Listen NOW on iTunes
Back to Articles

What Is a Self-Directed IRA & Why You Need One

ira retirement savings May 30, 2023

A couple of generations ago, a large majority of the population worked for companies that provided them with a pension or retirement income.  Now, very few people work for corporations large enough to provide them with retirement income.  Originally, Social Security was created to supplement pensions that were too small.  Because the amount of people receiving a pension is so small, many people depend on this “supplemental income” for their retirement needs.  Unfortunately, we all know that Social Security is running out.  Therefore, an alternate source of retirement income needs to be created.


IRAs or Individual Retirement Accounts were created with this purpose in mind.  Every American Citizen who has received income from working (getting a W-2), not investing, is allowed to open an IRA, in which they can save for retirement.  The account is much like a savings account but you are able to invest the money inside your IRA to increase your retirement funds within a certain set of guidelines.  Taxes depend on the type of IRA, but some can use pre-taxed money and your return on your investments are completely tax-free.  Some IRAs will be taxed as you draw the money out once you reach retirement age.  If you withdraw money early, there will usually be penalties.   


A Self-Directed IRA is just that: self-directed, meaning you are the one who gets to pick which investments your IRA funds get invested into.  There are rules and restrictions, but a self-directed IRA gives you complete control over your retirement funds and this is why my husband and I chose to have self-directed IRAs.


The International Revenue Service (IRS) regulation requires that a qualified custodian, or trustee, holds IRA assets on behalf of the IRA owner.  They require that a custodian or trustee provides custody of the assets, processes all transactions, maintains records, makes sure the required IRS reports are being filed, helps the client know and understand the rules and regulations in regards to certain prohibited transactions, issues client statements, and also executes other administrative duties on behalf of the self-directed IRA holder.


Although self-directed IRAs are available to everyone with earned income, self-directed IRAs are subject to more complicated regulations by the government, more specifically the IRS.  For this reason, it is highly recommended you chose a company that handles a lot of self-directed IRAs.  My husband and I have used Vantage Checkbook IRAs and Equity Trust over the years, although there are others out there.  Recently, we have added two companies to our favorites list: Quest Trust Company and Directed IRA.  You want a company that has been around for years and that handles a large number of accounts with millions of dollars.  They should also specialize in Self-Directed IRAs, not just "do" them.  So, forget banks like Chase, which is pretty new to the Custodial aspect of IRA accounts and just added IRAs to all the other things they do.  You want a company where Self-Directed IRAs are ALL THEY DO.  They should also provide their customers with an abundant amount of information in printed form, on their website, and through classes.  Remember, most IRA custodians lack the expertise that is necessary to administer such an account and the rules are very specific.  You need an expert.


Depending on what you are going to invest in, you may want to (or have to) set up an LLC for your IRA.  I know this sounds complicated but it is actually incredibly simple in this day and age.  My attorneys at Anderson Advisors set up all my LLCs (Yes, I have many and you will, too, someday).  Short on funds?  Simply set one up in minutes using LegalZoom.  It’s cheap and easy.  Plus, it really doesn’t have to be complicated.  KISS – Keep It Simple, Sweetie!


Advantages of a Self-Directed IRA

  • You have the ability to invest in real estate, rental properties, LLCs, private stock, hedge funds, mutual funds, and stocks and bonds
  • You can invest in things they are more familiar with, like Real Estate
  • You have increased control over investment strategies and decisions and you aren’t left at the mercy of a fund manager
  • Owners are protected from Bankruptcy and from creditors under the US bankruptcy code, up to $1,000,000 of IRA assets are exempted from bankruptcy (Although, when it comes to issues of fraud, divorce, deeds of trust, and failure to pay taxes, the protection is not normally applied)
  • You can invest in alternative investments, not just stocks and bonds.  This may maximize your returns, again, by investing in your own areas of expertise and private assets
  • Depending on the type of account, you may be able to earn money tax-free or not have to pay taxes on investment returns until you withdraw them


How to Open a Self-Directed IRA

IRA accounts are managed by custodians.  These custodians can be found at many financial institutions that offer IRA accounts: banks, insurance companies, brokerage firms, and mutual funds. However, self-directed IRA accounts are not offered by all custodians and I don’t recommend just picking a person or company out of convenience or familiarity.  Again, pick out a company that SPECIALIZES in Self-Directed Accounts.  The fees are less and the policies and rules they impose are far more investor-friendly (HINT: get a printout of all their fees and compare them ahead of time).  These types of companies know what they are doing.  They know the rules inside and out because it is not a hobby for them.  At this time, we are recommending Quest Trust Company and Directed IRA but there are others and we recommend you do your due diligence, look at their reviews, and at their fee structure.


For this reason, we are giving you a few tips to help you open a self-directed IRA account.


Our Top 5 Tips You Should Know Before Opening Your Self-Directed IRA


1.      Pick your IRA custodian Wisely:  Though it is possible to open your IRA account at almost any financial institution, only a few possess the know-how to hold alternative assets in a self-directed IRA. Having a good custodian can lead you through the complexities of having a self-directed IRA and also enlighten you about the potential dangers, which include prohibited transactions and fraud red flags.  Choose wisely. 


