What is a Self-Directed IRA?

Having a retirement plan is the key to financial safety and security. After all, until we make a plan we only have dreams. To make dreams a reality, we need to sit down and make action steps to get where we want to go.

Millions of Americans have decided to use Individual Retirement Accounts (IRAs) for their future. In a traditional IRA, you are able to send a certain amount of your earnings, either every year or with every paycheck, to a financial planner before you pay taxes on that income. The planner then makes stock, bond, or mutual fund purchases on your behalf.

Then, when you retire, you’re able to make withdrawals on the earnings of your investments. If you are already familiar with the basics of an IRA but you want to learn about Self-Directed IRAs, then you’ve come to the right place. First we’ll outline what self-directed IRAs are all about, then we’ll talk about one of the most common forms of it, the Gold IRA.

The Internal Revenue Service has strict laws and guidelines about what a financial planner can invest in with your IRA funds. Whether it’s a traditional IRA or a Roth IRA, these laws were initially put in place so that we, the consumers, are protected. These protections keep an IRA manager from investing in speculative assets. Generally speaking, managers can only invest in traditional mutual funds, stocks, and bonds.

With few exceptions, this means that we’re not able to invest in things like real estate, precious metals, art work, or even cryptocurrency as part of our tax-protected retirement. To be clear, anyone can invest in those things, just not with IRA tax shelter.

With a self-directed IRA you enter into a contract with your manager to invest in non-traditional assets for your retirement. In this case you get the same protections as an IRA—you can invest funds before you pay taxes on them, or you can pay taxes on the funds now and withdraw penalty free, later—but a self-directed IRA also comes with the same limitations.

Keep in mind that limitation. It’s the key difference between traditional investing in real estate or artwork and self-directed IRA investing. In a self-directed IRA, if you invest in real estate and that property value goes through the roof, you can’t sell that property and reap the profits unless you’re at the agreed upon retirement age (usually over 59 years old). 

A self-directed IRA is a great way to diversify your assets while still protecting you from being taxed on both sides of an investment. But it does limit how and when you can draw profit from those assets.

Some important things a self-directed IRA lets you invest in include:

There are many more options available, all with their own unique rules and guidelines. Be sure to inquire with your financial advisor on the feasibility of a given market for your goals.

With a traditional IRA, the only way to invest in gold is to buy stocks in a gold company or bonds through a mining company. With a self-directed precious metals account, or a Gold IRA, you’re able to invest in the physical metal itself.

Gold IRAs work just like all other self-directed IRAs. You hire an account manager, or agent, who uses your funds to purchase, transport, and store gold as an asset against your retirement. You’re not able to access the gold or house it yourself, as the IRS will count that as an early withdrawal. But you are able to reap the benefits of owning gold while also taking advantage of tax protections afforded by an IRA.

Gold IRAs can be a safety net protecting you from devalued assets if markets crash or inflation weakens your other assets. With a gold IRA you can also invest in palladium, silver, and even platinum. That means it can also be a prudent investment as new technologies and other industries move into precious metals for key components.

Related: Our top recommendations for gold IRA companies.

Every portfolio needs diversification. The most basic way to balance an investment account is to match stocks with bonds. The two markets typically compliment each other, with one going up if the other goes down.

Modern self-directed IRAs, however, give us a multitude of other options, giving us the freedom to use our own insights or life experience to decide how our finances and retirement are planned. And that planning can make all the difference.