How Do Self-Directed IRAs Work?

Why Retirement Accounts Matter

Planning for retirement is one of the most important financial decisions you can make. It’s not simply about accumulating savings, it’s about creating long-term financial independence and taking advantage of the unique tax benefits the U.S. retirement system provides.

Most people begin saving through an employer-sponsored plan like a 401(k). These plans are valuable, but they can feel limiting because investment options are typically restricted to mutual funds or company-selected portfolios. For investors who want more say in where their retirement dollars go, the next step is exploring Individual Retirement Accounts (IRAs), and, in particular, Self-Directed IRAs.

A Self-Directed IRA opens the door to a much wider world of investment opportunities, including many asset classes not available in a regular IRA. This flexibility allows you to take greater control of your retirement future, invest in areas you understand, and better align your portfolio with your long-term goals.

What Is a Self-Directed IRA?

A Self-Directed IRA (SDIRA) is not a special category defined in the Internal Revenue Code. Instead, it’s a regular IRA (traditional, Roth, SEP, or SIMPLE) that allows you to direct your funds into both traditional and alternative assets.

With a standard IRA at a brokerage, your choices are usually limited to stocks, bonds, and mutual funds. In contrast, a Self-Directed IRA permits you to diversify into investments such as real estate, private equity, precious metals, cryptocurrencies, and more. Importantly, these accounts must still follow IRS rules: you cannot invest in collectibles, life insurance, or enter into transactions with disqualified parties such as close family members.

The defining feature of a Self-Directed IRA is freedom. Instead of being confined to Wall Street offerings, you can invest in assets you understand best. This flexibility is what makes SDIRAs especially attractive to investors seeking both diversification and control.

Learn More: What Can I Invest in With a Self-Directed IRA?

The Self-Directed IRA vs. a “Regular” IRA

At first glance, a Self-Directed IRA may seem similar to a regular IRA, but the key difference is the scope of investment options. Traditional custodians, such as large banks or brokerage firms, only permit investments in conventional securities. This limitation exists because those institutions earn revenue by offering and managing those products.

Self-Directed IRAs emerged to fill the gap for investors who wanted to include alternative assets in their retirement plans. Instead of restricting your choices, self-directed custodians, such as IRA Financial, act as passive administrators. They hold the IRA’s assets and ensure compliance, but they do not sell products or offer financial advice. You are the decision-maker.

This distinction is critical for investors who want to diversify beyond public markets. According to the Retirement Industry Trust Association, only 4–7% of IRA assets are invested in alternatives today, but that number continues to grow as more investors seek protection from market volatility and inflation.

Why Choose a Self-Directed IRA?

There are three major reasons why investors choose a Self-Directed IRA: control, diversification, and tax benefits.

With a Self-Directed IRA, you, not the bank or brokerage, decide when and how to invest. This independence appeals to investors who prefer to apply their own expertise, such as in real estate or small business ventures. By allowing alternative assets, SDIRAs also give you the ability to balance your portfolio with investments that don’t always move in step with the stock market. This spreads risk and can open the door to new avenues for growth.

Just as important, Self-Directed IRAs provide the same tax advantages as other retirement accounts. Traditional SDIRAs grow tax-deferred, while a Self-Directed Roth IRA can provide entirely tax-free qualified withdrawals. Combining flexibility with tax efficiency makes Self-Directed IRAs a uniquely powerful retirement planning tool.

Types of Self-Directed IRAs

Any IRA type can be self-directed, but each has distinct rules and benefits:

• Traditional IRA: Contributions may be tax-deductible, earnings grow tax-deferred, and withdrawals are taxed as ordinary income. Early withdrawals before age 59½ typically incur penalties, and required minimum distributions (RMDs) begin at age 73.
• Roth IRA: Funded with after-tax dollars, Roth IRAs allow tax-free withdrawals in retirement if conditions are met. There are no RMDs, making Roth IRAs especially attractive for long-term wealth transfer.
• SEP IRA: Designed for self-employed individuals and small businesses, SEP IRAs allow high contribution limits based on compensation. Contributions must be made for all eligible employees.
• SIMPLE IRA: Intended for small businesses with fewer than 100 employees, SIMPLE IRAs offer a straightforward retirement option with employer contributions and higher limits than a Traditional IRA.

The Power of Tax Advantages

One of the greatest strengths of any retirement account is the ability to grow your investments with tax advantages that aren’t available in a standard brokerage account. When you invest personally, you may owe taxes each year on dividends, interest, or capital gains. That ongoing tax “drag” can significantly slow the growth of your portfolio over time. Retirement accounts remove that friction.

With a pretax Self-Directed IRA, your contributions may be tax-deductible in the year you make them, lowering your taxable income. From there, all earnings—whether from rental income, the sale of real estate, or the appreciation of alternative assets like precious metals or cryptocurrency—are sheltered from taxes as long as they remain inside the account. Taxes are only owed when you withdraw funds in retirement, ideally when you may be in a lower tax bracket.

Read More: Tax Deferral vs. Tax Free

A Self-Directed Roth IRA takes the opposite approach. You don’t get a tax deduction upfront, since contributions are made with after-tax dollars. But the trade-off is powerful: once certain conditions are met (generally, the account has been open at least five years and you’re age 59½ or older), all withdrawals (including earnings) are completely tax-free. Unlike a traditional IRA, there are no required minimum distributions, which allows the account to grow for as long as you choose.

