The Basics of the Self-Directed Retirement Account

Whether it is an IRA or a 401(k), moving to a self-directed account is about taking more control of your savings and future retirement lifestyle. While the standard IRA or 401(k) accounts limit investments to stocks, bonds, and other approved assets, self-directed accounts open other asset investment opportunities. Of course, there are still IRS enforced limits on asset types, but they are much more varied than the regular account.

What Assets are Allowed?

As of 2020, the IRS permits self-directed IRAs to invest in real estate, development land, promissory notes, tax lien certificates, precious metals, cryptocurrency, water rights, mineral rights, oil and gas, LLC membership interest, and livestocki. Collectibles in which you can invest includeii:

  • Artwork,
  • Rugs,
  • Antiques,
  • Metals – with exceptions for certain kinds of bullion,
  • Gems,
  • Stamps,
  • Coins – (but there are exceptions for certain coins),
  • Alcoholic beverages, and
  • Certain other tangible personal property.

The self-directed retirement account gives the investor an opportunity for diversification, as they can still have regular retirement accounts as well. Diversification into real estate and precious metals are the most popular, but possibilities are there for other interests. It can almost be a hobby as well as an investment vehicle.

Stay Within the Rules

This is the IRS after all, so there are volumes of rules. An advisor is a must before setting up one of these accounts. Not every investment firm will take them, especially when it comes to real estate and managing rental properties. You will need to find a custodian with this experience and a good track record.

The reason your choice of custodian is critical is that you are not allowed to do a lot of the management of the assets. The main rule is that you can make the buy and sell decisions, but apart from that, your custodian handles almost everything else; that includes the money. Contribution limits and withdrawal rules, as of this writing, are the same for self-directed IRAs and 401(k)s as for their regular counterparts.

There are other rules specific to asset types. One example related to real estate is that you cannot place a property in the account that you already own, and you cannot buy one into the account and use it personally, such as for a vacation home. Precious metals have their own rules, as do the other asset types. Great care should be taken to stay within the rules, as any prohibited transaction will cause your account to lose its tax-advantaged status.

There are Possible Downsides as Well as Advantages

Just as the stock market can be quite volatile, so can real estate prices, rents, precious metals valuations, and other collectibles carry their own risks. With your increased control over your investment buy and sell decisions comes added risk. The burden falls on you to do extensive due diligence before purchase decisions.

These types of accounts carry significantly higher fees than traditional IRA and 401(k) accounts, as the custodians are handling more tasks than just holding your stocks and executing buy and sell orders. Particularly with rental real estate, the custodian is tasked with handling the collection of rents, payment of utilities, and other property management tasks.

If you want to take more control of your financial future, a self-directed account can increase your tax-advantaged yields significantly. Take care in getting the right advice for setting it up and choosing the right custodian.

i How Self-Directed Accounts Work, Investopedia

ii Retirement Plan Investments FAQs,


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