forfeiture of your SDIRA tax benefits.
What’s the Difference Between Traditional and Roth SDIRAs?
The difference between a Roth and Traditional SDIRA comes down to its tax structure. You have to consider whether you will be in a higher tax bracket now or at retirement to reap the full benefits of each IRA.
Traditional SDIRA
With a traditional SDIRA, the account holder contributes pre-tax dollars. This investment then grows on a tax-deferred basis until being taxed as current income once withdrawals begin after age 59 1/2.
This works for most people because they benefit from deferring taxes on a portion of their income during their “peak” earning years. For the average person, peak earning years are when their income is taxed at a higher bracket.
The assumption is that people fall into lower tax brackets after retirement because they no longer work full-time. As a result, they will presumably pay a lower tax rate on their IRA withdrawals.
Roth SDIRA
With a Roth IRA, the account holder contributes after-tax dollars that will then grow on a tax-free basis. All withdrawals made after age 59 1/2 will not be taxed as current income. This can be a good option for someone anticipating that they will be in a higher tax bracket during retirement.
Rules, Contribution Limits, and Prohibited Transactions
For 2026, account holders under the age 50 have a contribution limit of $7,500. Account holders over 50 can add an additional $1,100 in catch-up contributions to max out at $8,600.
Once a person reaches age 59 1/2, they can begin making withdrawals tax-free. Note that Traditional SDIRAs require minimum distributions (RMDs) starting at age 73. Roth SDIRAs do not have RMDs.
Withdrawing funds before age 59 1/2 will result in a 10% penalty. The account holder will also need to pay income tax on the withdrawal amount based on their ordinary income tax rate.
Fortunately, Self-directed IRAs do qualify for the same hardship distributions as other IRAs.
While much is made of the alternative investment options available through the SDIRA, this account type isn’t made for free-for-all investing. For example, SDIRAs cannot invest in art, S-corporations, or life insurance.
SDIRAs also have strong restrictions against what the Securities and Exchange Commission calls self-dealing. This means that IRA owners are not permitted to essentially “do business with themselves.”
For example, selling your property to yourself, lending yourself funds from an IRA, taking IRA income, and paying IRA expenses with your own money are all prohibited.
In this scenario, the SDIRA owner is referred to as a “disqualified person” by the IRS.
In the case of a real estate investment, this distinction means that the IRA owner is prohibited from living at a property, staying at a property, doing any kind of work or maintenance, or directly funding any kind of work of maintenance.
The disqualified person’s title even extends to an account holder’s spouse, children, grandchildren, and parents. The same goes for any entity where the account holder possesses more than 50% ownership, holds a director role, or can be classified as a “highly compensated” employee.
How to Open a Self-directed IRA
Here is how the process works.
1. Choose a Custodian
Reach out to Horizon Trust, the custodian company I founded to simplify self-directed IRA investing, and setup an appointment.
2. Fund the Account
You can transfer, rollover, or contribute new funds. Your custodian will distribute them to your choice investments.
3. Select Your Investments
You choose the assets based on your knowledge and risk tolerance.
4. Manage the Strategy
Track performance, follow IRS rules, and build long term growth.
Is a Self-directed IRA Right for Me?
If you want more control, better diversification, and the ability to invest in real assets, an SDIRA is worth your time. If you are willing to learn the rules and follow them, this account can build significant wealth.
I built my own wealth through real estate, private deals, and alternative assets. I have seen how powerful these accounts are for long term growth. If you want tax free or tax deferred compounding, and you want control over the asset classes you invest in, an SDIRA may be the best tool for your future.
Self-Directed IRA FAQ
What type of IRA lets you invest in cryptocurrency?
A self-directed IRA allows cryptocurrency investments using tax deferred or tax free income.
Can I manage my own SDIRA?
Yes. You choose the investments. However, you must use a custodian to hold the account.
What can I not invest in?
You cannot invest in art, collectibles, S corporations, life insurance, or precious metals that fail IRS standards.
Can I live in a property owned by my SDIRA?
No. You cannot live in it, stay in it, or work on it. This is a prohibited transaction.
Can my SDIRA buy a property from a family member?
No. Transactions with disqualified persons are prohibited.
Can I mix personal funds with SDIRA funds?
No. Mixing funds violates IRS rules.
Can I borrow money from my own SDIRA?
No. Lending money to yourself or your business through your IRA is prohibited.