This dual framework gives investors flexibility. Some choose a traditional IRA for the immediate tax deduction, while others prioritize the long-term benefit of tax-free withdrawals with a Roth. Many use a combination of both to hedge against future tax changes.

In either case, the impact of compounding without tax drag cannot be overstated. Over decades, the ability to reinvest 100% of your gains can result in significantly greater retirement wealth. That’s why the tax treatment of Self-Directed IRAs makes them not just an investment vehicle, but a powerful long-term planning tool.

Custodian vs. Checkbook Control

Self-Directed IRAs can be structured in two primary ways, and understanding the difference is key to choosing the setup that fits your investment style.

In a custodian-controlled model, your IRA custodian holds the assets and must approve each transaction before it is executed. For example, if you want to purchase real estate, you submit the contract and supporting documents to your custodian. Once they review and approve the transaction, the custodian releases the funds. This structure is straightforward and ensures a second layer of compliance review, but it can also slow you down.

The alternative is known as checkbook control, which is achieved by forming an IRA-owned Limited Liability Company (LLC). With a Checkbook IRA, your IRA owns 100% of the LLC, and you, as the account holder, serve as the LLC’s manager. The LLC opens its own bank account, giving you the ability to write checks or send wires directly for investments. Instead of waiting for custodian approval, you control the timing and execution of every transaction. This structure is especially attractive to investors who want to act quickly, such as those purchasing real estate at auction, funding private loans, or managing multiple ongoing investments.

Checkbook control also provides greater privacy and efficiency. Custodians are still required to oversee reporting and maintain the tax-advantaged status of the IRA, but they are not involved in each transaction. This means fewer delays and, often, lower long-term costs. However, it also means you are responsible for maintaining strict compliance with IRS rules, since there is no custodian reviewing transactions beforehand.

In short:

• Custodian-controlled IRAs offer simplicity and an added compliance safeguard but may involve delays and higher fees.
• Checkbook control IRAs maximize speed and flexibility, giving you true autonomy over your retirement funds, but require a higher level of responsibility and recordkeeping.

Both models can be effective. The right choice depends on how actively you plan to invest and how much direct control you want over your retirement assets.

Custodians and Compliance

Even with checkbook control, a passive custodian is required to maintain your account’s compliance. The custodian holds your IRA’s assets, processes transactions, and ensures reporting requirements are met. They do not provide investment advice or recommend assets.

One of the most critical areas of compliance is avoiding prohibited transactions. For example, you cannot buy a home with your Self-Directed IRA and live in it yourself, nor can you lend money to close relatives using IRA funds. These rules are in place to protect the tax-advantaged nature of the account. Working with a qualified custodian helps you stay on the right side of IRS regulations.

Opening a Self-Directed IRA

Opening a Self-Directed IRA with IRA Financial is straightforward. You can set up your account online or through our mobile app (we’ll help you every step of the way as needed). Once established, you can fund it either through new contributions or by rolling over funds from an existing retirement plan.

The setup process typically takes between one and three weeks, depending on the speed of your current custodian and, if applicable, the state processing times for an LLC. Once funded, your IRA is ready to invest, giving you the freedom to take control of your retirement savings.

2025 IRA Comparison Chart

IRA Type	Eligibility	2025 Contribution Limit	Tax Treatment & RMD Rules
Traditional / Roth IRA	U.S.-based earned income; Roth subject to income limits	$7,000 (under 50); $8,000 (50+)	Traditional: tax-deferred, RMDs start at 73; Roth: tax-free growth, no RMDs
SEP IRA	U.S. business owner or employer	Up to 25% of compensation, max $70,000	Traditional: tax-deferred, RMDs start at 73; Roth: tax-free growth, no RMDs
SIMPLE IRA	Small business (<100 employees) or self-employed	$16,500 (under 50); $20,000 (50+)	Traditional: tax-deferred, RMDs start at 73; Roth: tax-free growth, no RMDs

Breaking Down the Chart in Plain Language

For individuals, the Traditional and Roth IRA remain the most widely used retirement accounts. The Traditional IRA is ideal if you want the immediate benefit of a tax deduction, while the Roth is powerful if you prefer tax-free income in retirement. Income limits apply to Roth contributions, but anyone can convert to a Roth regardless of income.

For small business owners and self-employed individuals, the SEP and SIMPLE IRAs offer higher contribution limits. The SEP IRA allows contributions up to 25% of compensation, with a maximum of $70,000 in 2025—making it especially attractive to entrepreneurs looking to save aggressively. The SIMPLE IRA, while carrying slightly lower limits, balances affordability with the ability for both employers and employees to contribute.

Each plan has trade-offs, but with the self-directed option, all can be used to access alternative assets that traditional custodians would otherwise restrict.

The Bottom Line

A Self-Directed IRA is more than another retirement account, it’s a strategy for freedom, flexibility, and empowerment. By moving beyond the limitations of traditional investment products, you gain the ability to put your retirement funds to work in ways that reflect your expertise and confidence. For some, that means owning rental properties or precious metals. For others, it may mean investing in startups, private loans, or emerging markets like cryptocurrency. Regardless of the path, the goal is the same: to build a diversified, resilient retirement portfolio while taking full advantage of tax benefits.

At IRA Financial, we guide you through every step of the process—from choosing the right account type, to setting up custodian or checkbook control structures, to ensuring ongoing compliance with IRS rules. With the right support, you can invest freely, grow securely, and retire on your own terms.

Invest freely. Retire confidently.

Frequently Asked Questions (FAQ)