A lot of people are tired of watching their whole retirement ride the stock market. A self-directed IRA lets you put some of it into things you can see and understand, like real estate and mortgage notes.
A self-directed IRA follows the same tax rules as any IRA. The difference is what it can own. Here's why more investors are making the switch, and what to watch out for.
1. You choose what to invest in
Most IRAs at big brokerages only let you buy stocks, bonds, and funds. A self-directed IRA can also hold real estate, private loans, mortgage notes, private companies, and precious metals. You decide.
2. You can invest in what you know
If you understand real estate better than the stock market, why keep all your retirement money in stocks? A self-directed IRA lets you invest where you have real knowledge.
3. You can add income that doesn't depend on Wall Street
Assets like mortgage notes pay on a set schedule. That income goes into your IRA whether the market is up or down. For many people, that steadiness is the whole point.
4. Real assets behind your money
When your IRA lends on a first mortgage note, there's a house behind the loan. That's not a guarantee, but it's something you can drive by and look at. You can't say that about a share of stock.
5. The same tax benefits as any IRA
In a traditional self-directed IRA, your earnings grow tax-deferred. In a Roth self-directed IRA, they can grow tax-free. Interest from a note stays inside the account, working for you. Traditional or Roth? Here's how to choose.
6. More control
You pick the deals. You can see exactly what your money is in. Some people go a step further with "checkbook control," where the IRA owns an LLC that you manage. That speeds things up, but it adds more responsibility and more ways to make a costly mistake. Talk to your CPA before you go that route.
7. You can start by moving money you already have
You don't need new money. You can transfer from another IRA, or roll over a 401(k) from an old job. Done the right way, it's not a taxable event. Your new custodian handles the paperwork.
The risks to know
Self-directed IRAs aren't for everyone. Go in with your eyes open.
- Fraud. Custodians hold your assets and process paperwork. They don't check whether a deal is any good. Bad actors know this and target self-directed IRA owners. Do your homework on anyone asking for your IRA money, including me. My free lender guide has the questions to ask.
- Strict IRS rules. Your IRA can't do deals with you or close family. Break the rules and the whole IRA can be taxed. Here are the rules.
- Fees. Self-directed custodians charge setup and yearly fees. Compare a few.
- Less liquidity. Real estate and notes can't be sold with one click like a stock.
- No guarantees. Any investment can lose money.
Is it right for you?
A self-directed IRA works best for people who want more control and are willing to learn. If you don't want to find and manage deals yourself, you don't have to. Your IRA can lend to an experienced operator who does the work, while your money stays inside your IRA.
General education, not tax, legal, or investment advice. IRA rules are strict and change over time. Talk with your custodian and a CPA or tax attorney before you invest. All investing has risk, including loss of principal.