What is a Self-Directed IRA and How Do You Know if You Have One?

If you are serious about creating consistent, predictable, secure wealth for today and tomorrow it’s imperative you know the difference. Failure to understand the difference between what I call a “plain vanilla IRA” and a “truly self-directed IRA” can mean the difference between failure and success, poor or rich, slave or free. (I’m only slightly exaggerating here).

What is a self-directed IRA or self-directed retirement account?

It is an IRA where the IRA provider empowers you, the client, to invest in anything allowed by law, without additional restrictions on investments. More on that in just a minute.

There is a lot of confusion on this issue. Where does the confusion begin? It begins with traditional financial institutions that offer IRA’s. If you call your local bank or brokerage and ask if your IRA is self-directed they will say something to the effect, “Yes! You have a self-directed IRA. We might make recommendations and give you advice but you can self-direct your own account as well.”

Unfortunately, that explanation doesn’t answer the question. The problem is further exacerbated by respected media outlets like Wikipedia. If you search Wikipedia for self directed IRA, here’s what you will find.

“A Self-Directed Individual Retirement Arrangement is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan… The custodian usually offers a selection of standard asset types that the account owner can select to invest in, such as stocks, bonds, and mutual funds.”

Again, this only touches on one important aspect of what makes an IRA self-directed, allowing you to make investment decisions. So what’s the difference between a “plain vanilla” IRA and a truly self-directed IRA?

  1. The Plain Vanilla IRA. Most IRA’s and retirement accounts fall into this category. A plain vanilla IRA is held by a traditional financial institution and restricts the account holder (you) to invest in commissionable or fee based only investments like stocks, bonds, mutual funds, CD’s, ETF’s and annuities. When they tell you you have a self-directed IRA what they mean is you can only buy from their list of commission and fee based approved investment products. Approved by who? The financial institution charging the fees and commissions.
  2. The “Truly” Self-Directed IRA. This is what we like to call it at Specialized IRA Services and it allows you to invest in all these options plus allow you to invest in virtually anything the IRS allows. With a self-directed IRA you are empowered to make your own decisions, invest in what you know and understand all while receiving the incredible tax benefits IRA’s offer. Common investments we see clients make at Specialized IRA are things like real estate, tax liens, FOREX, notes, mortgages and trust deeds.

To use a metaphor, think of it this way. Instead of being limited to a plain vanilla ice cream cone a self-directed IRA is like getting all the flavors of ice cream to choose from plus you can add all the sprinkles, toppings, whipped cream and cherries that you want!

What makes a self-directed IRA a self-directed IRA?

We do. That is to say, your IRA custodian cannot liberalize the rules set forth by the IRS but they are allowed to restrict them. The custodian creates the policies and procedures (within the IRS and DOL guidelines) on what they will allow clients to invest it. Firms are permitted to set these parameters and in the case of plain vanilla IRA’s handcuff account holders (you) to commission based products. In short, it’s the company that holds your IRA that makes it self-directed. In fact, Motley Fool understands this distinction and they wrote about it on their website.

“But in order to own these special assets in a retirement account, you’ll have to find a firm that offers a self-directed IRA. And while lots of brokers, banks, and other institutions will let you open an IRA, most of them don’t want to deal with the hassle of working with investments other than ordinary stocks and funds.”

So there you have it. If you truly want the opportunity to create wealth, security and independence using self-directed IRA’s you’ll need a Self-Directed IRA Provider like Specialized IRA Services. We allow you to make your own decisions and invest in what you want, not something that generates the highest possible commission for the broker.


About the Author

Edwin Kelly is CEO of Specialized IRA Services and is considered America’s leading expert on Self-Directed IRA’s. To learn more about getting started please visit our website here.