Retirement Investing Guide
Self-Directed IRA Account: How It Works
A self-directed IRA is an individual retirement account administered by a qualified custodian that permits a broader range of investments than many conventional brokerage IRAs.
The account can expand investment choice, but it also places more responsibility on the owner to investigate assets, direct transactions, maintain liquidity, avoid prohibited transactions, and obtain independent tax and legal guidance.
Quick Answer
You open an SDIRA with an eligible custodian, fund it through a permitted contribution, transfer, or rollover, select an investment the custodian accepts, complete diligence, and direct the custodian to transact in the IRA’s name. The custodian administers the account but generally does not recommend or validate the investment.
Self-Directed IRA Account Steps
- Choose the account type. Determine whether a Traditional, Roth, SEP, SIMPLE, inherited, or other eligible IRA structure fits your circumstances.
- Select a qualified custodian. Confirm it accepts the asset type and compare fees, workflow, service, reporting, security, and transaction timing.
- Fund the account correctly. Contributions, trustee-to-trustee transfers, and direct rollovers have different rules and documentation.
- Investigate the investment. Review the sponsor, strategy, collateral, valuation, liquidity, fees, conflicts, financial information, and exit assumptions.
- Direct the transaction. The custodian—not the owner personally—executes documents and sends IRA funds for an approved account investment.
- Maintain the account. Keep cash for expenses and fees, provide valuations, direct income back to the IRA, and monitor tax and reporting obligations.
What a Custodian Does—and Does Not Do
Administrative Role
The custodian holds or records IRA assets, processes properly documented directions, reports required information, and applies its own asset-acceptance policies.
Not an Endorsement
Custody does not establish that an investment is safe, suitable, fairly priced, liquid, compliant, or likely to perform as expected.
Investor Responsibility
The account owner is responsible for investment selection, diligence, transaction instructions, and avoiding self-dealing or other prohibited activity.
Funding an SDIRA
An account may be funded with annual contributions within applicable limits, a trustee-to-trustee transfer from another IRA, or an eligible retirement-plan rollover. Direct transfers and direct rollovers generally reduce the risk of missing deadlines or mishandling funds, but eligibility and tax treatment depend on the accounts and transaction. Never send retirement funds directly to an investment sponsor when the asset is intended to be owned by the IRA.
For official rules, review the IRS IRA FAQs and consult your custodian and tax adviser.
Questions to Answer Before Opening the Account
- Does the custodian accept the asset and transaction structure you are considering?
- What are setup, annual, transaction, asset, wire, valuation, and termination fees?
- How long do reviews, funding instructions, and document execution normally take?
- How will expenses, income, valuations, tax forms, and liquidity be handled?
- Could the transaction involve a disqualified person, personal benefit, services, guarantees, or extension of credit?
- Can you tolerate illiquidity, uncertain valuation, limited disclosure, and potential loss?
Review the Investment Before You Direct the Custodian
For a private fund, read the offering memorandum, subscription agreement, operating agreement, audited or reviewed financial information when available, fee and conflict disclosures, redemption provisions, valuation policy, and risk factors.
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Important Information
This content is educational and is not individualized investment, legal, accounting, or tax advice. Mid Atlantic does not act as an IRA custodian and does not determine whether a particular retirement-account transaction complies with tax law. Consult an independent qualified professional and the account custodian before acting. Private placements are unregistered, illiquid, speculative, available only to eligible accredited investors, and involve risk, including possible total loss. Read the current offering documents before investing. Trust metrics are management-supplied and should be reviewed against current company materials.