Self Directed IRA Basics

You may have heard the terms Self Directed IRA, Alternative IRA, or Real Estate IRA, but (like most investors) you could probably use some clarity. What exactly is a Self Directed IRA? What benefits does it offer? What kind of impact can a Self Directed IRA have on your retirement portfolio? 

What is a Self Directed IRA? 

A Self Directed IRA is just like a regular IRA. It is a retirement account that you contribute funds to and those funds grow via various investments. The only difference between a standard IRA and a Self Directed IRA is what kinds of investments you can choose. In a standard IRA you will be investing in stock market products like stocks, bonds, and mutual funds.  In a Self Directed IRA you can choose almost any asset. Popular Self Directed IRA assets include real estate and private placements.  

Why have you never heard of a Self Directed IRA? 

The concept of a Self Directed IRA is a novel one to many, as the majority of Americans hold their IRAs in large brokerage houses. They automatically assume that IRAs can only be invested in stocks, bonds and mutual funds since those are the products offered to them. Brokerage houses do not accommodate alternative investments due to the administrative burden involved and loss in commission. 

What are the benefits of a Self Directed IRA? 

  • Portfolio Diversification – A Self Directed IRA allows investors to diversify their retirement portfolios to include assets which are inaccessible in a standard IRA. Self Directed IRA custodians specialize in custodying privately held investments like real estate, private businesses, promissory notes, cryptocurrencies and more, all within a tax-advantaged account. 
  • Hands-on Investing – Self Directed IRAs encourage individuals to invest in what they are familiar with. It provides investors with the power to put money in investments which make sense for them personally. Different people have different strengths and expertise, and it makes sense that their investments should reflect those differences. 
  • Stability – With a Self Directed IRA, one can diversify from the volatility of the stock market, and invest in products with a steadier and more reliable revenue stream. Popular choices include rental real estate, secured promissory notes, and tax liens. 

How does a Self Directed IRA work? 

Like its standard counterpart, a Self Directed IRA is held by a qualified Custodian. The Custodian will hold your funds, execute transactions, and assist with any necessary tax filings. When you want to make a specific investment, here are the basic steps: 

  1. Choose an asset – This part is fully up to the investor. (In most cases, a Self Directed IRA Custodian will not offer specific financial advice.) You should choose an asset for which you have a good grasp of its potential profitability, as well as one that you have the means to manage. 
  1. Submit an Investment Authorization Form – Fill out the form, submit it to the Self Directed IRA Custodian, and the Custodian will perform the transaction. Of course, certain assets will have more extensive paperwork associated with their purchase. This is not due to the Self Directed IRA, but rather to the nature of the asset itself. For example, real estate often possesses a more involved process, including title and deed processing. 

Are there different types of Self Directed IRAs? 

Yes. A Self Directed IRA investor who wants to invest in alternative assets has a number of different account options. 

  • Custodial Self Directed IRA – This is the classic Self Directed IRA where the Custodian not only holds the account but also actively performs the transactions. 
  • Checkbook IRA – This is a type of Self Directed IRA where the account holder can perform transactions on their own. This investing power can be accomplished via various means. Two of the most popular are the IRA LLC and the IRA Trust. 
  • Self Directed Solo 401(k) – Although not technically an IRA account, the Solo 401(k) is often the better alternative for those who qualify. This is a retirement account that is reserved for those with self-employment income. It has checkbook control, increased contribution limits, and the possibility of a personal loan. 
  • Asset Specific IRA – This is a specialized form of a Custodial Self Directed IRA that limits the investment assets being offered. This kind of retirement account is often heavily marketed to ride the popularity wave of the specific assets being offered. The account will be optimized for the specific asset, but usually possesses the downsides of greatly increased fees and no ability to diversify. Assets that currently enjoy their own Self Directed IRA accounts include real estate and cryptocurrency. 

How do you set up a Self Directed IRA? 

The process to set up a Self Directed IRA is easy: 

  •  Open an account by completing an application online. You will be asked some basic questions, like, “What kind of account are you opening?” and “How are you funding your IRA?”. 
  • Fund the account by either transferring an existing IRA or rolling over a former Employer’s Plan like a 401(k) or 403(b). 
  • Invest the funds by instructing Madison Trust Company to issue a check or a wire to the investment of your choice. 

What can a Self Directed IRA invest in? 

