Self-Directed IRA: A Tutorial

Key facts

  • A Self-Directed IRA gives investors access to a wider range of investments than a Traditional IRA, but otherwise operates in similar ways.
  • Investors have the freedom to invest in almost any assets and are not just restricted to stocks, bonds, and mutual funds.
  • Contributions are made with pretax dollars, offering a significant tax benefit.

A Self-Directed IRA is an individual retirement account that gives you flexibility over your investment strategy. Unlike a Traditional IRA, you are not limited to stocks, bonds or mutual funds. Individuals are empowered to take charge of their retirement plan and choose the assets that best align with their risk tolerance and preferred investment strategy.

What Is a Self-Directed IRA?

Any IRA, whether it’s a Traditional, Roth, SIMPLE or SEP, can be a Self-Directed IRA. The only difference is the range of investment options available – real estate, limited partnerships, and gold are all available to the owner of a Self-Directed account.

Wider investment choices mean that you can more broadly diversify your portfolio and invest in more, including riskier, asset classes. In theory, riskier assets may give investors the opportunity to maximize their returns.

Who Is Eligible to Have a Self-Directed IRA?

Anyone can open a Self-Directed IRA, which has similar rules as a Traditional IRA. However, Self-Directed IRAs are not for everyone. They are best for people with an understanding of alternative asset classes, such as finance professionals.

What Are Permitted Investments in a Self-Directed IRA?

The only two things you can’t invest in are life insurance policies and collectibles. Everything else is fair game. So if you want to invest in mango trees in the Philippines, that’s allowed.

  • Examples of permitted investments: Rental property, private stock, LLCs, tax liens, foreign property, etc.
  • Prohibited investments: Life insurance policies, coins, artwork, cars, antiques, gems, and other collectibles.

As flexible as Self-Directed IRAs can be, there are still some rules. A qualified custodian must hold the fund’s assets on behalf of the account owner. The custodian processes all transactions on behalf of the fund owner. Many custodians impose additional rules and restrictions on what you can and cannot invest in, in addition to Internal Revenue Code restrictions.

Assets must be held for the benefit of the IRA account and not for the exclusive benefit of the owner or her family. It is not possible to buy your children a house using funds from your Self-Directed IRA. Once the IRA owns the asset, all associated profits and expenses must come from and return to the account.

Understanding Contribution and Withdrawal Rules

For investors under the age of 50, the annual contribution limit is $5,500 or total earned income, whichever is less. For those over the age of 50, the annual contribution limit moves to $6,500. Please note that this amount is the maximum contribution allowed across all your IRA accounts. For example, you can put $4,000 into a Roth IRA account and another $1,500 into a Self-Directed IRA. You can also fund a Self-Directed IRA with a rollover or an IRA-to-IRA transfer.

Like Traditional IRAs, all contributions are tax-deductible. Dividends and interest paid into the account are also not subject to tax while still in the account. Withdrawals after age 59 ½  are subject to federal taxes. Withdrawals before this age are subject to an early withdrawal penalty of 10%. The IRS may waive the penalty in cases of financial hardship. Also, like Traditional IRAs, Self-Directed IRAs are subject to required minimum distributions.


Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.

This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.