Self Directed IRA Basics

updated: 6/22/2022

If you’re looking to start investing with a Self Directed IRA, you’re in the right place! You may be wondering:  

  • What is a Self Directed IRA? 
  • What benefits does it offer? 
  • What kind of impact can a Self Directed IRA have on your retirement portfolio? 
  • And more!  

Key Points

  • A Self Directed IRA is a retirement account held by a custodian that lets you invest in alternative assets such as real estate, private placements, promissory notes, and more. 
  • Self Directed IRAs give investors the power to diversify their portfolio, invest in what makes sense to them personally, and hedge against the stock market. 
  • Self Directed IRAs have certain benefits over Standard IRAs, including greater asset choice, asset security, flat fees, and more. 
  • There are 3 simple steps to set up a Self Directed IRA: (1) Open an Account (2) Fund Your Account (3) Make an Investment. 

What is a Self Directed IRA? 

Illustrated people showing the acronym IRA - Individual Retirement Account.

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

What are the Benefits of a Self Directed IRA? 

Infographic displaying the Benefits of a Self Directed IRA. 1) Portfolio Diversification 2) Hands-On Investing 3) Stability.

Are There Different Types of Self Directed IRAs? 

Self Directed IRA

A Self Directed IRA is a retirement account that lets you invest in alternative assets beyond stocks, bonds, and mutual funds through a custodian. The accountholder directs the custodian to perform transactions. 

  • Optimized for low-transaction investments, like private placements.
  • Low-Cost Setup.
  • Simpler Setup. The creation of an LLC or Trust is not required.

Self Directed IRA with Checkbook Control (aka Checkbook IRA)

This type of Self Directed IRA allows the accountholder to perform transactions in real- time. This investing power is achieved through the creation of an entity, such as an IRA LLC or IRA Trust.  

  • Optimized for active investments, like real estate rentals.
  • Establish a designated checking account and make investments by simply sending a check or wire.
  • Broad Financial, Madison Trust’s sister company, will create the entity (LLC or Trust) for you to provide a seamless investment experience. 

What can a Self Directed IRA Invest In? 

A Self Directed IRA can legally invest in almost any asset. The only assets that are off-limits are collectibles, life insurance, S-Corps, and Cannabis. Some of the more popular investments include: 

  • Real Estate (rentals, commercial property, raw land, etc.)  
  • Private Placements (private equity funds, hedge funds, etc.)  
  • Startups and Crowdfunding  
  • Promissory Notes (secured and unsecured)  
  • IRA LLCs 
  • And Many More!  

You’ve got questions? We’ve got answers!

Comparison: Self Directed IRA vs. Standard IRA 

One concept that almost all investors and financial advisors can agree on is the importance of diversifying your portfolio. Investing in a variety of assets, including standard investment products (stocks, bonds, and mutual funds) and alternative assets (real estate, private placements, promissory notes, etc.) may reduce overall risk. You still may be wondering, which IRA account is best for me? Here are some of the basic differences between a standard IRA and a Self Directed IRA. 

 Standard IRA Self Directed IRA 
Asset Choice Standard investment 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, precious metals, and more. Almost any asset can be purchased, except collectibles and life insurance. 
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 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. Each Self Directed IRA company has a different fee structure. Madison Trust charges a flat annual fee that is not dependent on account value. View Madison Trust’s fee schedule.
IRS RulesAll 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, accountholders are encouraged to conduct their own due diligence and understand rules like Prohibited Transactions.
Custodian Must be held by a regulated custodian as required by the IRS. Most banks, brokerages, and online trading platforms offer IRA accounts.Offered exclusively by regulated custodians who specialize in Self Directed IRAs.

How Do You Set Up a Self Directed IRA?

The process to set up a Self Directed IRA at Madison Trust is as easy as 1, 2, 3!  

  1. Open a Self Directed IRA – Open a new Self Directed IRA account online in under 10 minutes. Fill out your contact information, the type of IRA desired, and how you will be funding your IRA.  
  2. Fund Your Account – Fund your account by either transferring from an existing IRA, rolling over a former employer’s plan like a 401(k) or 403(b), or making a contribution.  
  3. Make an Investment – Instruct Madison Trust to issue a check or wire to the investment of your choice, by completing an Investment Authorization Form.  

For more information, please visit How To Set Up a Self Directed IRA.  

Conclusion: Let’s Put It All Together 

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

Are you new to self-direction? We’re here for you!

Our dedicated Self Directed IRA Specialists will provide step-by-step guidance from account setup all the way to placing your investment. It’s time to start investing in what you believe in with a Madison Trust Self Directed IRA! 

Self Directed IRA – FAQs

What are the fees for a Self Directed IRA?

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

How much money can you put in a Self Directed IRA?

The contribution limits for a Self Directed IRA are the same as a standard IRA. If you are under 50 years old, you can contribute up to $6,000 per year. If you are 50 or older, you can contribute up to $7,000 per year. Contributions for the year prior must be made by the tax filing deadline.

In addition to the annual contributions, Self Directed IRA accountholders may also roll over or transfer funds from another retirement account.

What are Prohibited Transactions in a Self Directed IRA?

A Prohibited Transaction is an improper transaction between an IRA and a disqualified person. 

A good rule of thumb is that an IRA may transact with third parties but may not transact with close family members or closely held entities.

When can you take distributions from a Self Directed IRA?

If you withdraw funds from a Traditional Self Directed IRA before age 59 ½, you must pay applicable taxes and penalties. Once you reach age 72, you must begin to take required minimum distributions (RMDs). Roth IRAs are exempt from taking lifetime RMDs since taxes are paid upfront.  

Required Minimum Distribution Infographic explaining the age at which you can start taking your RMD without penalty (59 1/2 years old) and the age you must take an RMD from your Traditional IRA (72 years old). Roth IRAs are not required to take any RMDs.

How do I distribute assets from a Self Directed IRA?

To make a distribution from a Self Directed IRA, please complete a Distribution Request Form that details the distribution type, amount, and frequency of the distribution. If you are distributing an asset, please also submit a third-party certified value (ex: an appraisal, letter from an investment sponsor, CPA-certified valuation, etc.). Also, depending on the asset invested in, additional documents may need to be submitted.  

After the documents are submitted and approved, Madison Trust will send an Assignment of Interest to you. This documents the transfer of ownership from your IRA to your personal possession.  

How long does it take to set up a Self Directed IRA?

At Madison Trust, we make the Self Directed IRA setup fast and simple. Fill out our online application in about 10 minutes. Then, typically, it takes as little as 1-2 weeks for your funds to be transferred to your IRA or IRA LLC.

We will complete your request within a few days. However, the transfer of funds from another custodian depends on the financial institutions’ processes and procedures.  

Interested to learn more about the world of Self Directed IRAs? Reach out to us, and one of our IRA Specialists will answer all of your questions.

Have Questions?

Read our FAQs, or feel free to contact our team directly.

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