How To Setup A Self-Directed IRA (SDIRA)

How to set up a self directed ira

When it comes to retirement planning, a self-directed IRA (SDIRA) can help retirement savers planning for retirement access a variety of alternative investments.

As you explore your retirement saving options, it's a good idea to consider a SDIRA as a tax-advantaged investment vehicle. It offers the ability to make investments beyond the traditional stocks and bonds in most retirement accounts.

Ready to learn more about self-directed IRAs and take control of your financial future? Check out this investment advice about how to set up a self-directed IRA and what the best self-directed IRA might be for you!

What is a self-directed IRA (SDIRA) (definition)?

If you explore your retirement savings vehicles, you have likely encountered the traditional IRA and Roth IRA as tax-advantaged options. A self-directed IRA is a type of individual retirement account.

Like other IRAs, the contributions made to this investment vehicle enjoy tax advantages. Unlike other IRAs, a SDIRA can unlock access to alternative investments typically not available within an IRA.

The primary differentiator between SDIRAs and other IRAs is the type of investments you can hold within the account.

Can a traditional IRA be self-directed?

The answer is yes, but there are some differences. Unlike other IRAs, a self-directed IRA can give you the chance to make alternative investments typically not available within an IRA. These alternative investments are the major differentiator between SDIRAs and other IRAs.

Generally, regular IRAs have limited investment options, including stocksbonds, mutual funds, ETFs, and certificates of deposit. Although these types of investments are valuable ways to build wealth, they may not be the right fit for everyone.

That's when a SDIRA can come in handy. Through a SDIRA, you can access different types of investments and alternative assets such as real estate, limited partnerships, commodities, precious metals, livestock, cryptocurrency, and more.

Advantages and disadvantages of a self-directed IRA

This IRA has both positives and negatives, and there are some self-directed IRA rules. It's up to you to figure out if the good outweighs the bad and makes it worth it for you to invest in this way.


Here are some of the best things about a self-directed IRA.

More options and control

With this investing process, you gain more power and control over your investment options and choices. Instead of facing limited options, you can take control and choose the investments that make sense to you.

Easily diversify

You may seek to tap into investments with higher returns through this opportunity. Plus, you can create more diversification in your portfolio. This takes your risk factor down a notch and can give you more peace of mind when investing.

Possibility of making more money

You can possibly make higher earnings when using your own self-directed IRA. Since you choose what to invest in, you may earn more than you would if someone else made your investing decisions. But this is not a guarantee, and you still need to do your research.


The disadvantages and issues you may face when using a SDIRA. There are also rules to be aware of, which isn't a disadvantage as much as a caution.

Possible fees

Many self-directed IRAs have fees associated with setup and other costs. It's extremely important to research when setting up your IRA to make sure the account's value outweighs the costs.

Some transactions are prohibited

Some transactions are prohibited with a self-directed IRA. There are rules to follow, and you need to be aware of all of them when using a self-directed IRA.

You'll do the majority of the work

Do your due diligence when considering this approach. A lot of the work will fall to you, which can be a good or bad thing depending on the level of time and research you want to put into the task.


Fraud can happen and cause problems with your investments. Since the custodian of the self-directed IRA is not responsible for vetting investments, the possibility of fraud exists. You need to ensure you do your research to protect yourself against fraud.

Liquidity issues

It's not always easy to liquidate your investments. This may be an issue in some cases, and it's at least something to be aware of.

Higher risk

You will face greater responsibility for your investment choices. Typically, self-directed IRA investors have more risks built into their portfolios.

Therefore as an investor with this vehicle, it's essential to understand your risk tolerance.

Choosing the best self-directed IRA companies and how to set up a self-directed IRA

Now that you understand what this investment option is, let's explore how to set up a self-directed IRA with these instructions.

Choosing the best self-directed IRA companies

As mentioned earlier, most traditional banks and brokerage firms do not offer SDIRA accounts. However, you can open an account with a company that has the expertise and specializes in SDIRAs.

Some of the best self-directed IRA companies include:

Keep in mind that when it comes to determining the best self-directed IRA for you, it's crucial that you do your research.

The funding process

Once you open the account, you can add funds from your preferred account. You can take action on funding your account in three ways:

Direct contributions

Of course, you can open a SDIRA and start making contributions directly into the new account. You can make direct contributions via check deposits, automatic, or via one-time bank transfers.

