Self-Directed IRA Basics

What Are They and How To Open an Account

Written By: Daniel Gleich

What Is a Self-Directed IRA?

A Self-Directed IRA (SDIRA) is similar to a standard IRA. It's a retirement account that you contribute funds to, so that your retirement funds can grow through your investments. The difference between a standard IRA and a Self-Directed IRA is the types of investments your account can hold. A standard IRA allows you to invest in publicly-traded products like stocks, bonds, and mutual funds. With a Self-Directed IRA, you can choose to invest in almost any type of alternative asset. It's common to use a self-directed individual retirement account for investing in real estate, precious metals, and private placements.

Self-Directed IRAs at a Glance

Piggy Bank Icon with coins going in to show that when you invest with a Self-Directed IRA you can invest beyond Wall Street.

Invest Beyond 
Wall Street

A Self-Directed IRA is an individual retirement account held by a custodian that allows you to invest in alternative assets such as real estate, private placements, promissory notes, and beyond.

Increasing trend bar graph with arrow pointing up to show that you can diversify your portfolio and grow your retirement savings when you invest in alternative assets with a Self-Directed IRA.

Diversify Your Portfolio

You gain the power to diversify your portfolio, invest in what you know and believe in, and hedge against the stock market.

Hand holding bag of money icon to show that Madison Trust Self-Directed IRAs have low fees.

Low Fees


The fees for an SDIRA held at Madison Trust are among the lowest in the industry - and are set at a fixed rate regardless of the value in your account. 

iPhone icon with individual and gear to show that setting up a Self-Directed IRA is simple.

Simple Set Up


There are three simple steps to setting up an SDIRA: open an account, fund your account, and place your investment.

Understanding Self-Directed IRAs

You may have heard the terms "self-directed retirement account," "alternative IRA," or "Real Estate IRA," but you could probably use some clarity. What exactly is a self-managed retirement account? What benefits does it have? And what possible effects can this account have as part of your retirement investment strategy? 

Get answers from the Self-Directed IRA Specialists at Madison Trust to feel confident about gaining control of your retirement investments.

Self-Directed IRA investor speaking with a financial advisor to determine if alternative investing is right for him.

If you're looking to start self-directed investing, you're in the right place! We can help you learn:

You Have Questions? We Have Answers!

We’re here to assist you at any point of the process, from account setup all the way to placing your investment. Start the conversation today.

Why Have I Never Heard of Self-Directed IRAs?

The concept of a self-directed retirement plan is a novel one to many, as the majority of investors hold their IRAs in large brokerage houses. It is largely assumed that IRAs can only be invested in stocks, bonds, and mutual funds since those are the most common products offered. Brokerage houses generally do not accommodate alternative investments due to certain administrative tasks involved and potential loss in commission.
Investor woman speaking with a Self-Directed IRA Specialist about her alternative investments and shaking his hand.

What Are the Benefits of Self-Directed Investing?

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Portfolio Diversification

Self-Directed IRAs allows investors to diversify their retirement portfolios to include assets that are typically inaccessible in a standard IRA. With a self-directed retirement plan, you can invest in privately-held investments like real estate, private businesses, promissory notes, precious metals, and more, all within a tax-advantaged account.

Blue circle with a white check mark inside

Hands-on Investing

Self-Directed retirement plans encourage individuals to invest in what they are familiar with. They provide investors with the power to put money into investments that make sense for them personally. Different people have different strengths and expertise, and it makes sense that their investments should reflect those strengths.

Blue circle with a white check mark inside

Stability

Diversify beyond the volatility of the stock market and invest in products with a generally steadier, more reliable revenue stream. Popular alternative asset choices include rental properties, secured promissory notes, and tax liens.

How Does a Self-Directed IRA Work?