2.      Choose Between a Traditional or a Roth IRA:  You can choose between either, but if you qualify for a Roth, it is usually the one I would suggest getting. Also, the IRS does not recognize the term “self-directed IRA.”  To them, an IRA is an IRA, whether it’s self-directed or not. To know more about how to decide which IRA might be a perfect fit for you, ask your custodian to enlighten you more on these two IRAs and the benefits they have for you. 

  • With a traditional, I'll pay no taxes on the money I am contributing (or putting in) and will pay all the taxes later as I pull the money out during retirement.  
  • I like to think of a Roth as an account where I am paying taxes on all the money that goes in (I contribute) and paying no tax on the money I pull out after retirement.  This is the better deal, which is why you have income caps when contributing to your ROTH accounts.


3.      Know and Avoid Prohibited Transactions:  When you are investing your IRA yourself, there are certain transactions that IRS prohibits and you must know them and stay clear of them to avoid any unplanned tax consequences. Some of these prohibited transactions include buying a property for personal use or loaning money to yourself or your family members using your IRA funds.  IRAs are accounts that are meant to benefit you when you retire and not before.  Think of them as a separate company you are voluntarily working for, helping them earn excellent returns over time.  You won't be able to enjoy the fruits of your labor until those retirement years and no sooner.

This means you cannot buy a rental vacation property in Hawaii and then stay there during certain times of the year.  Nor can you buy a condo near your child’s college and rent it out to him or her.  Investments can not benefit you or your family members directly.  Therefore, it is advisable to familiarize yourself with the IRS rules and regulations in regard to prohibited transactions before investing your IRA.  This is why a good custodian is important.  My custodian asks me all the right questions before I invest and tells me if I am getting too close to any line the IRS has drawn.  I want all my investments to be legal so I can sleep at night.  I’m sure you do, too. 


4.      Consider Your Endlessness Investment Possibilities: A self-directed IRA unlocks a world of investment possibilities that are way beyond stocks and bonds.  There are so many interesting opportunities.  Just be sure to check the list because the IRS is very precise about what you can and cannot invest in.  You can invest in everything from raw land to private placements to Bitcoin and hold it in your self-directed IRA.  


5.      Pick your investment carefully:  This leads to picking your investment(s) wisely.  It is your responsibility to choose your investment and to conduct any due diligence yourself. The duty of an IRA custodian is to guarantee the asset is qualified to be held in an IRA, not to decide whether or not it is a good investment.  Your investments are your decisions only.  A self-directed IRA custodian can not offer any investment, tax, or legal advice. Before you open your self-directed IRA, invest your time in researching which investments you are comfortable with and in which asset classes.  Take 10 minutes a day to read and research your investments and you’ll become an expert in that investment within a year’s time.  Only invest in what you know, advice from Warren Buffett.


What do we invest in?  

My husband and I have been Self-Directing for years and our favorite investments (the ones we've made the best returns in while being securely backed by real estate) are, by far, Secured Notes to Real Estate Investors in our area.  We lend them money and make double-digit returns while our investment is recorded and secured with the county, backed by the real estate we lent money on.  We feel safe knowing that if the borrower doesn't make their quarterly payments to our accounts, we just call the note due and our performance deed allows us to take over the property without going through a lengthy foreclosure.  

We've invested in a variety of other things but the returns on these notes and the way we set them up make them one of our favorite, predictable, and secured investments.



I hope this article was informative and I really encourage you to open your own Self-Directed IRA.  You being in control of your own money is the only way to go.  No one cares more about your investments than you do.  Lead yourself and your family into intelligent investments that make sense for you. 

If you would like more information about how others invest in Mickey's House Foundation's properties, drop me an email or call/text me (my information is below).  We would be happy to show you how we Double the impact of our investment by helping to house those in need while giving you double-digit returns at the same time.  It truly is a win-win scenario!

God bless and

Go and Grow!!




Michelle Russell

[email protected]



© The Prosperity Process, LLC  

for BNB-Boss



Want to hire a Virtual Assistant but don't have a clue about how to get started...

We've created a program just for you inside our membership, VA Advantage.  Not a member yet?  We've got you covered, too.  We've made this program available for "outsiders" for a limited time and for less than $20. Grab it now before it's too late!

Go and Grow...

If you want to become financially free, you need the right education. That’s why we created our Mini-Courses on investing in Short-Term Rentals.  If you are serious about investing your time and money into an Airbnb (aka Short Term Rental), you need a system.  Our courses are jammed packed with everything you need to know to create massive, passive income.  Plus, they're affordable.

and take a look at July's BNB Budget Makeover Series inside our blogs...

This month, we give you loads of great ideas on using your orphan days to make inexpensive changes to your properties.  Begin here, with Budget Room Makeovers: Weekend Projects for Under $1000.  


Find Our More

Don't miss a beat!

New articles, blogs, podcast episodes, and courses delivered to your inbox. 

We hate SPAM. We will never sell your information, for any reason.