Self-Directed IRA: A Savvy Investor’s Little-Known Secret

Investors are increasingly turning to assets beyond traditional stocks and bonds. Fueled by stock market volatility and their growing sophistication, many are looking to invest in real estate, private …

Investors are increasingly turning to assets beyond traditional stocks and bonds. Fueled by stock market volatility and their growing sophistication, many are looking to invest in real estate, private stocks, hedge funds and other investments with an individual retirement account (IRA). Such investments made through a self-directed IRA can provide greater flexibility and control over the investments held in an individual’s retirement account.

Self-directed IRAs, which have been around since 1974, are within IRS guidelines. And while they are quickly growing in popularity, they still account for only a small percentage of the almost $4 trillion held in retirement accounts today. Though they were once little-known, self-directed IRAs are becoming more mainstream for their ability to offer greater diversification and investment potential and to offer informed individuals the ability to invest in things with which they are familiar.

Why set up a self-directed IRA?

Like traditional IRAs, self-directed IRAs allow taxes on assets held inside the IRA account to be deferred or postponed until the money is withdrawn from the account. With alternative investments, account owners can take a more proactive approach toward improving investment returns because they can choose assets that are not publicly marketed. Real estate investors, for instance, can capitalize on their knowledge of an area and/or market by investing in local property or a resort-style home in an up-and-coming area. Investors in private stock can capitalize on their knowledge of emerging companies and industries. Additionally, taxes on appreciation and rental income are deferred, so an investor can grow his or her portfolio at an even faster rate.

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Another benefit is broader diversification. Recent volatility in the stock market has forced many to take a harder look at their investment allocations in hopes of ensuring a good mix of opportunity and risk. A self-directed IRA provides a broader mix of investment opportunities beyond traditional publicly-traded assets. A leading investment option in self-directed IRAs is real estate. The following are a few ways retirement accounts invest using a self-directed IRA:

  • Residential rentals
  • Commercial properties
  • Condominiums
  • Land
  • Trust deeds and mortgages, as well as mortgage pools
  • Mobile homes

Other options that can be held in a self-directed IRA include:

  • Private stock and notes
  • LLCs
  • Limited partnerships
  • Tax liens
  • Hedge funds
  • Mutual funds
  • Stocks and bonds
  • Individual brokerage accounts
  • Annuities

Finding out more

Alternative investment options are not offered by every financial planner or advisor. Some brokers or custodians may even try to sway investors away from setting up a self-directed IRA because they do not fully understand the investment opportunities available or lack the capabilities to provide this option to their clients. However, alternative investments fit within IRS guidelines. The process can be greatly simplified when account owners work with an advisor knowledgeable about the different practices.

Individuals interested in learning more about setting up a self-directed IRA should talk with their financial professional, lawyer or accountant to determine whether investing in alternative assets with an IRA is right for them. Additionally, a retirement account custodian can provide the most up-to-date information pertaining to retirement account administration. Investors should look to individuals with proven track records and histories of working with self-directed IRAs when considering adding these assets to their retirement plan picture. Furthermore, regulatory knowledge and customer service throughout the investment process are essential elements for every diligent account owner.

TommyJoe A. (“TJ”) Valenzuela is vice president of sales and marketing for Trust Administration Services (, a division of First Regional Bank. He has more than 15 years of experience in the financial services industry, implementing marketing strategies that educate and benefit real estate professionals, attorneys and other advisors. He is a guest speaker at industry conferences, addressing topics such as taxable investment strategies and retirement plan investing.


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