You will not earn a paycheck forever, and retirement does not announce itself politely. One day, work income slows or stops, and the only thing replacing it is what you built ahead of time.
That reality is why retirement planning is not about saving. It is about control, structure, and knowing how your money can work for you while you are still earning.
Self-directed IRAs exist for this exact reason. They give you the ability to invest retirement funds intentionally instead of leaving your future tied to default options you did not choose.
What Is a Self-Directed IRA?
A self-directed IRA (SDIRA) is a retirement account that gives an individual control over their investment choices. An SDIRA can either be a Roth or a Traditional IRA.
In simple terms, it is a retirement savings plan that offers alternative investments, such as real estate, precious metals, private equity, and more, in a tax-advantaged setting.
SDIRAs offer plenty of advantages for savvy investors, but come with stricter regulations. The IRA owns the assets, and a qualified custodian must administer transactions and ensure IRS compliance.
7 Dos and Don’ts of SDIRAs
Before you move money into a Self-Directed IRA, it helps to know the guardrails that keep your account safe and compliant.
The right habits can unlock powerful tax advantages, while the wrong moves can trigger penalties, disqualification, or unexpected tax bills. This section breaks down the most important Dos and Don’ts so you can use an SDIRA confidently to build long-term, tax-advantaged wealth.
1. Do Start Early
Although an SDIRA is a savings account, it is also an investment account that adds value to your contribution. Just imagine a normal savings account and how compounding interest increases your money.
The same concept applies to SDIRA contributions, where you put your money away and have a self-selected method of compound returns on your money.
If you have a Roth IRA, you get a tax break because it offers tax-free growth and tax-free withdrawals in retirement.
Early starters gain bigger tax breaks and returns. For example, you can contribute $7,500 annually ($8,600 if you’re 50 or older). At a hypothetical 7% annual return, consistent contributions over 30 years could exceed $700,000, assuming no taxes, penalties, or interruptions.
2. Do Diversify with a Focus on Crypto, Real Estate, and Other Alternatives
SDIRAs give you more control over your investment decisions, enabling you to put your retirement savings into real assets you are knowledgeable about and diversify your portfolio.
Some alternative investments you can purchase through your SDIRA include:
- Rental real estate
- Raw land
- Private placements
- Precious metals (IRS-approved bullion)
- Cryptocurrency (subject to custodian rules)
If your account does not have sufficient funds, a bank may make a loan arrangement, with the property serving as collateral. This is called a non-recourse loan, and it’s a powerful advantage of self-directed IRAs.
Important note: Using leverage triggers Unrelated Debt-Financed Income (UDFI), meaning the portion of profits tied to borrowed funds may be taxable, even inside a Roth or Traditional IRA. Diversification is powerful, but understanding the tax implications is essential.
3. Do Check Out the Backdoor Roth IRA
A backdoor Roth IRA is an administrative arrangement with your custodian to sidestep income limits and contribute to a Roth SDIRA. This strategy is for high earners to bypass Roth income limits. Here’s how it works:
- Contribute to a Traditional IRA (non-deductible)
- Convert those funds to a Roth IRA
- Pay ordinary income tax on the converted amount
Recent tax legislation has extended current tax brackets beyond their previously scheduled sunset, providing greater long-term certainty when evaluating Roth conversion strategies.
4. Don’t Rush Backdoor Roth Without the Right Math
Run the numbers before converting to a backdoor Roth IRA to ensure the upfront tax cost makes sense for your situation.
This is because you will pay taxes on the year you make Roth IRA contributions, and the tax burden will be higher than in a Traditional IRA. For example, converting while you’re in a high tax bracket (such as 37%) may not make sense if you expect a lower taxable income in retirement.
Before converting, consider:
- Current vs. future tax brackets
- State income taxes
- UDFI exposure if using leverage
- Time horizon until retirement
Roth conversions are most effective when done strategically, not emotionally.
5. Don’t invest in Prohibited Investments and Transactions
The IRS places strict guardrails around what you can and cannot do inside a Self-Directed IRA. These rules exist to prevent self-dealing and to ensure your IRA is used strictly for retirement investing, not personal benefit today.
If you cross these lines, the consequences are severe. A prohibited transaction doesn’t just affect the deal in question; it can disqualify your entire IRA, forcing the IRS to treat the account as fully distributed. That means immediate income taxes on the full balance, plus potential penalties.
