What is a Self Directed IRA?

by | Feb 27, 2017

The self-directed IRA is a special version of the tax-advantaged retirement account known as the “Individual Retirement Arrangement” that was created by the law called ERISA (Employee Retirement Income Security Act of 1974).  The distinguishing feature of a self directed IRA versus captive (i.e. non-self-directed) IRA's is the flexibility to invest the IRA's funds in absolutely any asset that's not expressly prohibited by law.


...In a broader sense, the IRA in general, and the self-directed IRA in particular, is something of a "bribe" offered by Uncle Sam to motivate you to save for retirement.  The "bribe" you're being offered is:

  • A tax deduction for contributing money to the account
  • Tax-free compounding of profits
  • Protection against claims from creditors
  • Easy bequeathment to future generations

The law gives you as an owner of a self directed IRA another gift as well:  Extraordinary flexibility in terms of asset selection. ERISA specified only two assets that you can never buy in your IRA:  Life Insurance and Collectibles.  There were – and are – no other asset-type restrictions in ERISA.  There are other rules to consider – most notably, the rules concerning “disqualified persons” – but as a discreet matter, the only assets that are inherently prohibited inside of an IRA are Life Insurance and Collectibles. That means, as a practical matter, that nearly everything else is "on the table" for your self directed IRA:  real estate, precious metals, private loans, tax lien certificates and much more! I'd be remiss if I didn't warn you that there are some very rigid rules concerning the use of self directed IRA's with which you must comply.  You can learn more about those rules here.  But those rules are a small price to pay for near-complete flexibility in the way you're allowed to invest your retirement savings!


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