What a self-directed retirement account is
A self-directed retirement account is an IRA or solo 401(k) where you, not a bank or brokerage, decide what to invest in. Instead of choosing from a menu of mutual funds and stocks your provider offers, you control the money directly and pick the investments yourself—real estate, private loans, cryptocurrency, precious metals, or business stakes. The account still grows tax-deferred or tax-free depending on whether it is traditional or Roth, but the investment choices are yours to make.
The catch is that you need a custodian—a licensed company that holds the account and processes transactions—because the IRS requires it. The custodian does not advise you or manage the money; they just hold it and make sure you follow the rules. You find the custodian, you find the investment, and you tell the custodian to execute the deal.
Self-directed accounts are not for everyone. They require you to know what you are doing, to research investments thoroughly, and to understand the restrictions the IRS places on what you can and cannot buy. If you make a prohibited transaction—for example, investing in property you personally use, or lending money to a family member—the IRS can disqualify the entire account and tax all the money inside it immediately.
Key Takeaways
- You choose the investments in a self-directed account, not a bank or brokerage, and you need a custodian to hold the account and process transactions.
- Self-directed IRAs and solo 401(k)s can hold real estate, private loans, precious metals, and other assets that standard retirement accounts do not offer.
- The IRS prohibits certain transactions—such as investing in property you use personally or lending to close relatives—and breaking these rules can disqualify your entire account.
- You are responsible for finding investments, researching them, and ensuring they comply with IRS rules; the custodian does not provide investment advice.
- Custodian fees are typically higher than standard brokerage fees because they handle more complex transactions and paperwork.
How a self-directed IRA differs from a standard IRA
A standard IRA at a bank or brokerage like Fidelity or Vanguard limits you to stocks, bonds, mutual funds, and exchange-traded funds. The provider's platform shows you what is available, you click to buy, and the transaction settles in days. The provider handles all the paperwork and compliance.
A self-directed IRA removes those limits. You can invest in a rental property, make a private loan to a business, buy a piece of farmland, or hold gold bars. But you have to find the investment yourself, negotiate the terms, and arrange the transaction. The custodian then steps in to hold the money and document the deal, but they do not vet the investment or tell you whether it is a good idea.
Standard IRAs charge annual fees of $0 to $50. Self-directed IRAs typically charge $200 to $500 per year, plus transaction fees for each investment you make. Some custodians charge per transaction; others charge a flat annual fee. If you make many investments, costs add up quickly.
Types of investments you can hold in a self-directed account
The IRS does not maintain a list of what you can invest in; instead, it lists what you cannot. That means almost anything is allowed: real estate (rental properties, land, commercial buildings), private business loans, notes secured by property, precious metals (gold, silver, platinum, palladium in certain forms), cryptocurrency, tax liens, and stakes in private companies or partnerships.
Real estate is the most common self-directed investment. You use the account's cash to buy a rental property, and all rent collected goes back into the account tax-free. If you sell the property later, the profit stays in the account and grows tax-deferred. You cannot live in the property yourself or rent it to a close relative—those are prohibited transactions.
Private loans are another option. You can lend money from your self-directed account to a business or individual (not a family member) and charge interest. The interest income flows back into the account. Some investors use self-directed accounts to fund real estate deals or small business ventures in exchange for a note and interest payments.
Precious metals must meet purity standards set by the IRS. Gold must be at least 99.5% pure, silver 99.9%, platinum 99.95%, and palladium 99.95%. You cannot hold collectible coins or jewelry; the metals must be bullion or coins minted by a government. The custodian typically arranges storage with an approved depository.
Prohibited transactions that can disqualify your account
The IRS prohibits self-dealing—using your retirement account to benefit yourself or close relatives. If you break these rules, the IRS treats the entire account as distributed to you in that year, and you owe income tax on the full balance plus a 10% early withdrawal penalty if you are under 59½.
You cannot invest in property you use personally or rent to a spouse, parent, child, or grandchild. You cannot lend money to yourself, a spouse, or a lineal relative (parent, child, grandchild). You cannot use the account to buy or lease property from a disqualified person. You cannot hire yourself or a family member to manage the account or the investment.
You also cannot invest in certain collectibles—artwork, antiques, gems, stamps, or coins (except government-minted bullion coins). Life insurance policies and S-corporation stock are prohibited. Some custodians will not allow cryptocurrency or certain alternative investments even though the IRS does not explicitly ban them; check with your custodian before committing to an investment.
The definition of "disqualified person" is broad and includes your spouse, lineal descendants (children, grandchildren), lineal ancestors (parents, grandparents), and spouses of those people. It does not include siblings or cousins, so you can invest with them.
