Forge Trust

How Can I Use a Self-Directed IRA?

By Zander Koallick
Key Takeaways
  • A self-directed IRA (SDIRA) is a type of retirement account that can hold alternative assets, such as private debt, investment real estate, hedge funds, and shares of private companies.

  • Most self-directed IRAs are funded by a rollover from a 401(k) or an IRA Transfer into a SDIRA, though an account owner can contribute money held outside a retirement account into a SDIRA as well.

  • Holding alternative investments is possible in a self-directed IRA, but to do so you need to find a custodian that offers this kind of tax-advantaged retirement account.

Every day, you use specialized tools that can make your life better. For instance, you may use an air fryer to make crispy French fries without the need for cooking oil or use an electronic trimmer to make your hedges look crisp and neat. While you could simply use a skillet or hedge clippers for these tasks, specialized tools allow you to get the exact results you’re looking to achieve.

You can take a similar approach to planning for your retirement. While retirement saving is far more complex than cooking or landscaping, using a specialized tool can help you gain more control over your financial future. In what follows, we’ll explain how to use a specialized tool for retirement saving: a self-directed IRA (SDIRA). We’ll also take you through an example of how to fund an account, as well as how to buy and hold an investment in a SDIRA.

Our previous article, “What is a Self-Directed IRA?”, gave a broad overview of this unique kind of IRA. As we explained in that piece, a person may want to use a SDIRA retirement account if they want more freedom and choice than regular IRAs offer. Self-directed IRAs can hold investments (such as public stocks and mutual funds) that are eligible in all types of IRAs. But SDIRAs also enable investors to hold alternative assets, which may offer compelling benefits in terms of returns and/or portfolio diversification.

How Self-Directed IRAs Work: A Quick Recap

A self-directed IRA is a type of IRA that is eligible to hold alternative assets — assets which are likely not permitted to be held in an IRA offered by a brokerage company like Fidelity or Charles Schwab. Investments in SDIRAs must be administered by a self-directed IRA custodian, which is typically a trust company. Unlike regular IRAs, however, the custodian of a SDIRA may not offer any advice or guidance to the account holder regarding the suitability or appropriateness of investments. That’s how we get the term “self-directed.”

You can fund a self-directed IRA in two primary ways:

  • You can roll over a 401(k) or another qualified retirement account into a SDIRA, or transfer assets from an existing IRA.
  • You can contribute money held outside a retirement account to a SDIRA, subject to IRS contribution limits.

In both cases, once the account is funded, a self-directed IRA holder may invest their money as they deem appropriate, provided they stay within the rules prescribed by the IRS for SDIRAs.1

The Benefits of Self-Directed IRAs

Self-directed IRAs come with many potential benefits. As a Do-It-Yourself (“DIY”) retirement account, a SDIRA may be ideal for those who like to handle tasks themselves. Self-directed IRAs put the retirement saver in charge of their account and gives them the latitude to hold a wide variety of investments beyond the ones allowed in a regular IRA. This quality can appeal to the investor who enjoys researching — and investing — in assets beyond mutual funds and public stocks.

The tax benefits associated with self-directed IRAs are similar to other qualified retirement plans. In the case of a Traditional self-directed IRA, savers may take advantage of tax-deductible contributions. For self-directed Roth IRAs, meanwhile, withdrawals are generally tax-free after a required minimum holding period.

By being eligible to hold alternative assets, self-directed IRAs can offer portfolio benefits as well. Alternative assets (such as investment real estate or shares of private companies) may at times outperform public stocks and bonds. These assets may also provide uncorrelated returns, meaning they don’t necessarily rise and fall in lockstep with traditional investments.

Types of Investments Allowed in Self-Directed IRAs

Self-directed IRAs are permitted to hold investments that can be held in a regular IRA. This includes, for example, public stocks and bonds, cash, and mutual funds. Beyond these investment types, SDIRAs may also hold alternative investments, including but not limited to, assets such as:

  • Private Debt

    Sometimes called private or direct lending, non-public debt securities have become increasingly popular investments for both individuals and institutions in recent years.2

  • Partnerships

    Often colloquially called hedge funds, partnerships can pursue different methods and goals depending on their mandates. Examples include “long/short” equity strategies or “macro” funds that make bets on interest rates and other economic trends.3

  • Real Estate

    Owning property can offer both the potential for regular income as well as the possibility of capital appreciation. Crucially, though, a SDIRA account holder may not derive any direct benefit from the property in question — meaning, for example, you or family members cannot live in a home you hold in your self-directed IRA.4

  • Private Company Shares

    You may own shares in private companies such as startups within self-directed IRAs. Traditional custodians generally don’t permit these shares within a retirement account, but some trust companies (such as Forge Trust) allow this practice.

