What Is a Self-Directed IRA, and How Does It Work? [2025 Guide]

A self-directed IRA (SDIRA) gives you much more control over your account than a conventional IRA. It also allows you to invest in nontraditional assets. Unlike a regular IRA, which an administrator manages for you, an SDIRA is under your direct responsibility. 

Conventional IRAs typically focus on stocks, bonds, ETFs, mutual funds, and other traditional investments. In contrast, a self-directed IRA may invest in alternative assets like precious metals, crypto, and real estate. 

Setting up an SDIRA is an excellent way to diversify your investment portfolio and potentially generate high returns, provided you do your due diligence. 

Table of Contents

1. What is a self-directed IRA? 
2. How does a self-directed IRA work?
3. What types of investments can you include in an SDIRA? 
4. Rules and requirements to know 
5. Pros and cons
6. How to open a self-directed IRA

What is a self-directed IRA? 

A self-directed IRA is a variation of an individual retirement account (IRA). While it requires the oversight of an authorized trustee or custodian, the account owner manages it directly, hence the term “self-directed.” 

Investment options set a self-directed IRA apart from a conventional IRA. An SDIRA allows you to expand your investments beyond assets like bonds, stocks, ETFs, and certificates of deposit (CDs). A self-directed IRA can hold various commodities, including physical gold, real estate, crypto, and business entities.

It’s easy to see why the flexibility and diversity of the SDIRA appeal to many investors. However, managing this type of IRA takes considerably more forethought, research, and planning than a conventional individual retirement account requires.

Note that the custodian administering your SDIRA account can’t give investment advice, so you’re responsible for all research, investment choices, and key decisions in account management. As such, an SDIRA may be a good fit for you if you’re an experienced, diligent investor who understands the market, knows IRS rules, and is ready to shoulder any extra risks. 

How does a self-directed IRA work?

Self-directed IRAs are available through companies offering SDIRA setup and custody. A licensed custodian handles IRA documentation and ensures your account answers IRS requirements. At the same time, as we mentioned, you’re in charge of investment decisions. 

You can fund a self-directed IRA through direct contributions, as you would with a regular IRA. You can also roll over money from your current IRA or 401(k) to an SDIRA.

Traditional vs. Roth self-directed IRAs

A self-directed IRA can be a traditional or a Roth IRA. The main difference between the two is how they work tax-wise. Traditional IRA contributions are tax-deductible, but you must pay taxes on withdrawals when you retire and start making distributions from your account. 

In contrast, Roth IRA contributions don’t qualify for a tax break, but since you’re putting in taxed money, your account investments get a tax break as they grow, and any qualified distributions are tax-free as well.

Choose investment assets

Since self-directed IRAs focus on nontraditional assets, from gold and crypto to land and private businesses, it’s important to evaluate potential returns and risks before investing.

Specifically, you must verify you’re purchasing legitimate, qualifying assets and handling them correctly. For example, any real estate you hold in your IRA must be investment-only—so you can’t place a vacation home in your IRA and then lease it to your adult child. Violating these rules could result in hefty penalties.

How to manage your account

As a self-directed IRA holder, you’re responsible for looking after your investments. This includes tracking your assets, keeping accurate records, and following IRS guidelines. 

Your custodian will handle the bulk of technical account management: maintaining your investment records, collecting administrative fees, sending the appropriate forms to the IRS, and processing transactions when you make an investment. 

However, you’re accountable for checking your investments are IRS-compliant and assessing fair market value (FMV) for assets like private equities or real estate. You may consider working with an experienced financial advisor or a tax consultant to double-check that you’re making the right decisions for your SDIRA and that you’re following the tax law.

Cover IRA expenses

Any costs associated with a self-directed IRA investment, like maintenance or legal fees, must come from the IRA, not your personal account. Using your private funds to cover these expenses may count as an unlawful transaction. 

What types of investments can you include in an SDIRA? 

A main selling point of self-directed IRAs is the ability to invest in many different assets beyond stocks, bonds, and ETFs. Note that each commodity comes with distinct rules, risks, and growth potential, so research carefully before you choose your investment plan. 

Gold 

Gold has retained its value for thousands of years, which makes it an attractive hedge investment in times of economic instability. While physical gold has a limited growth potential and doesn’t pay dividends like stocks, it’s a stable store of value. 

Any gold and other precious metals you hold in an SDIRA must be IRS-compliant. For gold, this means purity of at least 99.5%. One notable exception is the American Gold Eagle coin (22 karat, or 91.67% purity). You must also store your gold in an authorized depository supervised by an IRS-approved custodian, not at home. 

Establishing a gold SDIRA is straightforward if you work with a reputable precious metal IRA company. For example, American Hartford Gold earns our “best overall gold IRA” designation. It helps clients set up a gold IRA in just a few days, with detailed guidance from its specialists. AHG partners with Equity Trust Company as a custodian and directs gold to secure facilities like the Delaware Depository.

Cryptocurrency

Crypto is the polar opposite of gold as an investment asset: it’s fairly new, intangible, lucrative in its growth potential, and super volatile. It could be a viable long-term option for investors who can handle the risk.

Cryptocurrencies like bitcoin and ethereum have shown impressive peaks and sharp dips over the years. Thus, investing in crypto could mean both major returns and significant losses. We recommend consulting an expert before you invest any significant amount in crypto.

