A Closer Look: Self Directed IRA Rules You Should Know About

A self-directed Roth IRA (short for Individual Retirement Account) is one of the most popular types of retirement accounts in the United States. Currently, 19 percent of households in the country have one.

Are you thinking about starting a self-directed IRA for yourself? Are you unsure of where to begin?

Read on to learn more about a self-directed IRA and the self-directed IRA rules everyone ought to know.

What Is a Self-Directed IRA?

A self-directed IRA is a type of retirement account that holds investments prohibited by regular IRAs (mortgages, real estate, private placements, notes, etc.). It is administered by a trustee or custodian, but it is also directly managed by the person who holds the account. This is why it’s known as a “self-directed” IRA.

In general, self-directed IRAs are best for those who are familiar with the investing world and understand the alternative investments these types of IRAs allow. If you’re looking to diversify your investment portfolio and already have a good handle on the basics of retirement planning, this might be a good option for you.

Self-Directed IRA Rules

If you’re going to set up a self-directed IRA, there are specific rules you’ll need to know and follow. The following are some of the most important ones to keep in mind:

  • No engagement (from you or your self-directed IRA custodian) with disqualified persons, including your beneficiaries, family members, and entities owned by these individuals
  • Cannot be used for individual benefit (for example, rental income from investment properties owned by the IRA must be deposited into the IRA account, not a personal account)
  • No investing in disallowed assets (this includes collectibles, life insurance, S-corps)

Clearly, self-directed IRAs are not for the faint of heart. If you don’t abide by the rules outlined above, you could face serious penalties and legal issues.

How to Choose the Best Self-Directed IRA

Are you interested in setting up a self-directed IRA? If so, here are some tips that can help you choose the right one for your needs:

  • Look for low fees: Don’t spend an arm and a leg in fees; always compare fee schedules before making a final decision 
  • Prioritize customer service: Read reviews and find out how good the company’s customer service is before you agree to work with them
  • Prioritize investment knowledge: Find out how long the company has been in business and how much experience its advisors have working with clients like you 

The most important thing to remember is to take your time when choosing your self-directed IRA. This is a big investment decision, and you shouldn’t give in to pressure from someone who just wants you to choose their company over someone else’s.

Set Up a Self-Directed IRA Today

Now that you know more about self-directed IRA rules and how to choose the right one for you, it’s time to get started. Keep the tips listed above in mind so you can start saving for retirement right away.

If you want to learn more about retirement planning or setting up a self-directed IRA for real estate, we have lots of resources that can help. Check out some of the other investment articles on our site today.