Self Directed Retirement Accounts: IRAs and 401ks

Self Directed Retirement Accounts: IRAs and 401ks

Self directed retirement accounts — whether it is an IRA or a 401k — are tax advantaged savings vehicles that offer you the ability to invest in a wide range of opportunities.

When you have an IRA or 401k, your investment options are limited to whatever is available from your plan’s sponsor. And, those opportunities are usually limited to stocks, some bonds and some funds. When you have a self directed retirement account, you can invest in almost anything at all — it’s self directed!
self directed ira
Want to invest your tax advantaged funds in your brother’s ostrich farm? No problem. Want to buy an apartment building? You got it. Want to invest in a franchise? You can do it!

How Do You Open a Self Directed Retirement Account?

Once you find a custodian, you’ll open an account and contribute money to it, just as you would with any other IRA.

“Custodian?” you ask.

Most retirement accounts are held with brokerage firms and banks. However, these types of companies do not typically offer self directed accounts.

Custodians of self-directed IRAs are often companies that specialize in them and the types of investments each custodian will agree to handle will differ. So, depending on your investment goals, you might have to shop around.

Sometimes a financial advisor can act as the custodian of your self directed account.

Are Self Directed Investment Options Really Limitless?

There are a couple of investments that are strictly off the table. The IRS forbids investments in collectibles and life insurance. You also can not invest in ventures with your parents, your children and other specifically defined individuals.

Another big thing to avoid with self directed accounts is “self-dealing.” You cannot provide any services to the investments in the self directed account.

Here is more information from the IRS about prohibited transactions.

Beyond that, if you can find a custodian, you can make the investment.

However, it is critical that you yourself understand the ins and outs of the investments you wish to make. A custodian cannot offer you advice.

What Are the Limits on a Self Directed Retirement Account?

A self directed retirement account, be it a 401k, IRA, Roth IRA or Roth 401k, all have the same eligibility and contribution limits as regular accounts.

Required mandatory distribution rules also apply.

Pros and Cons of Self Directed Retirement Accounts

There are a number of pros and cons to self directed retirement accounts:

Fees: Fees for a self directed retirement account can be high, but can vary widely.

Liquidity: Many investments made with a self directed retirement account are not liquid — meaning they can be difficult to sell if you need the money. It is also important to think through required minimum distributions if you cannot sell the asset when it is time to take those withdrawals.

Diversification: A self directed account lets you diversify beyond traditional investment options.

Risks and Rewards: Risks and rewards can be much higher with less mainstream investments.

Expertise: Typically, you need to have some expertise to make an investment with a self directed account.

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