Investor completing an Investment Authorization form to instruct their Self-Directed IRA custodian to invest in an alternative asset.
Like its standard counterpart, your self-directed retirement plan is held by a regulated custodian. The custodian will hold custody of your assets, execute transactions, and assist with any necessary tax filings. If your account is established and you're looking to make a specific investment, here are the basic steps:

Choose an Asset: This part is fully up to the investor. 
SDIRA custodians cannot offer specific financial advice. Consider choosing an asset for which you have a good grasp of its potential profitability as well as one that you have the means to manage.

Submit an Investment Authorization Form: Fill out the Investment Authorization form and submit it to your SDIRA custodian, and your custodian will perform the transaction on your behalf. Of course, certain assets will have more extensive paperwork associated with their purchase; this is not due to the account structure but rather to the nature of the investment itself. For example, real estate often possesses a more involved process, including title and deed processing.

What are the Potential Risks of SDIRAs?

Due Diligence

As a Self-Directed IRA account holder, it is your responsibility to understand your investment and the Self-Directed IRA rules set by the IRS. It is the Self-Directed IRA custodian’s responsibility to administer your account and hold your IRA’s assets; they legally cannot sell investment products, verify legitimacy, or give investment advice. It is considered best practice to conduct due diligence and speak with a financial advisor before making an investment decision.

Fees

Like standard brokerage accounts, Self-Directed IRA fees vary based on the custodian. Potential fees can include account opening fees, annual account maintenance fees, administrative fees, and transaction fees. Amongst the lowest in the industry, Madison Trust’s flat-rate fees help ensure the profitability of your investment. For a transparent look at our fees, please refer to the fee schedule.

Potential Fraud

In today’s technology-centered world, it’s important to be on high vigilance of fraud when completing everyday activities like shopping online, checking emails, and making bank transactions. Like when you make any important purchase, it is essential to ask questions and consult a professional before making an investment decision. Keep in mind that custodians who guarantee a return on investment, give advice, or want you to act quickly on an investment may all be indications of fraudulent activity.

To debunk some of the most common self-directed investing myths, check out our recent blog,
Self-Directed IRA Investment Myths: Busted! Shedding Light on SDIRA Misconceptions

For further reading, explore With Great Risk, Comes Great Reward: Self-Directed IRA Investor Alert Response.

What Can a Self-Directed IRA Invest In?

Self-Directed IRAs can legally invest in almost any asset. The only assets that are off-limits are collectibles, life insurance, 
and S-Corporation stock. Some of the more popular investments include:

Icon of a tall building to signify investing in real estate with a Self-Directed IRA.
Real Estate
(Rentals, Commercial Property, Raw Land, etc.)
Icon of dollar bill and coins to show that you can invest in private placements with a Self-Directed IRA.
Private Placements
(Private Equity Funds, Hedge Funds, etc.)
Icon of documents with a dollar sign on it to signify that you can invest in promissory notes with a Self-Directed IRA.
Promissory Notes
(Secured and Unsecured)
Icon of a rocket ship to indicate that you can invest in startups and crowdfunding with a Self-Directed IRA.
Startups and Crowdfunding
Stack of bullion to show that you can invest in precious metals with a Self-Directed IRA.
Precious Metals
And Many More Alternative Assets

Are There Different Types of Self-Directed Retirement Accounts?

Yes. You can choose to open a classic Self-Directed IRA or a Self-Directed IRA with Checkbook Control (also known as a Checkbook IRA).

Self-Directed IRA


A self-directed individual retirement account allows you to invest in alternative assets beyond stocks, bonds, and mutual funds. You, as the account holder, direct your custodian to perform transactions on your behalf.

White Circle with checkmark icon inside
Optimized for low-transaction investments, like private placements and precious metals
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Place investments by instructing your custodian, such as Madison Trust, to send your IRA funds by writing a check or sending a wire directly to your investment
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Simple and low-cost setup; setting up an LLC or trust is not required

Self-Directed IRA with Checkbook Control (Checkbook IRA)

This self-directed investing account allows you, as the account holder, to perform your everyday transactions in real-time. This investing power is achieved through the creation of an entity, such as an IRA LLC or IRA Trust.

