Self-directed IRA
Published on October 04, 2024
by Grace Lorraine Angeles
Grace Lorraine, an IRS Enrolled Agent and CPA with 14 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working abroad.
Table of Contents
I want to diversify my IRA. Is it possible?
Yes, you can set up a self-directed IRA, which lets you diversify your investments and potentially enhance your returns while combining the advantages of a retirement account.
What is a self-directed IRA?
A self-directed IRA (SDIRA) is a type of individual retirement account (IRA) that allows you to invest in a broader array of assets that a traditional and Roth IRA can’t. You can hold real estate, commodities, digital assets, and other alternative investments.
Additionally, you gain control of managing and holding these assets. This is most beneficial if you have specialized knowledge in certain sectors. An SDIRA demands more effort and careful research from you.
Can I convert my traditional IRA to a self-directed IRA?
Yes, there are two ways to convert your existing IRA into a self-directed IRA:
- Direct transfer: Your current custodian can transfer the funds directly to your self-directed IRA. This is an easy and safe option as it avoids penalties and is tax-free.
- Rollover option: You can withdraw funds from your existing IRA and deposit them into your SDIRA within 60 days to avoid taxes and penalties.
Grace Lorraine Angeles
Tax Manager
14 years of Expat Tax Experience
30-minutes US$247.
IRS qualified Enrolled Agent (EA) Federally authorized to practice before the IRS on all US tax matters Philippine Certified Public Accountant (CPA) Degree in Bachelor of Science in Accountancy (BSA)
I have specialized in Philippine and U.S. taxation for both local and foreign clients and have become knowledgeable in Philippine and U.S. federal and state tax returns preparation.
What investments can I add to my self-directed IRA?
Aside from Wall Street products like stocks, bonds, and mutual funds, you can also hold other assets such as:
- Cryptocurrency: You can gain exposure to the potential high returns of crypto.
- Precious metals: SDIRA allows investment in gold or silver.
- Real estate: You can purchase and manage residential, commercial, or rental properties.
- Private equity and venture capital: You can buy into private companies, startups, or venture capital funds.
- Farmland: You can acquire farmland or timberland with potential exposure to long-term growth.
Can my Bitcoin be transferred to my SDIRA?
Yes, you can transfer Bitcoin and other coins like Ethereum to your self-directed IRA. However, you must follow specific steps and requirements due to IRS rules and regulations.
It is essential to set up your account with a qualified custodian who supports cryptocurrency investments, and you can get assistance from there.
How do I set up a new self-directed IRA?
Here’s a step-by-step guide to opening an SDIRA:
- Choose a qualified custodian: Search for a custodian who can hold SDIRAs and supports your investment of choice. The custodian can be a bank, credit union, trust company, or IRS-approved firm.
- Complete the requirements: You can start to submit requirements based on your chosen custodian’s conditions. You are also required to complete forms relating to opening the account.
- Fund the account: You can transfer funds from your existing IRA or put separate funds for your SDIRA. Funding can be done annually for self-directed IRAs.
- Invest in alternative assets: You can now purchase or hold your alternative asset of choice administered by your qualified custodian.
- Manage and monitor your account: Carefully monitor and assess your investments, making adjustments as necessary. Make sure to adhere to IRS regulations for every investment choice.
When do I need to contribute to my self-directed IRA?
You are allowed to make yearly contributions as stated by the IRA. Additionally, account holders who are aged 50 and above are able to make catch-up contributions of up to US$1,000.
| Maximum annual amount (USD) | Year |
| US$7,000 | 2024 |
| US$6,500 | 2023 |
What are the risks included in opening a self-directed IRA?
Aiming for higher returns also means having additional risks to look out for. Here are the things you need to watch out for:
- Lack of legal and regulatory protection: Qualified custodians typically do not evaluate or review the legitimacy of investments in your account.
- Risk of fraud: You can be exposed to fraudsters exploiting self-directed IRAs because SDIRA custodians may offer limited protections. You could encounter fraud custodians or fraudulent investment opportunities.
- Lack of information: Other investments have limited disclosure on their financial information and other records, and available data may not be audited by public accounting firms.
- Illiquid investments: Many assets are highly illiquid, like real estate, private equity, and venture capital. You’ll need to sell off the investment to gain returns.
- Tax regulations: Other alternative assets have complex tax rules to follow and could complicate your tax filing. Failing to file the proper taxes will subject you to penalties.
When can I withdraw from my self-directed IRA?
The distribution rules followed on traditional and Roth IRAs are also applicable to self-directed IRAs.
Traditional SDIRA vs. Roth SDIRA
For a traditional SDIRA, you are required to start taking the required minimum distributions (RMDs) annually when you reach 72 or 73 if you turn 72 after December 31, 2022.
For a Roth SDIRA, you can start to withdraw contributions when you reach 59½ years old or older, on top of that, you need to have the account for at least five years. Withdrawing from Roth SDIRA is tax-free and penalty-free.
If you start making withdrawals without meeting the necessary requirements, you may face regular income tax and a 10% penalty.