How to set up a self-directed retirement account
First, choose the type of account: a self-directed traditional IRA, self-directed Roth IRA, or self-directed solo 401(k). A solo 401(k) allows higher contributions if you are self-employed and gives you access to loans from the account, which IRAs do not. A Roth grows tax-free and has no required withdrawals in retirement; a traditional IRA grows tax-deferred and requires withdrawals starting at age 73.
Next, find a custodian that specializes in self-directed accounts. Common custodians include Rocket Dollar, Alto IRA, Directed IRA, and Equity Trust. Each charges different fees and supports different investment types, so compare their fee schedules and investment options before opening an account. Some custodians specialize in real estate; others focus on cryptocurrency or private loans.
Open the account with your chosen custodian and fund it by rolling over money from an existing IRA or 401(k), or by making a new contribution (up to $7,000 per year in 2024 for an IRA, or higher if you are 50 or older). The custodian will provide the paperwork and walk you through the process.
Once the account is funded, you identify an investment, negotiate the terms, and instruct the custodian to execute the transaction. The custodian holds the money, processes the deal, and maintains records. You are responsible for ensuring the investment complies with IRS rules.
Costs and fees you should expect
Self-directed accounts cost more than standard IRAs because custodians handle complex transactions and maintain detailed records. Annual custodian fees range from $200 to $500 or more, depending on the provider and account type. Some custodians charge a flat annual fee; others charge per transaction.
Transaction fees vary widely. Real estate purchases might cost $500 to $1,500 per transaction to process and document. Precious metals storage and insurance can run $100 to $300 per year. Cryptocurrency transactions may have per-trade fees or flat monthly charges. Private loan setup might cost $250 to $500.
You may also pay third-party costs outside the custodian: title insurance for real estate, appraisals, inspections, storage fees for precious metals, or legal fees to structure a private loan. These costs come from the account's cash, reducing the amount available to invest.
Before opening a self-directed account, calculate the total annual cost and compare it to the expected return on your investment. If you plan to make only one or two investments, the fees may outweigh the benefit. If you are an active investor making multiple deals per year, the fees become a smaller percentage of your total activity.
Risks and responsibilities of self-directed investing
When you direct your own investments, you bear all the risk. If a real estate deal fails, a private loan defaults, or a business investment loses money, the loss comes from your retirement savings. There is no advisor to second-guess your decision or protect you from a bad choice. You are responsible for due diligence—researching the investment, checking the numbers, and understanding the risks.
Self-directed accounts also require ongoing compliance. You must keep detailed records of every transaction, maintain documentation that investments comply with IRS rules, and file tax forms if the account generates unrelated business income (such as rental income from real estate). If the IRS audits your account, you need to prove that every transaction was allowed.
Liquidity can be a problem. Real estate and private loans are not easy to sell quickly if you need cash. If you face a financial emergency and need to withdraw money from a self-directed account before age 59½, you owe income tax and a 10% penalty on the withdrawal—and you may have to sell an illiquid investment at a loss to raise the cash.
Finally, self-directed accounts require discipline. It is easy to make emotional decisions or chase trends when you control the money. Many self-directed investors lose money because they did not research thoroughly, did not diversify, or invested in something they did not understand.
Frequently Asked Questions
Can I invest in real estate I already own through a self-directed IRA?
No. If you already own the property personally, you cannot transfer it into a self-directed IRA. The account can only buy property you do not currently own. If you want to invest in real estate through a self-directed account, you must use the account's cash to purchase a new property.
What happens if I accidentally make a prohibited transaction?
The IRS treats the entire account as distributed to you in that tax year. You owe income tax on the full balance and a 10% early withdrawal penalty if you are under 59½. The account is disqualified and loses its tax-protected status. This is why it is critical to understand the rules before investing and to work with a custodian familiar with compliance.
Can I borrow money from my self-directed account?
Solo 401(k)s allow loans from the account, but IRAs do not. If you have a self-directed solo 401(k), you can borrow up to 50% of the account balance (or $50,000, whichever is less) and repay it with interest. The interest goes back into the account. IRAs do not permit loans under any circumstances.
Do I need investment experience to open a self-directed account?
No formal experience is required, but self-directed investing demands that you research thoroughly and understand what you are buying. Many custodians offer educational resources and can connect you with advisors who specialize in self-directed investments. If you are unsure about an investment, do not make it—the custodian will not stop you, but the IRS will hold you accountable.
Can I use a self-directed account to invest in cryptocurrency?
Yes, but not all custodians support it. Some custodians specialize in cryptocurrency IRAs; others do not offer it at all. If you want to hold crypto in a retirement account, you must find a custodian that supports it and understand the tax and compliance rules. Cryptocurrency is volatile and unproven as a long-term retirement investment, so weigh the risks carefully.