It is hard to detail a complete asset listing because a Self Directed IRA can legally invest in almost any asset. The only two assets that are off-limits are collectibles and life insurance settlements. Some of the more popular investments include: 

  • Real Estate (rentals, commercial property, raw land, etc.) 
  • Private Placements (Private Equity Funds, Hedge Funds, LLCs, etc.) 
  • Promissory Notes (secured and unsecured) 
  • Cryptocurrencies 
  • IRA LLCs 

Interested to Learn More? Reach out to us, and one of our IRA Specialists will answer all of your questions.

Self Directed IRA – Pros and Cons 

The choice to invest with a standard IRA or Self Directed IRA can depend on multiple factors. Investors are unique, their investing goals are unique, and the way to achieve those goals can differ greatly. Here are the basic differences between a standard IRA and a Self Directed IRA. 

 Standard IRA Self Directed IRA 
Asset Choice Standard stock market products. These can be individual stocks as offered by online trading platforms or aggregated products like mutual funds.   Diverse asset choice. Investors can purchase real estate, shares in a private business, or precious metals and immediately transform them into retirement assets. Almost any asset can be purchased with the exception of collectibles and life insurance settlements. 
Asset Security No guaranteed security. The value of the IRA will generally rise and fall with the stock market. No guaranteed security. Some assets like real estate tend to retain value while others like cryptocurrency can be more volatile. 
Fees Standard fee schedules are asset-based. That means a defined percentage of the overall account will be assessed as the annual fee. The larger the account (and the more it grows,) the higher the fee charged. Different Self Directed IRA companies have different fee structures. Madison charges a flat annual fee that is not dependent on account size. There can also be transaction fees for active buying and selling. 
Account Opening Simple. Can be done in 15 minutes. Madison’s custodial Self Directed IRA can be opened in 15 minutes. A Checkbook Self Directed IRA can take longer to set up due to the establishment of the LLC or Trust. 
IRS Rules All retirement accounts are subject to the same rules. A standard IRA will normally not run into any potential infractions due to the third-party structure of the investing. A Self Directed IRA has the same rules as a standard IRA. However, due to the more hands-on nature of the account, account holders need to be more sensitive to rules like Prohibited Transactions. 
Sourcing Most banks, brokerages, and online trading platforms offer IRA accounts. Offered exclusively by Custodians who specialize in Self Directed IRAs (and the asset-specific IRAs that utilize them.) 
Ideal Client Workers who want to save for retirement but would prefer that their funds be invested by a qualified third party. This could be because they trust in the stock market or simply don’t have the time to pursue other investments. Workers who want to actively grow their retirement funds in assets that make sense to them. Self Directed IRA investors often have a do-it-yourself spirit or wish to pursue a solid investment opportunity that is not available with a standard account. 

What are the fees for a Self Directed IRA? 

The cost to set up a Self Directed IRA with Madison Trust Company is $50, and $95 per quarter to maintain. You can learn more about Self Directed IRA fees here. 

What are the contribution limits for a Self Directed IRA? 

The contribution limits for a Self Directed IRA are the same for a standard IRA. Please see Contribution Limits for a more detailed listing. In addition to the annual contributions, Self Directed IRA account holders may also roll over any amount from another retirement account.  

What are Prohibited Transactions in a Self Directed IRA? 

IRC Section 4975(a) states that an IRA owner may not take any personal benefit from his or her plan before the age of retirement. Dealings that violate this clause are known as “Prohibited Transactions.” The simple definition of a prohibited transaction is: any transaction between a “Retirement Plan Asset” and a “Disqualified Person”. 

To learn more about how to apply this formula in your Self Directed IRA, please visit our page on Prohibited Transactions. 

The Madison Advantage 

Madison Trust is at the forefront of the Self-Directed IRA industry due to its impeccable customer service and sensible fee schedule. When you call Madison Trust, you will be serviced by a friendly and knowledgeable member of our team. Our staff members undergo CISP training (the most comprehensive IRA training available), allowing them to guide you through complex transactions with care, sensitivity, and precision.   

Even better, our fee schedule is a flat rate and easy to understand. The cost to set up a Self Directed IRA is $50, and $95 per quarter to maintain. We do not charge any asset-based fees (which would increase as your account value increases). See how our annual fee compares to others in the industry. 


A Self Directed IRA provides investors with the means to pursue alternative investments that are not available with a standard account. Opening an account is fairly simple, as is the investing process itself. Due to the hands-on investing model, the Self Directed IRA investor should be educated in the basics of Prohibited Transactions. From a growth perspective, a Self Directed IRA will often charge lower fees than a standard retirement account, thereby leaving more funds available for investing.  

Interested to Learn More? Reach out to us, and one of our IRA Specialists will answer all of your questions.