What Is A Self-Directed IRA (SDIRA)?

That’s where a self-directed IRA (SDIRA) comes in. In this guide, we’ll explain what a self-directed IRA is, how it works, what you can invest in, and what rules you need to watch out for.

📌 Also read: What Is An IRA? (Types Of IRAs, Rules, And Eligibility)

What Is a Self-Directed IRA (SDIRA)?

A self-directed IRA (SDIRA) is a type of traditional or Roth IRA that gives you access to a broader range of investments. 

Most regular IRAs limit you to publicly traded assets like stocks, bonds, ETFs, and mutual funds. A self-directed IRA, on the other hand, could give you the option to invest in alternative assets, including real estate, private equity, private lending, precious metals, and certain digital assets.

You can open either a self-directed traditional IRA or a self-directed Roth IRA, depending on your tax goals.

The contribution limits, tax rules, and withdrawal guidelines are generally the same as those of a regular traditional or Roth IRA. The key difference is what you’re allowed to invest in.

Here’s a quick breakdown of how traditional and Roth IRAs work:

You can typically begin taking qualified distributions from either type of IRA starting at age 59½. Early withdrawals may trigger a 10% penalty plus ordinary income taxes.

With a Roth IRA, there’s a special rule: you can always withdraw your original contributions at any age without taxes or penalties. However, to withdraw your earnings tax-free, you need to meet two conditions:

This flexibility, combined with the ability to invest beyond traditional markets, is why some investors consider opening a self-directed IRA.

How Much Can You Contribute to a Self-Directed IRA?

The contribution limits for self-directed IRAs are the same as those for regular traditional or Roth IRAs.

For 2025, the IRS contribution limits are:

✅ Up to $7,000 if you’re under age 50
✅ Up to $8,000 if you’re age 50 or older (this includes a $1,000 catch-up contribution)

You’re allowed to open multiple traditional and Roth IRAs, including self-directed ones. But your total contributions across all IRAs (self-directed or not) must stay within the annual limit.

📝 Keep in mind: The amount you’re eligible to contribute depends on your income. For example, Roth IRA contributions may be reduced or phased out at higher income levels. And your ability to deduct traditional IRA contributions can vary if you or your spouse has access to a workplace retirement plan.

How Does a Self-Directed IRA Work?

With a regular IRA, your investment options are usually limited to stocks, bonds, ETFs, and mutual funds. If you want to invest in alternative assets, you’ll need to open a self-directed IRA through a provider that supports the specific investment types you’re interested in.

✏️ Hypothetical Example: If you want to hold digital assets inside your IRA, you’ll need to work with a provider that allows those types of investments. Most traditional brokerages and large banks do not support this.

Self-directed IRA providers vary. Some are limited to a single asset class, like digital currency or precious metals. Others offer broader access to multiple alternatives, such as real estate, private equity, promissory notes, or closely held businesses.

📌 Carry is a platform that offers a flexible self-directed IRA. You can use it to invest in a wide range of eligible alternative assets, not just a single asset type. Carry provides technical support but does not offer personalized investment, legal, or tax advice.

You Still Need a Custodian for a Self-Directed IRA

Every IRA, whether regular or self-directed, must have a custodian that’s approved by the IRS. For most regular IRAs, the custodian is typically the bank or brokerage where you opened the account.

With a self-directed IRA, the process is different. You’ll need to find a third-party custodian that supports alternative investments. This custodian acts as a required intermediary between you and your investments.

Even though a self-directed IRA gives you more flexibility, it is not fully self-managed. If you want to invest in private assets like startups or certain digital assets, you must direct your custodian to process the transaction. You won’t have direct access to write checks or make trades on your own.

Your custodian is also responsible for:

✅ Keeping records of your account
✅ Handling IRS filings and reporting
✅ Ensuring the IRA remains in compliance with tax rules

❌ Custodians for self-directed IRAs do not provide investment advice. You’re responsible for selecting your own investments, performing due diligence, and understanding the rules, especially around prohibited transactions.

Fees may vary depending on the custodian. Some charge flat administrative fees, while others charge per asset or transaction. These costs are often higher than those of a regular IRA.

