Angel Investing

How To Set Up a Self-Directed IRA in Five Steps

By | January 3, 2022

Maybe you’ve had your standard individual retirement account (IRA) for some time.

But do you want to make more unique investments than your current plan permits with the potential for higher appreciation?

Many people choose traditional and Roth IRAs over a self-directed IRA (SDIRA). However, knowledgeable investors may be missing out on investment opportunities in nonstandard sectors like real estate, private equity, crowdfunding, and cryptocurrency. A self-directed IRA opens up these possibilities.

Interested in learning more? Discover how to set up a self-directed IRA and tips you should know before getting started.

What Is a Self-Directed IRA (SDIRA)?

A self-directed IRA is a retirement plan that allows you to hold a wider variety of investments than other IRAs. Investments for traditional and Roth IRAs usually involve stocks and bonds, but a self-directed IRA can include any of the following alternative investments:

  • Real estate 
  • Promissory notes
  • Tax lien certificates
  • Precious metals
  • Mineral rights, oil, and gas 
  • LLC membership interest
  • Livestock
  • Cryptocurrency
  • Water rights
  • Undeveloped raw land
What is a Self Directed IRA?

A self-directed IRA may vary in the investments you can have, but this plan comes with the same tax advantages, eligibility standards, and contribution caps as traditional and Roth IRAs. The main difference is that a self-directed IRA allows you to take the reins and manage your own retirement account.

How To Set Up a Self-Directed IRA

Although opening a self-directed IRA lets you manage your own account, you’ll still need to follow a specific set of instructions to get started. These steps involve seeking out a third party’s services and carrying out your chosen investments. 

Here are the five steps you need to learn for how to set up a self-directed IRA:

1. Get a Custodian or Trustee

You’ll first need a custodian or trustee to open a self-directed IRA. A custodian protects assets without ownership rights to buy, sell, or move assets on their own. Meanwhile, a trustee is an owner of the plan’s assets.

Custodian vs Trustee

To seek out a custodian or trustee, get in touch with organizations that focus on self-directed IRAs such as certain banks, trust companies, or IRS-approved nonbank entities. Organizations like RocketDollar and AltoIRA help take the brain damage out of the set-up and regulate aspects of your IRA management. 

Other organizations include Equity Trust, Madison Trust, Millennium Trust Company, and The Entrust Group. These custodians charge fees for their management of your assets.

 2. Choose Your Investments

To take advantage of alternative investment opportunities, you’ll have to figure out which choices are right for you. You can invest in a range of areas from real estate to cryptocurrency with a self-directed IRA, but it’s crucial to choose wisely in order to minimize risk.

Don’t know where to make your investments? Look into the best sectors to invest in to gather the information you need.

3. Perform Due Diligence on Investments

Once you decide on the sectors you’d like to invest in, it’s time to perform due diligence. To do so, you’ll want to review all relevant materials such as financial records and performance. Looking into a potential investment’s liquidity ratio is a great start. Here are additional steps you should take:

How to Perform Due Diligence on SDIRA Investments

Doing your due diligence will give you a better gauge on the return on investment (ROI) of your self-directed IRA.

4. Get a Broker to Purchase Your Investments

After you’ve decided on your investments, you’ll need to find an investment broker to carry out your transaction. An investment broker is an individual or company that works with you so you can purchase and sell investments. They differ from a custodian or trustee because a broker has the authority to buy and sell assets, whereas a custodian or trustee simply holds or tracks your assets. 

The broker’s purchase or sale of your investments enables you to make transactions in the market. The broker will then collect fees from you once the transactions are completed.

5. Have Your Custodian Complete the Transaction

The final step is to ask your custodian or trustee to finish the remaining tasks for the transaction. This usually involves deciding whether to settle the trade, which is a process that entails giving cash to the seller and transferring securities to the buyer. 

From there, your custodian is responsible for safeguarding your assets and tracking any changes in your account.

Types of Self-Directed IRAs

There are two different types of self-directed IRAs: traditional and Roth. All regular (non-self-directed) IRAs are either traditional or Roth, and the same is true for self-directed IRAs. These two self-directed IRA options differ from one another in the following areas:

  • Income requirements
  • Required minimum distributions
  • Withdrawals
Self Directed IRA: Traditional IRA vs Roth IRA

To help you decide which is best for you, here’s a more in-depth explanation of the primary differences between a self-directed traditional versus Roth IRA:

Self-Directed Traditional IRA

A self-directed traditional IRA has no income limit. However, you’ll need to begin taking required minimum distributions starting at age 72. In addition, withdrawals are penalty-free but not tax-free after the age of 59 ½.