White Circle with checkmark icon inside
Optimized for transaction-heavy investments, like rental properties and fix-and-flips
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Place investments by simply writing a check or sending a wire from your Checkbook IRA's designated checking account
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Broad Financial, Madison Trust's sister company, will create the entity (LLC or trust) for you to provide a seamless account setup experience
Learn More

Self-Directed IRA vs. Standard IRA: What's the Difference?

One concept that almost all investors and financial advisors can agree on is the importance of diversifying your portfolio. Investing in a variety of assets, including Wall Street products (stocks, bonds, and mutual funds) and alternative assets (real estate, precious metals, private placements, promissory notes, etc.) may reduce overall investment risk. 

But you still may be wondering, "Which IRA is best for me?" Below are some of the basic differences between a standard IRA and an SDIRA.

Standard IRA
Self-Directed IRA
Asset Choice
Typically offers Wall Street products. These can be individual stocks as offered by online trading platforms or aggregated products like mutual funds.
Typically offers a diverse asset choice. Investors can purchase real estate, shares in a private business, precious metals, and more. Almost any asset can be purchased, except collectibles, life insurance, and S-Corporation stock.
Asset Security
No guaranteed security. The value of the IRA will generally rise and fall with the stock market.
No guaranteed security. Some assets, like real estate, tend to retain value, while others can be generally more volatile.
IRS Rules
All IRAs (individual retirement accounts) are subject to certain IRS rules.
A Self-Directed IRA follows the same rules as a standard IRA. However, due to the more hands-on nature of the account, account holders are encouraged to conduct their own due diligence and understand rules like prohibited transactions.
Custodian
Must be held by a regulated custodian as required by the IRS. Most banks, brokerages, and online trading platforms offer IRAs.
Self-Directed IRA vs. Standard IRA Retirement Portfolio Examples Infographic - Self-Directed IRA is a Truly Diverse Portfolio where you can invest in startups and crowdfunding, gold/precious metals, standard assets (stocks and bonds), real estate, private placements, and promissory notes. Standard IRAs are a typical retirement portfolio where you can invest in stocks and bonds.
Standard IRA
Asset Choice
Standard stock market products.
Fees
Standard fee schedules are asset-based. That means a defined percentage of the overall account will be assessed as the annual fee.
Account Opening
Depending on the institution chosen, can be done in 15 minutes.
IRS Rules
All retirement accounts are subject to the same rules.
Self Directed IRA
Asset Choice
Diverse asset choice.
Fees
Different Self Directed IRA companies have different fee structures. Madison Trust charges a flat annual fee that is not dependent on account value.
Account Opening
Madison’s Self Directed IRA can be opened in 15 minutes. A Checkbook Control Self Directed IRA can take longer to set up due to the establishment of the LLC or Trust.
IRS Rules
A Self Directed IRA has the same rules as a standard IRA.

Diversification Beyond Wall Street Awaits

Reach out, and one of our Self-Directed IRA Specialists can assist you with getting started on your self-directed investing path.

Setting Up a Self-Directed IRA

The process to set up a Self-Directed IRA at Madison Trust is simple. Madison Trust's Specialists can guide you through the entire process from setting up your account to placing your investment. 

For more information our simple setup process, download the How To Invest with a Self-Directed IRA at Madison Trust PDF.
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Investor Standing Next To Phone and Plant Icon to show opening a Self-Directed IRA

Open a Self-Directed IRA

Open a self-directed retirement account with Madison Trust by completing our easy online application.
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Investor Standing Looking At Screen Icon to show funding a Self-Directed IRA

Fund Your Account

Fund your Self-Directed IRA by transferring or rolling over all - or a portion of - your funds from an existing retirement account, such as an IRA or 401(k), or by making an initial contribution.​
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Investor Standing Holding Check Icon to show placing an investment with a Self-Directed IRA.

