Self-Directed IRA Basics: What Are They and How To Open an Account

You may have heard the terms "self-directed retirement account," "alternative IRA," or "real estate IRA," but like most investors, you could probably use some clarity. What exactly is a self-managed retirement account? What benefits does it have? And what possible effects can a Self-Directed IRA have as part of your retirement investment strategy? Get answers from the Self-Directed IRA Specialists at Madison Trust, then get help gaining control of your retirement investments with a Self-Directed IRA:

If you're looking to start investing with a Self-Directed IRA, you're in the right place! We can help you learn:

Self-Directed IRAs at a Glance

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Invest Beyond Wall Street

A Self-Directed IRA (SDIRA) is an individual retirement account held by a custodian that lets you invest in alternative assets such as real estate, private placements, promissory notes, and more.

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Diversify Your Portfolio

Self-Directed IRAs give you, the investor, the power to diversify your portfolio, invest in what you know and believe in, and hedge against the stock market.

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Low Fees

The fees for a Self-Directed IRA 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. 

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Simple Set Up

There are three simple steps to setting up a Self-Directed IRA: open an account, fund the account, and place an investment.

What is a Self-Directed IRA?

A Self-Directed IRA is similar to a standard IRA. It's a retirement account that you contribute funds to, so that your retirement funds can grow through 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 IRA for real estate, precious metals, and private placements.

Why Have I Never Heard of a Self-Directed IRA?

The concept of a Self-Directed retirement plan is a novel one to many, as the majority of Americans hold their IRAs in large brokerage houses. They automatically assume that IRAs can only be invested in stocks, bonds, and mutual funds since those are the products offered to them. Brokerage houses do not accommodate alternative investments due to the administrative tasks involved and loss in commission.

What Are the Benefits of a Self-Directed IRA?

Portfolio Diversification: A Self-Directed IRA allows investors to diversify their retirement portfolios to include assets that are inaccessible in a standard IRA. Self-Directed IRA custodians specialize in privately held investments like real estate, private businesses, promissory notes, cryptocurrencies, and more, all within a tax-advantaged account.

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 differences.

Stability: With a Self-Directed IRA, one can diversify from the volatility of the stock market and invest in products with a steadier and more reliable revenue stream. Popular choices include rental real estate, secured promissory notes, and tax liens.

How Does a Self-Directed IRA Work?

Like its standard counterpart, a Self-Directed IRA is held by a qualified custodian. The custodian will hold your funds, execute transactions, and assist with any necessary tax filings. When you want to make a specific investment, here are the basic steps:

Choose an Asset: This part is fully up to the investor. In most cases, a Self-Directed IRA custodian will not offer specific financial advice. You should choose 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 form and submit it to the Self-Directed IRA custodian, and the custodian will perform the transaction. Of course, certain assets will have more extensive paperwork associated with their purchase; this is not due to the Self-Directed IRA but rather to the nature of the asset itself. For example, real estate often possesses a more involved process, including title and deed processing.

Are There Different Types of Self-Directed IRAs?

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 IRA is an individual retirement account that lets you invest in alternative assets beyond stocks, bonds, and mutual funds. You, as the account holder, direct the custodian to perform transactions.

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Optimized for low-transaction investments, like private placements and precious metals
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Place investments by instructing Madison Trust to send your IRA funds by writing a check or sending a wire directly to your investment.
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Simpler and low-cost setup; setting up an LLC or trust is not required

Self-Directed IRA with Checkbook Control (Checkbook IRA)

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

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Optimized for transaction-heavy investments, like real estate rentals and fix-and-flips
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Place investments by simply writing a check or sending a wire from your Checkbook IRA 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 investment experience
Learn More

What can a Self-Directed IRA Invest in?

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

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Real Estate
(Rentals, Commercial Property, Raw Land, etc.)
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Private Placements
(Private Equity Funds, Hedge Funds, etc.)
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Promissory Notes
(Secured and Unsecured)
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Startups and Crowdfunding
Precious Metals
And Many More

Got questions? We've got answers!

Contact us and we'll be glad to walk you through your investing options.
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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 risk. 
But you still may be wondering, "Which IRA is best for me?" Here are some of the basic differences between a 
standard IRA and a Self-Directed IRA.

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 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.
Must be held by a regulated custodian as required by the IRS. Most banks, brokerages, and online trading platforms offer IRAs.
Offered exclusively by regulated custodians who specialize in Self-Directed IRAs.
Standard IRA
Asset Choice
Standard stock market products.
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.
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.

Setting Up a Self-Directed IRA

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

Open a Self-Directed IRA with Madison Trust by completing our easy online application.
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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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Place an Investment

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

Take This Info on the Go!

Download this PDF that outlines our simple setup process.
Download PDF

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

The cost to set up a Self-Directed IRA with Madison Trust Company is $50; maintenance is $100 per quarter.

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 2023, the Self-Directed IRA maximum contribution is $6,500 if you're under age 50. If you're age 50 and over, you can make an additional $1,000 catch-up contribution ($7,500 maximum contribution for age 50+). For more information on Self-Directed IRA contributions, please visit our frequently asked questions.

Please note that Self-Directed IRA limits can change on a yearly basis. Madison Trust Company representatives are always happy to answer any questions you may have. Schedule a call today to get your questions answered.
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Ready to Get Started? We're Here for You! 

Madison Trust offers Self-Directed IRA 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!
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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.

How long does it take to set up a Self-Directed IRA? 

At Madison Trust, we make your Self-Directed IRA setup fast and simple. Once you fill out our easy online application, it typically takes about one to two weeks for your Self-Directed IRA to be funded.* Once your account is opened and funded, simply place an investment by instructing Madison Trust to invest in the asset 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 a Self-Directed IRA with your 401(k).

What are the tax advantages of a Self-Directed IRA?

When you invest with a Self-Directed IRA, 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 Self-Directed IRA 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 Self-Directed IRAs must be held by a custodian. A Self-Directed IRA custodian is responsible for administering the retirement account and holding custody of the IRA’s assets. Self-Directed IRA custodians allow account holders to invest beyond Wall Street and into alternative assets such as real estate, promissory notes, private placements, precious metals, and more. Visit The Guidelines on How To Choose the Right SDIRA Custodian.

Can anyone have a Self-Directed IRA?

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

How much money can you put in a Self-Directed IRA?

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 $6,500 in 2023 ($6,000 in 2022). If you are age 50+, you can contribute up to $7,500 in 2023 ($7,000 in 2022). Contributions for the year prior must be made by the tax filing deadline. For more information, visit Contributions FAQs.

In addition to annual contributions, Self-Directed IRA account holders may also roll over or transfer 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?

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

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

What are prohibited transactions in a Self-Directed IRA?

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.

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 Self-Directed IRA 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 do I distribute assets from a Self-Directed IRA?

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.

Our Self-Directed IRA Specialists are here to answer all of your questions.(800) 721-4900

Ready to start investing in your future?

Reach out to our team, and we’ll answer any questions you may have.
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