    It’s important to remember that you must be an accredited investor to invest in many alternative assets, so be sure to know the requirements before investing.5

Example: How to Use a Self-Directed IRA to Invest in Real Estate

Here’s a simplified, step-by-step example of how to use a self-directed IRA to invest in one well-known alternative asset, investment real estate.

  • Presume you hold $500,000 in a 401(k) plan, with the assets invested in mutual funds.
  • You want to use the $500,000 to invest in real estate, so you liquidate your positions and roll over the cash into a Traditional (non-Roth) SDIRA.
  • Once the account is funded, you use the cash to buy a small apartment building.
  • The income from the investment property and capital gains (presuming you sell the property for a gain) are tax-deferred because they’re held in a tax-advantaged account (the SDIRA) until age 59½, or when you choose to take withdrawals from the account after that age.
  • The structure can allow for significant tax savings if your taxable income is lower during retirement than when you make the investment.

In this simplified example, the investor purchased real estate directly, though in many cases property investors may use an LLC or other investment vehicles in these types of transactions. Check with your financial advisor or an attorney when purchasing real estate to see if direct IRA ownership or using an intermediary vehicle such as an LLC is the best option for you.

Prohibited Investments in Self-Directed IRAs

The range of permitted SDIRA investments is broad, but not unlimited. In general, the IRS requires that you maintain an arm's length from your IRA investments.6 Here are some investments and prohibited transactions the IRS does not allow to be held in self-directed IRAs:

  • Collectibles (such as artwork or rare coins)
  • S Corporation shares
  • Life insurance

Knowing the rules is crucial: the last thing you want to do is engage in a prohibited self-directed IRA transaction and suffer the tax consequences.

For retirement savers who prioritize greater freedom, a self-directed IRA could be a compelling choice. Self-directed IRAs allow you to hold a wide range of alternative assets and reap the same tax benefits as regular IRAs, too. Understanding how these unique retirement accounts work is essential, however, and can help you get the most out of your retirement savings.

Forge Trust Co., a subsidiary of Forge Global, is an IRA custodian that offers self-directed IRA services for investors. To learn more, click here.

Frequently Asked Questions on How to Use a Self-Directed IRA


How do I use a self-directed IRA?

To use your self-directed IRA, you need to fund it and then purchase qualified investments. These can be traditional investments, such as public stocks or bonds, or alternative assets, such as private debt, real estate, or private company shares.


How can I use a self-directed IRA to invest in real estate?

Assuming you’ve already funded your self-directed IRA, you can use the money to purchase direct investment real estate (such as a small apartment building). Additionally, you can purchase passive real estate interests in a limited partnership or LLC. Just make sure you stay within the rules outlined by the IRS. This means you cannot derive any personal benefit. For example, if you buy an apartment building in your SDIRA, you and your family cannot live there.


How can I use a self-directed IRA to invest in startups?

You can use your self-directed IRA to purchase shares in private companies, such as startups. Assuming your account is already funded, you would simply buy shares using funds in your SDIRA.


How can I fund a self-directed IRA?

Funding a self-directed IRA can be completed by transferring your Traditional IRA to a SDIRA, rolling over your 401(k) account (or other qualified retirement account), or contributing money held outside a retirement vehicle.


What types of investments can I hold in a self-directed IRA?

You are permitted to hold investments in a self-directed IRA that are eligible for a regular IRA. This can include cash, public stocks and bonds, or mutual funds. In addition, you may also hold alternative assets, such as private debt, investment real estate, partnerships, and private company shares.


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About the Author

Zander is a seasoned product leader with a 12-year history in financial technology, specializing in private market investments. His tenure includes roles at LTSE, Alto, and IHS Markit, where he focused on product management and strategy. Zander holds an MBA from Vanderbilt University, focusing on International Business, and a B.A. in Economics from Colby College.

Please read these important disclosures.

Forge Trust Co. does not give legal, tax, or investment advice, and is solely a passive custodian for IRAs. This blog post is intended to provide general education regarding SDIRAs. Nothing in this post is an endorsement or recommendation of any investment, promoter, or investment product. You should seek your own legal, tax, and/or investment advice if you wish to proceed with a self-directed IRA.