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How to Open a Self-Directed IRA in 5 Easy Steps

If you’re like most people, you probably have your IRA account invested in mutual funds or ETFs. While this is a sound investment strategy, it’s not the only option available to you. If you’re looking to invest in tangible assets, you may want to consider opening a self-directed IRA (SDIRA). A SDIRA gives you more control over where your money is invested. In this article, we’ll show you how to open a self-directed IRA in five simple steps.

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A broader range of investment options, but with some constraints

Opening a self-directed IRA offers a wider range of investment options. This can be a great option for people who want to invest in alternative assets, such as real estate, private companies, and precious metals.

Just like a traditional IRA, self-directed IRAs do come with some restrictions. The biggest challenge people face when trying to open a self-directed IRA is understanding the rules and restrictions around what they can invest in.

One perspective is to contrast it with our traditional IRAs.

Can we withdraw dividends from our IRAs without limitations or penalties?


The same is true for earnings from your SDIRA. You cannot also keep dividends from traditional IRAs in your personal investment accounts. Separate banking and/or investment accounts are also required for the SDIRA.

Opening a self-directed IRA can be intimidating but help is available

While you can invest in many things, you cannot invest in collectibles like art or rare coins, or in life insurance. Stay away from these and you’ve already won half the battle!

It can be intimidating to feel that you are in total control of your own investment decisions, especially when you have been using an investment management company for a long time. With a self-directed IRA, you are the one who decides what to invest in rather than an investment manager.

However, there are many online resources and support groups available to help you make informed investment decisions.

We’ve found our custodian to be extremely helpful in answering any questions we’ve had about opening and managing our account. They also hold monthly online workshops during which we can submit questions.

How do you open a self-directed IRA?

Assuming you’re comfortable with the level of risk involved in self-directing your IRA, here are five easy steps to get started:

1. Figure out the structure of your self-directed IRA and choose a custodian

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SDIRA structure

One of the first decisions you must make is how you will structure your SDIRA. What I mean is, do you want checkbook control or do you want your custodian to handle all of your transactions?

When it comes to real estate transactions, having checkbook control gives you an advantage. For example, if you find a cash deal and need to act quickly, you can wire transfer money and close on it within hours.

Hours??? Doesn’t closing take 30-45 days?

Not when you come across unusual deals like county real estate auctions, which we’ve experienced first hand recently.

Also, having checkbook control will save you a lot of money if you’re going to buy and manage rental properties, because a custodian may charge you for every transaction they run for you.

You also won’t need to obtain approval to make purchases, which can cause delays if you need to close on a deal quickly.

How can I have checkbook control?

I’m glad you asked. 🙂 To have checkbook control, you must first establish a limited liability company (LLC) owned by the IRA or self-directed IRA LLC. It is critical that you do this correctly, or you may face penalties and unwanted distributions.

Choosing a custodian

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After determining how you want to structure your SDIRA, you can proceed to selecting a custodian. You can use an existing or new IRA custodian. Be sure to research any fees associated with opening and maintaining your account.

We opened our account with UDirect and chose to set up an LLC for our SDIRA. We found it to be the best option for our real estate investments because we have checkbook control. The only fees we pay to the custodian are a $275 annual maintenance fee and wire fees, which are infrequent. They do not charge a fee for each asset held in the account.

There are many different custodians to choose from, so it is easy to find one to set up your account.

It’s important to do your research to find the one that’s right for you. Besides fees, consider other factors such as investment options and customer service.

2. Set up your account

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After you decide on a custodian, this is usually a simple process of filling out some paperwork and providing identification documents.

Be sure to read all the fine print before you sign anything. You don’t want to get stuck with hidden fees or restrictive terms.

3. Fund your account

This can be accomplished by transferring funds from an existing IRA or by making a new contribution. Your custodian should provide you with the necessary forms to complete the transfers. Note: You cannot fund the SDIRA by taking a distribution and then sending a personal check to your new custodian.

4. Invest your money

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This is where the fun (or frustration) begins! You’ll need to do your research to find appropriate investments that fit within the rules of a self-directed IRA.

Due to the real estate environment, it took us a while to find our first investments, but the second deal came very quickly. We’ll get to talking about those soon. In the current real estate market, it may be hard to find a good deal, but patience is a virtue for a reason. If you have other investments in mind, you may be able to invest right away.