Self-Directed Roth IRA

Meanwhile, a self-directed Roth IRA asks that your income is less than a certain amount. However, no minimum distributions are needed under this plan. Lastly, you can withdraw at any time without penalties or taxes after the age of 59 ½.

Self-Directed IRA Pros

Having a self-managed IRA comes with a variety of perks. Read through some of the main reasons you may want to consider this plan below

Pros & Cons of Self-Directed IRAs

Pro #1: More Investment Options

Unlike standard IRAs that only allow investments in stocks and bonds, self-directed IRAs make it possible to pursue alternative investments. These options include investments in real estate, precious metals, livestock, and more.

Pro #2: Automatic Tax Breaks

A self-directed IRA comes with built-in tax breaks on any funds you make from your investments. That’s because money earned from your investments can be tax deductible if you satisfy certain standards based on your income, retirement plan, and other criteria.

Pro #3: Individualized Investments 

Since you’re able to make alternative investments, self-directed IRAs let you cater your account to your interests. Whether you prefer real estate or cryptocurrency, a self-directed IRA gives you the opportunity to make investments that are personalized to your passions.

Pro #4: Diversification of Funds

By opening a self-directed IRA in addition to other investment or retirement accounts, you’re able to diversify earnings. That’s because keeping money in a variety of accounts allows you to spread out your funds.

Pro #5: More Appreciation on Investments

A self-directed IRA allows you to choose investments that may have a higher appreciation. These high-yield alternative investments include local and small businesses, precious metals, angel investing, and cryptocurrency.

Self-Directed IRA Cons

Although setting up a self-directed IRA comes with advantages, there can also be downsides. Here are some of the main disadvantages of a self-directed IRA:

Con #1: Some Investment Limitations

Self-directed IRAs open up the possibility for alternative investments, but they also prevent you from making certain investments. For example, you won’t be able to pursue investments in life insurance, collectibles, or your own real estate.

Con #2: Higher Risk for Investments

Since you’re responsible for choosing your own investments, you’ll need to do your research to avoid risk. Before deciding on where you’d like to invest, it’s important to understand what high-risk investments are and how you can manage them.

Con #3: Higher Account Maintenance Fees

With a self-directed IRA, your account maintenance fees may also be on the higher side. Companies such as banks charge you regular fees for their services, which can be more costly for self-directed IRAs than other IRAs.

Con #4: Restrictions on Some Transactions

You’ll face some limitations on the kinds of transactions you can make. The IRS prohibits using funds from your self-directed IRA to purchase your own property or send loans to yourself or relatives. To prevent tax repercussions, be sure to avoid these kinds of transactions.

Con #5: Potential for Fraud

Your custodian or trustee administers your account, but they cannot give you financial advice. That means they’re not responsible for notifying you of potentially fraudulent investments. Those with self-directed IRAs need to be vigilant to ensure potential investments and promoters are legitimate.

Who Should Open a Self-Directed IRA?

People who wish they could make more unique investments than their current plan permits may want to learn how to set up a self-directed IRA. 

With a self-directed IRA, you can make alternative investments beyond the traditional stocks and bonds. If this kind of flexibility appeals to you, a self-directed IRA may be the right fit for you.


Still have questions about how to set up a self-directed IRA? Here are all the answers to the most common concerns:

How Much Does It Cost to Set Up a Self-Directed IRA?

It generally costs between $250 and $395 to open a self-directed IRA. In addition, you’ll want to have enough money to buy stocks, which vary in cost.

Can You Create Your Own Self-Directed IRA?

Although you manage your own account, you don’t entirely create your own self-directed IRA. You’ll first need to find a custodian or trustee to offer you a self-directed IRA.

What Is the Difference Between a Self-Directed IRA and a Traditional IRA?

The difference between a self-directed IRA and a traditional IRA is in the types of investments you can make. While traditional and Roth IRAs involve investments in stocks and bonds, a self-directed IRA allows you to make alternative investments in real estate, precious metals, cryptocurrency, and more.

How Much Can You Deposit in a Self-Directed IRA?

The amount you can deposit in a self-directed IRA varies by year. In 2022, those under 50 years old cannot deposit more than $6,000. Those over 50 cannot deposit more than $7,000.

What type of fees are associated with a SDIRA?

A self-directed IRA usually includes a fee for opening your new account, an annual fee, and administrative or transaction fees for third parties. For accounts holding between $100,000 and $249,000, you’ll also need to pay an annual renewal fee. Lastly, you’ll have smaller fees for paying bills via mail or wire transfer.

Learning how to set up a self-directed IRA can feel overwhelming. However, once you understand the basic steps and read some tips, you’ll become a pro at managing your own IRA.Looking to find the right investments for your self-directed IRA? Check out our angel investing platform with over 10,000 companies to choose from. By browsing through the options, you’ll be one step closer to your own self-managed IRA.

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