📝 Note: There’s also a structure called an IRA LLC (sometimes called a “Checkbook IRA”). It lets you open a dedicated bank account under an LLC owned by your IRA, so you can write checks and manage investments directly. This approach requires careful setup and strict rule compliance.

Benefits of a SDIRA

The main advantage of a self-directed IRA is flexibility. Instead of being limited to publicly traded securities, you can explore a wider range of asset classes that aren’t available in a regular IRA.

✅ More investment options

You can use a self-directed IRA to invest in almost any asset type, such as real estate, private equity, private lending, precious metals, and in some cases, certain digital assets.

✅ Access to alternative opportunities

This structure may appeal to investors who want to buy property through an IRA, invest in a private fund, or gain exposure to early-stage startups.

✅ Potential for higher returns

Alternative assets are less tied to public markets and can provide opportunities for growth. But this also comes with higher risk and less liquidity.

✅ Same tax advantages as a regular IRA

Whether you open a self-directed traditional IRA or Roth IRA, you’ll still benefit from the same tax-deferred or tax-free treatment, depending on the account type.

Risks of a SDIRA

A self-directed IRA gives you more freedom, but also more responsibility. You’re in charge of selecting investments and making sure your account stays compliant with IRS rules.

Here are some key risks to be aware of:

❌ Prohibited Investments

You’re allowed to invest in almost any asset type, except for a few categories that are specifically restricted by the IRS:

❌ Prohibited Transactions

This is one of the most complex areas of SDIRA compliance. Your IRA is not allowed to engage in transactions with certain individuals, known as disqualified persons. These include:

📝 Important: A prohibited transaction, such as buying property from your own IRA, can lead to severe tax consequences, including disqualification of the entire account.

❌ Higher Risk of Fraud

Self-directed IRA custodians do not evaluate or endorse investments. They simply hold the assets and process transactions. This opens the door to potentially fraudulent or unvetted investment schemes, especially in the private market.

❌ Less Liquidity

Many alternative investments are illiquid, meaning they can’t be quickly sold for cash. Real estate, private company shares, or promissory notes may take months, or longer, to sell.

This becomes especially important if you’re age 73 or older and need to start taking required minimum distributions (RMDs) from a traditional IRA.

❌ More Fees

Unlike traditional IRAs, which often charge minimal or no fees for trades, self-directed IRAs can come with additional costs:

These fees vary depending on the custodian and the type of asset being held.

❌ Lack of Diversification

Having more choices doesn’t always lead to a balanced portfolio. In many cases, account holders concentrate their funds in just one or two investments, which may increase risk if those investments underperform.

📝 Note: A self-directed IRA may be a useful tool for certain strategies, but it’s not ideal for every investor. It typically requires more effort, planning, and caution than a regular IRA.

📌 Have an existing IRA? Move it into Carry’s Self-Directed IRA to access alternative investments. You can check how it works here.

How to Open a Self-Directed IRA

Opening a self-directed IRA starts with finding an IRS-approved custodian. Unlike traditional IRAs offered through large brokerages, self-directed IRAs require working with a specialized custodian, often a trust company or a financial institution focused on alternative investments.

Each custodian sets their own rules around what investment types they support. Some only allow one specific asset class, like real estate or crypto, while others provide broader flexibility. Before opening your account, confirm that the custodian can support the types of investments you’re planning to make.

Once you’ve selected a custodian:

📝 Note: With a self-directed IRA, you must direct the custodian to carry out each transaction. They do not offer financial advice or vet the quality of investments, so it’s up to you to perform due diligence and stay within IRS rules.

📌 If you’re interested in Carry’s IRAs, click here to learn more.

Wrapping Up

A self-directed IRA gives you access to a wider range of investment options than a typical IRA. You can hold assets like real estate, private equity, and crypto, but with that added flexibility comes added responsibility. You’re required to do your own due diligence, work through a qualified custodian, and stay on top of IRS rules to avoid penalties.

This account type may not be ideal for everyone, especially those unfamiliar with alternative investments or uncomfortable managing compliance on their own. Still, for investors seeking more control and diversification, it could be worth exploring.

📌 Looking for more details on IRAs or IRS rules? Check out our other articles for in-depth guidance:

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