Place Your Investment

Instruct Madison Trust to send your IRA funds by writing a check or sending a wire directly to your investment.

How Much Does it Cost to Use a Self-Directed IRA?

The cost to set up a self-directed account with Madison Trust Company is $50; maintenance is $105 per quarter. Our quarterly maintenance fees are flat-rate, no matter what the value of your account is. We never charge asset-based holding fees which are fees that are charged at a percentage that’s based on the value of your account. With Madison Trust, you never have to pay more for being successful. Visit our transparent Fee Schedule page for more information. 

What Are the Contribution Limits for a Self-Directed IRA?

The IRS places annual limits on the amount that can be contributed to a retirement account. In 2024, the Self-Directed IRA maximum contribution is $7,000 if you're under age 50. If you're age 50+, you can make an additional $1,000 catch-up contribution ($8,000 maximum contribution). For more information on Self-Directed IRA contributions, please visit our frequently asked questions.
Please note the maximum contribution limits can change on a yearly basis. Madison Trust's SDIRA Experts are always happy to answer any questions you may have.

Our Story

Madison Trust is an industry-leading Self-Directed IRA custodian with a passion for empowering individuals to gain control of their retirement investing. Learn more about our story from our President & CEO, Daniel Gleich.

See why thousands of clients choose Madison Trust!

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More Resources

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Check out our schedule of upcoming webinars and view our previously recorded webinars to learn about Self-Directed IRAs, alternative investments, trending industry topics, and more!

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Whether you're interested in learning about what you can invest in or you need a guide to help set up your account, you can find all the help and information you need in our blog. Be sure to check back regularly to stay up-to-date on all of the information you need to know about investing with a Self-Directed IRA.

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Self-Directed IRA Resources

Explore our informative gallery of articles and videos discussing topics such as the essentials of Self-Directed IRAs, fundamental aspects of Real Estate IRAs, investing with a Gold IRA, and more in our Self-Directed IRA resource center!

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Ready to Get Started? We're Here for You! 

Madison Trust offers self-directed investing services that are easy to get started with! Thanks to our dedicated Self-Directed IRA Specialists, you will be provided with step-by-step guidance from account setup all the way to placing your investment. 

It's time to start investing in what you know and believe in with a Madison Trust Self-Directed IRA!
Self-Directed IRA Specialist at Madison Trust to show our incredible customer service.

Self-Directed IRA – FAQs

How much does a Self-Directed IRA cost?

Among the lowest in the industry, Madison Trust offers competitive flat fees - set at a fixed rate regardless of the value of your account. For more information, visit our Fee Schedule.

When can you take distributions from a Self-Directed IRA? 

To start withdrawing funds from your Self-Directed IRA you must be at least age 59 ½. If you opened a Self-Directed Traditional IRA, you must take required minimum distributions (RMDs) each year after you turn age 73. Self-Directed Roth IRA account holders are exempt from taking RMDs, since taxes are paid upfront.

To receive funds earned through your Self-Directed Roth IRA investments without penalty, you must reach age 59 ½ and have the account opened for at least five years. Self-Directed Roth IRA contributions can be withdrawn at any time.

To learn more about distributions, visit distribution rules.

Required Minimum Distributions (RMDs) Infographic. Taking a distribution before age 59 1/2 incurs a 10% early withdrawal penalty. You may start taking penalty-free distributions at age 59 1/2. Self-Directed Traditional IRA account holders are required to take RMDs once you reach age 73, deductible contributions and earnings will be taxed at ordinary income. Self-Directed Roth IRA account holders do not need to take RMDs, you can even pass on the wealth to your heirs.

How long does it take to set up a self-directed individual retirement account? 

At Madison Trust, we strive to make your account setup fast and simple. Once you fill out our easy online application, it typically takes about one to two weeks for your SDIRA to be funded.* Once your account is opened and funded, simply place an investment by instructing Madison Trust to send your funds directly to the investment of your choice.

