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

Are you serious about creating consistent, predictable, secure wealth for today and tomorrow?

If so, it’s imperative you know the difference between a traditional IRA and a self-directed IRA.

Failure to understand the difference between what I call a “plain vanilla IRA” and a “true 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?

A self-directed IRA is an IRA where the IRA provider (that’s us!) empowers you, the client, to invest in anything allowed by law, without additional restrictions on investments.

There is a lot of confusion surrounding this distinction. The confusion begins with traditional financial institutions that offer IRAs, like your bank or credit union.

If you call your local bank or brokerage and ask if your IRA is self-directed, they will say something like, “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 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.

A Traditional IRA vs. A Self-Directed IRA

So, what’s the actual difference between a “plain vanilla” IRA and a “true” self-directed IRA?

The “Plain Vanilla” IRA:

Most IRAs 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 investments like stocks, bonds, mutual funds, CDs, ETFs, and annuities.

When they say you have a self-directed IRA, what they mean is you can only buy from their list of approved commission and fee-based investment products. Approved by who? The financial institution charging the fees and commissions, of course! This means they’re prioritizing their ability to make money, not yours.

The “True” Self-Directed IRA:

This is what we like to call our IRAs at Specialized Trust Company. This kind of IRA allows you to invest in all these options, plus allows you to invest in virtually anything else the IRS allows.

With a self-directed IRA, you are empowered to make your own decisions and can invest in what you know and understand, all while receiving the incredible tax benefits IRAs offer.

Common investments we see clients make at Specialized Trust Company are real estate, tax liens, FOREX, notes, mortgages and trust deeds.

Think of it this way… instead of being limited to a bland, boring vanilla ice cream cone, a self-directed IRA is like getting to choose your favorite ice cream flavor. Plus, you can add all the sprinkles, toppings, whipped cream, and cherries you want!

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

We do.

While your IRA custodian cannot liberalize the rules set forth by the IRS, we are allowed to work within them and set custodian-specific parameters.

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. In the case of plain vanilla IRAs, firms will handcuff account holders to commission-based products. Other firms, like Specialized Trust Company, allow their account holders to access the full spectrum of investment possibilities.

In short, the company that holds your IRA is what makes it self-directed. Trusted online investment advice source The Motley Fool said it best:

“…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.”

What’s the best way to make sure an IRA is truly self-directed?

Find a company that prioritizes your control. Specialized Trust Company is one of the rare firms that is willing to put in the work to guide you to wealth and success with your own “true” self-directed IRA. So why wait? Invest in the future of yourself and your family, the way you want. Get started today.


About the Author

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