5. Monitor and adjust your investments as needed

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Photo by Wayan Parmana on

Once you’ve made your initial investment choices, you’ll need to stay on top of them to make sure they’re performing as you expected. You may also need to make adjustments from time to time, depending on changes in your goals or the market conditions.

You must also provide your custodian with a year-end evaluation of the SDIRA. They essentially need to know the worth of your account. The custodian files this information with the IRS on your behalf.

Some objections against a self-directed IRA?

When I first started researching real estate investing with an SDIRA, I thought: “OMG, opening a self-directed IRA feels like it’s the worst investment sin you could commit.” I found a few naysayers who think it’s a bad idea. That made me want to learn more.

Many articles are written by financial advisory firms or individuals who may never have held one and are simply repeating sound bites. Of course, why would I send you off to manage your own investments if I am an investment manager?

Articles like this one claim that you can’t claim deductions such as repairs or property taxes against personal income. While this is correct, you can still deduct them from your LLC investment income. So you’ll eventually pay taxes only on the profits you make. Is this any different from investing in traditional IRAs?

To put things in perspective, we can’t deduct investment losses from traditional IRAs from our personal income when it comes to mutual funds.

One of the most common objections I hear is that you can’t depreciate assets or claim capital losses in an SDIRA, as you can with after-tax real estate investments.

That is a valid point, but the same can be said about other investments, such as mutual funds in retirement accounts versus mutual funds in taxable accounts.

The same rules apply to your SDIRA; you cannot deduct losses, but your money grows tax-free until you withdraw it.

Can we harvest tax losses in our traditional IRAs?


The same is true for losses in our SDIRA’s real estate investments.

We can buy rental properties with a SDIRA and invest the income in other retirement accounts if we want without increasing our tax liability.

In a nutshell, a self-directed IRA provides you with the same tax benefits as traditional retirement accounts. There are also some advantages and disadvantages to having a SDIRA, just like traditional IRAs.

You are also not allowed to put any sweat equity into your investments. A contractor is required in something as simple as replacing a faucet in your rental property, in your SDIRA.

Final thoughts

Traditional retirement accounts are the way to go if you don’t want to worry about directing your investments. If you want to have more control over how you invest your money or invest in more tangible assets, a self-directed IRA is a viable option. It’s very easy to open one once you choose a custodian.

And you don’t have to go all in either. You can open a SDIRA with a small amount of your investment portfolio.

Who can benefit from opening a self-directed IRA?

In terms of our FIRE audience, I believe a SDIRA is a good option for early retirees who want to invest more in assets such as real estate but have the majority of their money locked up in traditional IRAs.

When we retired, and our assets in the market grew more than we expected, we wanted to lock in some of those gains, and transferred a third of our assets to a SDIRA. It felt great to know we’d have some tangible assets in our pre-tax accounts rather than putting all of our eggs in the stock market basket.

This is not for the average 401(k) investor because you must educate yourself about the process. It will take more time than simply purchasing a mutual fund. However, the SDIRA custodian can provide some guidance.

For newcomers who are still working and beginning to accumulate, a simple allocation of 90% stocks and 10% bonds is probably the best way to go. Work, invest, work, and invest some more. Repeat until you achieve financial independence.

What is our SDIRA up to?

After doing our research, we felt comfortable pursuing a SDIRA, and so far, we are pleased with our investments.

Little has changed in the way we invest; we still buy real estate, but because we can now count on our tax-deferred investments, we are bigger players. We kept our eyes and ears open to this possibility because we’re always open to checking other investment options and making adjustments as needed. We’re also learning a lot, which makes us better investors.

When I told a friend we were opening an SDIRA, he suggested we blog about it because he’d like to see how it works and it’s something new that not many early retiree bloggers discuss. So we’re here as your lab rats and we’ll not leave the bad and the ugly out! 😉

We’ve already made a couple of real estate deals, and as a result, we now have new projects to look forward to. We can’t wait to tell you more about those! Who said early retirement had to be boring and predictable? 🙂

What are some of the advantages and disadvantages of opening a self-directed IRA that you’ve heard about?


After dedicating 13 years of his career to Vanguard, José retired from the corporate world at the young age of 44. During his tenure at Vanguard, he expertly coordinated the production of both electronic and print educational materials for 401(k) participants. Now, he relishes in his early retirement, cherishing time spent with his family, indulging in his favorite hobbies, seeking out new experiences, and savoring meals in the comfort of his own backyard.

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