Disqualified persons:
The IRS bars SDIRA owners from doing business with close relatives or engaging in self-dealing.
- You
- Your spouse
- Parents and grandparents
- Children and grandchildren
- IRA service providers
Banned Investments
Certain assets are off-limits no matter how attractive they look. These include
- Collectibles (art, antiques, rugs, stamps, most coins)
- Life insurance
- S-corporation stock
Banned Actions
How you use IRA-owned assets matters just as much as what you buy. Examples of prohibited actions include:
- Personal use of IRA-owned property
- Loans to yourself or disqualified persons
- Buying or selling assets between your IRA and yourself or close family
Because these rules are highly technical and unforgiving, the safest approach is to treat your SDIRA as completely separate from your personal finances. When in doubt, always confirm a transaction with your custodian before moving forward, not after.
6. Do Co-Investing for Expensive Assets
Not all close relatives are considered disqualified persons; siblings and other qualified investors can still transact in assets with your SDIRA.
SDIRAs can co-invest with non-disqualified persons to access higher-value deals like:
- Commercial real estate
- Large apartment complexes
- Private equity or startups
- Precious metals such as gold and silver
Co-investing allows your IRA to participate in opportunities that may be too large to fund alone. Pooling capital gives investors access to larger assets, stronger income potential, and broader diversification while keeping ownership percentages clearly defined. Each party’s returns and expenses must flow proportionally based on their investment share.
The IRS allows SDIRAs to invest alongside other parties, but the structure must remain strictly arm’s-length. No investor can receive special benefits, personal use of the asset, or compensation outside their ownership percentage. Violations can trigger a prohibited transaction and disqualify the IRA.
7. Do Choose Your Custodian Carefully
The first task when investing in a self-directed IRA is finding the right custodian and the right investment alternatives that fit your retirement plan.
Given that you have an idea of the IRA and the type of investment you want, you may consider the following factors while looking for a self-directed IRA custodian:
- Ease of account maintenance and setup: How easy is it to open and maintain an SDIRA account with a custodian?
- Fees: For administration, setup, and transaction costs.
- Customer service: Efficiency in terms of helping a client with account issues.
- Checkbook control: Whether a client can invest or direct investment by just writing a check.
- Investment options: Ability to offer alternative investment options such as real estate, crypto, e.t.c.
Take Control, Stay Compliant
Self-Directed IRAs are powerful tools for building long-term, tax-advantaged wealth. But they only work when used correctly.
Start early. Diversify intelligently. Respect the rules. And always model the tax impact before making major moves.
When structured properly, an SDIRA can be more than a retirement account. It can be the foundation of lasting financial independence.
FAQs
What is a self-directed IRA (SDIRA)?
A self-directed IRA is a retirement account that lets you choose from a broader range of investments beyond typical stocks and mutual funds. It can be set up as either a traditional or Roth IRA, with the same general contribution limits and tax rules.
Who actually owns the assets in an SDIRA?
With an SDIRA, the IRA, not you personally, owns the assets. A qualified custodian is required to hold title, administer transactions, and help keep the account compliant with IRS rules.
Can I co-invest with others using my SDIRA?
Yes, SDIRAs can co-invest alongside non-disqualified persons (such as siblings or unrelated partners) to access larger deals like commercial real estate or private equity. However, you cannot co-invest in a way that involves you, your spouse, certain family members, or IRA service providers as disqualified parties.
What types of investments are prohibited in an SDIRA?
Certain assets are always off-limits, including collectibles (like art, rugs, antiques, and most coins), life insurance contracts, and S-corporation stock. Even with allowed assets, how you use them matters, and using them for personal benefit can still trigger a prohibited transaction.
What happens if I engage in a prohibited transaction?
A prohibited transaction can cause the IRS to treat your entire IRA as distributed as of the first day of the year in which the transaction occurred. This can result in immediate income tax on the full account balance and potential penalties, effectively undoing years of tax-advantaged growth.
Can my SDIRA use financing to purchase assets?
Yes, but the loan must be non-recourse, meaning the lender’s only collateral is the asset itself. You cannot personally guarantee the loan. Income tied to debt financing may also trigger Unrelated Debt-Financed Income (UDFI) taxes.
Can I manage or work on properties owned by my SDIRA?
No. You cannot perform repairs, provide services, or contribute “sweat equity” to assets your IRA owns. All work must be done by third parties and paid directly from IRA funds to avoid a prohibited transaction.