With either a Roth or a traditional IRA, you will have to take note of any contribution limits established by the IRS, even if you choose the self-directed IRA option. As of 2024, you can contribute up to $7,000 per year into a traditional or Roth IRA, according to the IRS, either of which can be self-directed.

If you choose to work with a traditional IRA, you won't have to deal with any income restrictions. If you choose a Roth IRA, there are income limits to be aware of along the way.

For 2024, married couples filing jointly can contribute up to $7,000 to a Roth IRA if their annual before-tax income is less than $230,000, according to Charles Schwab.

On the other hand, if you are a married couple filing jointly that earns over $240,000, you will be unable to contribute to a Roth IRA.

A rollover

Do you have a different kind of retirement account, such as a 401(k) or 403(b)? You can roll these funds over into a newly opened SDIRA through a direct or indirect rollover.

No funds will need to be withheld for taxes in a direct rollover. In an indirect rollover, you will receive the funds through a check or wire transfer that will require you to pay a distribution fee of 10% to 20% - and then deposit the funds into your new SDIRA within 60 days.

Transfers from an existing IRA

Already have an IRA set up at another institution? You can transfer the funds into the same type of retirement account. For example, suppose you have a traditional IRA at another institution.

In that case, you can transfer your funds into a Traditional SDIRA and reinvest the money. The same would apply to Roth IRAs as well.

The investing process

When you open up a self-directed IRA, your SDIRA account administrator will act as a recordkeeper for your account. That said, you have the power and control to make investments within your IRA that fit within your investment goals. Once you open and fund your account, you will have the ability to choose your investments.

As you build your investments, you will need to stay vigilant to prevent any prohibited transactions. A prohibited transaction is defined by the IRA as improper use of your IRA by you or a disqualified person.

An example of a prohibited transaction includes the sale, exchange, or lease of property between your IRA and a disqualified person.

Once you've decided what investments will work best for your portfolio, you can make your investments in your SDIRA account.

Example of a self-directed IRA

Now let's get into an example of how a self-directed IRA works. Let's say that you open a self-directed IRA account. Making this choice allows you to invest in a wide range of assets that most retirement funds typically won't allow. These assets include:

  • Private equity, private placements, LLCs, Limited Partnerships, joint ventures, startups
  • REITs, residential real estate, commercial real estate, mortgage notes
  • Microloans, oil investments, livestock
  • Hedge funds, precious metals, and more.

Throughout the process, you will be responsible for choosing the appropriate investments for your situation. Additionally, as the record keeper, your SDIRA account provider will keep track of the types of investments you make.

That being said, it's essential to keep in mind that you can't invest in insurance, collectibles, and S-corporations.

Self-directed IRA rules and regulations

Based on regulations from the U.S. government, individual retirement accounts must be overseen by a financial institution. With other types of IRAs, the overseeing financial institution often limits the types of investments the account owner can make through the account.

However, with a self-directed IRA, the overseeing financial institution opens up the possible types of investments for the account owner. Instead of being limited to particular asset classes, most account owners can make a wide range of untraditional investments within their IRA.

An example of a prohibited transaction includes the sale, exchange, or lease of property between your IRA and a disqualified person.

In addition, an example of disqualified persons includes family members, beneficiaries of the IRA, or anyone involved in the administration of your IRA. Be sure to follow all self-directed IRA rules.

Who can benefit most from a self-directed IRA?

A self-directed IRA offers an excellent opportunity to take control of your retirement investment strategy. In most cases, experienced investors will benefit most from this account.

With the proper knowledge in place, experienced investors are in a unique position to capitalize on the benefits of a self-directed IRA.

However, a SDIRA is not the right fit for everyone. If you aren't an experienced investor or want to preserve a more liquid portfolio, then the alternative investment opportunities of a self-directed IRA may not be the best choice for you.

A self-directed IRA can be a great choice

Now you know how to set up a self-directed IRA and the best companies. By doing your research, assessing your risk tolerance, and choosing the right provider, a self-directed IRA can be a great choice that offers more flexibility and ways to invest in more than just traditional assets. Before you dive in, however, you must understand how investing really works.

You can do that with our completely free investing course bundle! And for financial inspiration and motivation, follow Clever Girl Finance on FacebookYouTubeTiktok, and Instagram!

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