You must hold your crypto IRA assets in an IRS-compliant digital wallet. A crypto IRA provider like iTrustCapital can help you navigate the process of opening a traditional, Roth, or SEP IRA funded with cryptocurrency.

Rental homes, land, and more

An SDIRA can also hold other investment assets, such as rental properties, farmland, private businesses, venture capital funds, and tax liens. 

Real estate is a popular choice with investors since it’s a stable, tangible asset that offers a passive income stream (if you lease your property) and has significant growth potential.

Rules and requirements to know 

Self-directed IRAs give you plenty of investment freedom and flexibility. Nevertheless, this wealth-building vehicle comes with a complex set of rules that regulate contributions, withdrawals, transactions, and more. 

Permitted transactions

SDIRAs enjoy several awesome tax breaks. On the flip side, stepping outside the limits of authorized transactions could disqualify your IRA account and cancel any tax benefits. 

For example, while self-directed IRAs can hold many asset types, these exclude collectibles (like antiques and art), S-corps, and life insurance policies. 

Self-dealing is one major restriction on SDIRAs. This means you can’t personally use the property in your account. For instance, you can’t direct your IRA to invest in a business you own, lend yourself or close family money from your IRA, or purchase a rental home and then stay in it. 

Moreover, you can’t do any maintenance work on IRA-held real property personally; it would count as an indirect contribution (aka “sweat equity”). If you aren’t sure whether a transaction is allowed, please talk to a professional. Don’t risk the penalties!

Contribution limits

The contribution limits for self-directed IRAs are the same as for regular IRAs. The IRS publishes updated amounts every year. In 2024, these were $7,000 per year for account holders under 50 and $8,000 per year for those over 50. 

Additional limits may apply to Roth IRA contributions based on your income and filing status.

Taxes

To reiterate, regular SDIRAs qualify for tax-deductible contributions, while Roth IRAs are eligible for tax-free withdrawals (provided you’re 59½ or older and have opened your account at least five years prior.)

For example, let’s say you contribute $5,000 to a regular SDIRA. You can deduct this sum from that year’s taxable income. However, when you retire and start making withdrawals, these are subject to taxes as ordinary income. 

In contrast, if you contribute $5,000 to a Roth IRA, this amount is still part of your annual taxable income. However, you won’t need to pay taxes on withdrawals upon retirement.

Withdrawal rules

You can start withdrawing money from your IRA at 59½. Any withdrawals you make before that are subject to a 10% premature withdrawal penalty (plus regular income tax). If you have a Roth IRA, you can withdraw contributions (not earnings) penalty- and tax-free at any time.

Also, you must start making required minimum distributions (RMDs) once you turn 73. 

Pros and cons

If you’re looking for a long-term investment strategy that goes beyond traditional stocks and bonds, a self-directed IRA could be the way to go. 

Pros

• Build a diverse portfolio of investment assets like precious metals, cryptocurrency, real estate, and businesses

• Protect your wealth from financial crises (e.g., if you buy stable assets like physical gold) 

• Generate more impressive returns than traditional assets (e.g., if you invest in crypto or fast-appreciating real estate)

• Enjoy the same attractive tax benefits, like tax-deductible contributions or tax-free withdrawals, as regular traditional and Roth IRAs

Cons

• Requires significant research to make sure you follow complex IRS regulations and avoid prohibited transactions

• Pay extra custodian and storage fees (depending on the assets your account holds)

• Face restrictions on using the assets you hold in your account

Overall, an SDIRA can be a terrific option for savvy investors who practice smart planning and careful risk management.

As for any risky asset, you should minimize the percentage of money you hold in any one asset. Also, if the asset appreciates in value, consider selling some to capture and preserve profits. Keep in mind that crypto is available through other means than an SDIRA.

How to open a self-directed IRA

Once you decide a self-directed IRA is the right option for you and choose the kind of investment assets you’d like to add to your portfolio, it’s time for the next steps.

1. Research providers

Look for an IRA company or a licensed custodian that works with the type of assets you’re interested in. For example, if you want to invest in physical gold, you may compare offers from Priority Gold, American Hartford Gold, and other reputable providers that can guide you through setting up a gold IRA. 

Choose a trusted company that offers competitive fees and quality customer support. Make sure you understand the fee structure (e.g., flat management fee versus a percentage of your assets) and how it may change as your investments grow. 

Tip

Take a peek at reviews and learn what other investors say about working with this provider.

2. Fund your account

After you open your SDIRA, you’ll need to fund it. You may do this through a direct contribution (following the annual limits) or transfer/rollover from another IRA. The second option may take a couple of days to several weeks.

When you purchase assets for your SDIRA, you’ll have to work together with your custodian, who will handle the transaction.

3. Manage your account

A self-directed IRA isn’t a one-and-done task. While your custodian will help with management, you’ll need to oversee your account, watch how your assets perform, and stay up-to-date with IRS guidelines. 

Maintain accurate records of your investments, gains, expenses, and recent valuations. Keep track of IRS Form 5498 (IRA Contributions Information), which your custodian should file on your behalf, and other relevant tax forms. 

Eventually, you’ll also need to work out a long-term strategy for selling assets, withdrawing funds, or starting distributions when you retire.