What Is A Self-Directed IRA And How Can I Use It?

I recently had the pleasure to interview Will Sugg, a fellow personal finance blogger that works towards his fortune with Self Directed IRAs. I am no professional in the arena, so he was very willing to answer the few questions I had about them – I hope they can demystify the Self Directed IRA questions YOU may have. 1. What is an Self Directed IRA?

A Self Directed IRA is an IRA that allows you to buy or invest in things other than Mutual Funds, Stocks and Bonds. Self Directed also means that the custodian is merely a holding bank account for your retirement funds and you have to “Direct” them to buy or invest in the Asset you want to hold in your retirement account. The “Direction” for the custodian that I use is a several page form that you fill out with all the details of the investment, then I fax or email it to the custodian. It tells them what to do, what to expect, and where to send a check. I think of a Self Directed IRA as “The Do It Yourselfers” retirement account/plan. If you have specific knowledge bout some area that makes money then you can profit from that in your IRA. There is very little that you cannot invest in with IRA funds. See a list below.

2. Who can use a Self Directed IRA?

Anyone can open a Self Directed IRA as long as you have earned income or your spouse does. Basically if you can open an IRA with a bank you can open Self Directed IRA. Business owners can benefit significantly once they realize the potential of this type of IRA or 401K.

3. What is the difference between a SD IRA, a Traditional IRA, and a ROTH IRA?

There is really only 2 choices in IRAs; Roth or Traditional. Either can be Self Directed.

4. Where can I sign up for one?

You open a Self Directed IRA with a custodian that understands what they are. I’ve listed several on my blog here.

5. Why should I use a SD IRA over a ROTH or a Traditional IRA?

You can have either as Self Directed. If you are opening a new account and you’re not yet retired I would say that you should open a Roth account since the growth it creates is tax free on harvest. I have both a Traditional and Roth Self Directed IRA but almost all of my investment activity is done in the ROTH. The reason you want to Self Direct your IRA is so that you can use your specific knowledge to help your retirement account grow instead of relying on others opinions and management skills.

6. How much can I invest in one?

If you already have a Roth or Traditional IRA established at another custodian you can roll it over to a Self Directed custodian. If your opening a new account with a Self Directed Custodian. Right now the IRA says you can contribute 4,000.00 per year. That figure can change as dictated by the IRA and congress. Of course for the Roth type you are also constrained by the Earned Income limits set by the IRS.

7. Can I roll a ROTH or Traditional IRA over to an SDIRA? How about my 401k?

Sure you can roll over either type of IRA into a Self Directed Custodian. It’s very simple and painless.

8. How long have you been investing in SD IRAs?

I’ve been using my Self Directed IRA for investing for the past 4 years.

9. Where did you learn about SD IRAs?

I learned about using an IRA to buy Real Estate from talking with family, friends, and some business contacts that were using theirs to do the same thing. Then I did a lot of research on the internet to determine which custodian I like better and opened an account. I first rolled just a small amount into it so I could do one transaction. Once I got the hang of it and understood how this could significantly help my retirement plan I rolled the rest of the money I could into my account.

10. What CAN’T I invest in with an SD IRA?

There are such things as Prohibited Investments and you need to learn what they are. Here is a short list: – Artworks – Rugs – Antiques – Metals – Gems – Stamps – Coins – Alcoholic beverages – Certain other tangible personal property But most folks wouldn’t want to invest in these any way. Here is the IRS language about Prohibited Investments in case you want to see everything. You also can’t profit from the IRA meaning you can’t loan yourself money from it or buy a Rental Property and then go live in it, that is considered Self Dealing.

11. I want to invest in real-estate through my SD IRA. How do I go about telling my brokerage account that I’m buying a house with my SD IRA?

This example is just to illustrate of the process there is Due Diligence you need to perform to ensure that the investment is prudent for you. It also assumes that you have the entire purchase price in cash. You first open a Self Directed IRA with a Custodian that understands what that really means. Not all IRA’s are self Directed so that you can buy Real Estate in them. Check out the short list from above, all of those custodians are real Self Directed Custodians. After you have the account open and funded, you find the investment. In this case some Real Estate property and get it under contract. Have your agent if there is one open Escrow. Then it’s merely ending the Custodian the “Direction of investment” forms and them sending a check for the purchase price. Once Escrow closes the transaction and records the deed your IRA is now owner of the property. Your SDIRA can borrow money to fund the purchase, however the down payment required is usually 30% or more. That however is another topic for another day…

12. When can I withdraw from my SD IRA?

The same times as you can with any other IRA or 401K plan (59 1/2).

