Best Places to Open a Self-Directed Roth (or Traditional) IRA

Only certain IRA custodians support nontraditional assets

Fact checked by Timothy LiReviewed by Margaret James

A self-directed individual retirement account (SDIRA) is much like other IRAs, but with one key difference: Only SDIRAs let you invest in nontraditional assets, such as real estate, precious metals, and cryptocurrencies.

It’s not that alternative investments aren’t allowed in IRAs. According to the Internal Revenue Service (IRS), by law, the only things that can’t go into an IRA are life insurance and collectibles. However, the “big box” IRA companies want you to invest in the financial products that they sell—traditional investments such as stocks, bonds, and mutual funds—so they choose not to traffic in nontraditional assets.

Still, no matter which type of IRA you have, a trustee or custodian—such as a bank, brokerage, or robo-advisor—must set up and administer the account. And because not all custodians support nontraditional assets, you need to find a special SDIRA trustee or custodian that offers the alternative investments that you want to buy and sell.

Key Takeaways

• A self-directed IRA (SDIRA) is a retirement account that lets you invest in nontraditional assets, such as real estate and precious metals.
• You can set up an SDIRA as either a traditional IRA (tax-deductible contributions) or Roth IRA (tax-free withdrawals).
• Per Internal Revenue Service (IRS) rules, SDIRAs must be set up and administered by a trustee or custodian, which can be a bank or other financial institution.
• Most IRA custodians only offer traditional holdings (e.g., stocks and bonds), so you’ll need a special SDIRA custodian if you want to invest in alternative assets.  
• While a custodian administers your SDIRA, you directly manage it, meaning that you must research your investments and understand the tax consequences.

What Is a Self-Directed Individual Retirement Account (SDIRA)?

SDIRAs are structured like other IRAs, with the same tax advantages, contribution limits, and distribution rules. However, one thing that sets SDIRAs apart from their conventional cousins is the types of investments that they offer: Only SDIRAs support nontraditional assets. That means SDIRAs provide better diversification, greater flexibility, and higher potential returns.

Real estate—from single-family homes to alpaca farms—is one of the most popular SDIRA assets. There are dozens of other options, including but not limited to:

• Businesses, franchises, and startups
• Convertible notes
• Crowdfunding
• Cryptocurrencies
• Equipment leasing
• Foreign land
• Livestock and crops
• Limited liability companies and partnerships (LLCs and LLPs), and trusts
• Oil and gas rights
• Specified precious metals (silver, gold, platinum, palladium)
• Private equity and private stock
• Private lending options (mortgages and other loans)
• Tax liens and deeds
• Warrants and structured settlements

Warning

Certain investments are off-limits for all IRAs. The law states that you can’t use an IRA to invest in life insurance or collectibles, including artwork, rugs, antiques, gems, stamps, most coins, most metals, and alcoholic beverages.

SDIRA Custodians

While a custodian administers your SDIRA, you directly manage it (hence “self-directed”). By contrast, if you have a standard IRA, the custodian picks the investments for you, and the choices are limited to the ones it sells—typically stocks, bonds, and mutual funds. 

According to the IRS, an IRA/SDIRA trustee or custodian “must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.” If you want to take advantage of an SDIRA, you’ll need a custodian who specializes in SDIRAs and offers the specific nontraditional asset investments in which you’re interested.

SDIRA custodians do not give investment advice. Account owners are responsible for doing their own research and picking investments.

Best Places to Open an SDIRA

An SDIRA custodian could be a bank, credit union, brokerage firm, or another IRS-approved firm (you can find one online by searching for “SDIRA custodian”). To help you get started, here’s a rundown of five of the best self-directed IRA companies for 2024.

Important

Always perform your due diligence on an SDIRA custodian before opening an account. SDIRAs not only have more stringent rules than traditional IRAs, but the industry also attracts dishonest companies that prey upon investors.

What are the contribution limits for self-directed individual retirement accounts (SDIRAs)?

The self-directed individual retirement account (SDIRA) contribution limits are the same as they are for standard IRAs. For 2024, you can contribute up to $7,000. If you’re age 50 or older, you can add a $1,000 catch-up contribution for a total of $8,000.

What can you buy with an SDIRA?

The key advantage of using an SDIRA is that you can invest in nontraditional (aka alternative) assets. Standard IRAs are generally limited to stocks, bonds, mutual funds, and certificates of deposit (CDs). By contrast, SDIRAs can hold numerous types of real estate (the most popular SDIRA asset), certain precious metals, tax liens, private mortgages, cryptocurrencies, private equity, partnerships, horses, livestock, and farmland. Custodians offer different investment options, so be sure that the assets you want are part of the custodian’s lineup.

Should I invest in a traditional or Roth IRA?

Standard IRAs and SDIRAs can be structured as either the traditional or Roth version. A key difference is the timing of the tax advantage.

• Traditional IRA — You deduct contributions when made and pay taxes on withdrawals later.
• Roth IRA — You pay taxes on contributions when made and get tax-free withdrawals later.

It’s impossible to predict your retirement tax bracket—after all, your financial situation and the tax laws could change between now and then. Still, it’s generally a good idea to go the Roth route if you expect to be in a higher bracket during retirement. On the other hand, a traditional IRA makes the most sense if you need the tax break now or anticipate being in a lower tax bracket in your post-work years.

The Bottom Line

SDIRAs let you invest in assets that are off-limits to conventional IRAs, offering greater diversification and potentially higher returns in the process. Still, even though they have more flexibility and options than their conventional cousins, they entail more rules and risks and have a steeper learning curve. Accordingly, SDIRAs are best suited for people who already have experience with nontraditional investments and want to hold them in a tax-advantaged account.

Read the original article on Investopedia.