*Please note, our processing timeframe does not include the transferring institution’s processing time. Turnaround time and delivery method back to Madison Trust is subject to the external institution’s processing times and procedures.

Can I roll my 401(k) into a Self-Directed IRA?

Yes, you can roll over your 401(k) into a Self-Directed IRA. You can rollover all – or a portion - of your funds. To do so, you will start the process by contacting your existing 401(k)’s plan administrator. For more information, view The Quick Guide to Funding an SDIRA with your 401(k).

What are the tax advantages of Self-Directed IRAs?

All income from an investment returns directly back to the Self-Directed IRA without being taxed and without being added to your personal taxable income for that year. You can reinvest these earnings into another opportunity and keep growing your retirement savings in a tax-advantaged environment.

Like standard IRAs, potential tax benefits vary depending on your account type. If you have a Self-Directed Traditional IRA, you can lower your income tax owed when you contribute to your account. If you have a Self-Directed Roth IRA, you pay taxes upfront, but you can take out your earnings tax-free in retirement.

Do I need a custodian for my Self-Directed IRA?

Yes! All IRAs must be held by a regulated custodian. A Self-Directed IRA custodian is responsible for administering the retirement account and holding custody of the IRA’s assets. Visit The Guidelines on How To Choose the Right SDIRA Custodian.

Can anyone open a Self-Directed IRA?

Yes! Just like a standard IRA, anyone can open a Self-Directed IRA. To contribute, the investor must earn taxable income. For more information, visit our blog Can Anyone Open an SDIRA?

How much money can you put in a self-directed retirement account?

The contribution limits for a Self-Directed IRA are the same as a standard IRA. If you are younger than 50 years old, you can contribute up to $7,000 in 2024 ($6,500 in 2023). If you are age 50+, you can contribute up to $8,000 in 2024 ($7,500 in 2023). Contributions for the year prior must be made by the tax filing deadline. For more information, visit Contributions FAQs.

In addition to annual contributions, you may also transfer or roll over all – of a portion of – your funds from an existing qualified retirement account such as an IRA or 401(k).

Do I need an LLC with my Self-Directed IRA?

You are not required to establish an LLC to invest in an alternative asset. Depending on your specific investments’ needs, establishing a Self-Directed IRA LLC may be beneficial. An IRA LLC enables you to invest your retirement money directly into the investment of your choice without having to contact your custodian for your everyday transactions. IRA LLCs are optimized for transaction-heavy investments, such as real estate rentals and fix-and-flips.

Do you have to file taxes for a Self-Directed IRA?

As a self-directed account holder, you do not need to file an annual tax return. However, each year you must provide your SDIRA custodian with the fair market value (FMV) of your account. Visit IRS Tax Tips for Retirement Accounts for more information.

Your self-directed retirement account would likely owe taxes if it generated business or trade income that is not related to the tax-exempt purpose of the IRA (Unrelated Business Income Tax) or when debt is leveraged to purchase an asset with your IRA (Unrelated Debt Financed Income).

What are prohibited transactions in a self-directed retirement account?

A prohibited transaction is a transaction that involves the account holder or other disqualified persons benefiting from the IRA’s investments. A good rule of thumb is that an IRA may transact with third parties but may not transact with close family members or closely held entities.

How do I distribute assets from an SDIRA?

To make a distribution from a Self-Directed IRA, complete a Distribution Request Form that details the distribution type, amount, and frequency of the distribution. If you are distributing an asset, please also submit a third-party certified value (i.e., an appraisal, letter from an investment sponsor, CPA-certified valuation, etc.). Depending on the asset, additional documents may also need to be submitted.

After the documents are submitted and approved, Madison Trust will send an Assignment of Interest to you. This documents the transfer of ownership from your IRA to your personal possession.

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