13. Is my SD IRA funded by pre-tax or post tax dollars? Do I pay a tax when taking it out or when I efile?

Depends if your IRA account is Roth or Traditional.

14. Can I have an SD IRA for my spouse if they are unemployed (contribute twice as much)?

If you can do it with a Roth or Traditional IRA you can do it in a Self Directed IRA.

15. Is there a phase-out schedule like in the ROTH IRA that pertains to an SD IRA?

Yes, these apply to your Roth IRA whether or not it’s Self Directed.

14. What is your SD IRA invested in?

My Self Directed IRA is 100% invested in Promissory Notes secured by either Real Estate or in some cases by Mobile Homes. Some of the Notes I bought at a discount and others I lent the entire amount of the Note to the Borrower. I’m still in the cash generating mode of investment so I am investing to get cash flow going. Once I build up a nice monthly cash flow I may move to another type of asset. Certainly in the long term goals I have I want to own Real Estate.

Will clearly has a vast knowledge about the subject and I’m happy he was willing to take an interview for it – I suggest you all check out his website regularly at http://willsugg.com/irablog/ to keep up to date on the latest happenings in the SDIRA arena!

Filed Under: 401KadviceCompensationfinancial educationHouseInterviewsInvestingReaders RequestsReal EstateRetirementROTH IRATraditional IRA

  • I have recently switched to a self directed IRA and am finding that it is very beneficial. I am investing in realestate and have total check book control.

  • I open these accounts on request by some of my investors. I highly recommend these programs.

    Great post on this important topic. Hope to see more posts on this topic.

    High Return Investing with Dax’s last blog post..Reader Questions on Self-Directed IRA’s

  • Kyle

    If you direct your broker to purchase a promissory note for your self directed IRA, and the maker of the note defaults on the note, can I as the owner of the IRA enforce the note, or does my broker have to enforce it?

  • Dylan

    Is there management fees on a SD IRA?

    I’m looking to roll over and out of a current Roth IRA that has $65/year management fee, to one with out a management fee. No Load Mutual funds come to mind.

  • Pat Thomas

    I want to pay off a business building that is owned by an irrevocable trust that is mine and my husbands. We rent out half of the building and occupy the other half and sublet an office on our half. We have a 401k plan and it restricts us from using funds to payoff the mortgage. Because we own it through the trust. I want to roll over the 401k funds into a self directed IRA and then let the IRA purchase the building and we pay the IRA back. Real loan but we are paying us the interest instead of the bank. How can I do this?

  • Hi Hank,
    I’m re-incarnating my old blog into a new model. The old link above is no longer active. I’ve narrowed the scope to my new blog only include Self Directed Roth IRA’s. I’ll be posting a whole bunch of new content soon and have a ton of ideas on things I’d like to do. I’m really just beginning at TheTaxFreeInvestor.com. Thanks for keeping this post up.


    PS. To answer Pat’s Question above. It really sounds like what your trying to do is called self dealing. Self Dealing is a prohibited transaction. I would suggest to buy a different building using the SDIRA that will operate at the desired profit equal or greater to your payment and pay your mortgage payment that way. Just a thought.
    .-= Will´s last undefined ..If you register your site for free at =-.

  • Ted

    “When can I withdraw from my SD IRA?

    The same times as you can with any other IRA or 401K plan (59 1/2).”

    You can withdraw contributed amounts from a Roth IRA at any time. Just not the earnings.

  • Self directed IRA is the Individual Retirement account that is opened and maintained by an individual and the savings of this account is meant to the retirement life. It is one of the most popular retirement plans in the United States.

  • Melwheeler89


    I am also looking at a Self Directed IRA. The two companies I have spoke with are http://www.selfdirectediragroup.com and http://www.pensco.com. Both seem to really understand SD IRA's but I was curious who you used since it seems you are having a positive experience.



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  • David Emil Lombard

    Thanks for this great Q & A. I am looking further into many options and this definitely gave me another perspective.

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  • harlyd

    You can’t us IRA funds to do business with yourself or any other 
    Disqualified Person.
    It is calles a prohibited transaction. http://www.broadfinancial.com/prohibited-transactions                                                                         ,      

  • TexasPropertyInvestor

    Just curious on the response to this as well. I am a real estate investor and I have new investors who come to me and want to invest in my projects but first need to know where to start with their SD IRA. I usually just tell them to do their own research because I can’t personally vouge for any.