What to Put in Your Self-Directed Roth IRA

Most individual retirement accounts (IRAs) consist of traditional investments, such as stocks, bonds, and mutual funds. However, a self-directed IRA lets you access a wide variety of investment options—everything from real estate and precious metals to cryptocurrencies and mineral rights—giving you more control and greater diversification over your investments.

Key Takeaways

A self-directed IRA (SDIRA) can hold virtually any investment except life insurance and collectibles.
You can set up a self-directed plan as a traditional (tax-deductible contributions) or Roth (tax-free withdrawals) IRA.
An IRA custodian, such as a bank, brokerage firm, or another financial institution, must set up and administer your SDIRA.
Most “big box” IRA custodians only offer traditional investments (e.g., stocks and bonds), so you’ll need a special SDIRA custodian if you want to invest in alternative assets.

What Is a Self-Directed IRA (SDIRA)?

Self-directed IRAs (SDIRAs) are structured like standard individual retirement accounts (IRAs) and have the same tax advantages, contribution limits, and withdrawal rules. However, only self-directed IRAs offer you nontraditional assets. Overall, SDIRAs can provide greater flexibility, better diversification, and higher potential returns than their conventional cousins.

SDIRA custodians have different investment options, so if you’re keen to invest in a particular asset—say, cryptocurrencies—be sure to confirm that it’s in the custodian’s lineup before opening an account.

SDIRA Custodians

The law requires tax-advantaged retirement assets—such as those in IRAs—to be held by a trustee or custodian. According to the Internal Revenue Service (IRS), an IRA custodian “must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.”

Most “big box” IRA custodians limit their investment options to traditional assets, such as stocks, bonds, and mutual funds, because they prefer that you invest in their financial products. That means you’ll need a special SDIRA custodian if you’re interested in alternative investments, such as real estate and precious metals.

SDIRA custodians don’t give investment advice, and because they are self-directed, you manage your own investments. Though this gives you greater control than with a standard IRA, be aware that it also entails considerably more work.

By law, the only things that can’t go into an IRA are life insurance and collectibles. The key reason why “big box” IRA companies don’t support alternative investments is that they want you to invest in the financial products they sell—traditional investments such as stocks, bonds, and mutual funds.

What Can You Buy With an SDIRA?

Your SDIRA can hold virtually any type of investment except for life insurance and collectibles. Here’s a rundown of the more common SDIRA investments.

Real Estate

From rentals to alpaca farms, real estate is one of the most popular SDIRA assets. You can invest in all types of real estate and real estate-related assets, including apartment buildings, condominiums, commercial property, foreclosures, improved or unimproved land, leases, offshore property, single-family and multi-unit homes, storage spaces, tangible asset deeds, trust deeds, and mortgage notes.

Precious Metals

Precious metal prices tend to be inversely correlated to the stock market—meaning that when stock prices are low, precious metal prices rise, and vice versa. They can be a great way to diversify your portfolio, protect against currency deflation, and serve as a hedge against inflation. Your SDIRA can hold gold, silver, platinum, and palladium. Keep in mind that the IRS has specific requirements, and precious metals that fall outside those specifications are considered collectibles and not allowed in an SDIRA.

Private Equity

Private equity refers to investing in privately held companies not listed on a public exchange. It can be an excellent way to invest in people, projects, or causes that you hold dear. Through your SDIRA, you can invest in limited liability companies (LLCs), limited partnerships (LPs), C corporations, private placements, private hedge funds, real estate investment trusts (REITs), startups, and small businesses.

Private Lending

Private lending lets you invest in debt-based financial instruments, or loans—including personal loans, business loans, mortgage notes, and car financing. Loans made by SDIRAs require a promissory note—a written promise to repay debt under specific terms (e.g., timeline and interest rate). A perk of owning notes is that they provide a steady income stream where the income grows tax free (Roth) or tax deferred (traditional).

Limited Liability Companies (LLCs)

Though you can invest in alternative assets directly with your SDIRA, another approach is to create an LLC owned by the SDIRA to manage your investments. This strategy offers liability protection, faster transactions with checkbook control, less paperwork, and fewer administrative fees.

If your SDIRA owns an LLC, it is governed by the same laws as the SDIRA—which means that the LLC can’t invest in life insurance and collectibles.

Other Investments

Because an SDIRA can invest in anything except life insurance and collectibles, the list of potential investments is lengthy. Other options include—but are not limited to—arcades, art galleries, bowling alleys, life settlements, retirement homes, show horses, vineyards, and renewable energy—e.g., solar energy, biofuel, water power, wind energy, and energy-efficient housing.

Pros

Investment flexibility
Diversification
Higher potential returns
Greater investment control

Cons

Higher-risk investments
Complex tax reporting
Prohibited transactions
More work

What Is the Best SDIRA Company?

A custodian must set up and administer the account no matter what type of IRA you have. However, most IRA custodians only offer stocks, bonds, mutual funds, and the like. You will need a special SDIRA custodian if you want to invest in anything beyond the traditional asset classes.

An SDIRA custodian could be a bank, credit union, brokerage firm, or another IRS-approved firm. Unfortunately, the industry attracts fraudsters that prey upon unsuspecting investors, so you must do your due diligence, thoroughly vetting any prospective companies. Check out Investopedia’s Best Self-Directed IRA Companies rankings for the best custodians.

What Are the Contribution Limits for a Self-Directed IRA?

IRA contribution limits are the same across all types of IRAs, including self-directed plans. For 2024, you can contribute up to $7,,000, or $8,000 if you’re age 50 or older.

Should I Invest in a Traditional or Roth Self-Directed IRA?

Whether you have a conventional IRA or a self-directed one, you can structure it as either a traditional or Roth IRA. A key difference is when you get the tax break.

Traditional IRAs: You deduct contributions when made and pay taxes on distributions later.
Roth IRAs: You pay taxes on contributions when made and get tax-free distributions later.

It’s impossible to predict your retirement tax bracket with 100% certainty because your financial situation could change—and so could the tax laws. Still, it’s generally a good idea to choose a Roth if you expect to be in a higher bracket during retirement. Alternatively, a traditional IRA can be the better choice if you anticipate being in a lower bracket in your golden years or need the tax break now.

The Bottom Line

Self-directed IRAs (SDIRAs) offer more flexibility, better diversification, and higher potential returns than their conventional counterparts do. Still, SDIRAs generally involve more work, rules, and risk.

The alternative investments that you can hold in an SDIRA tend to be chancier than the blue-chip stocks and bond funds in a standard IRA. As a result, SDIRAs are best suited for investors who are already familiar with nontraditional assets and are interested in holding them in a tax-advantaged retirement account.