It is NOT simply a retirement account you manage yourself.
There is actually a section of the tax code with specific criteria (Section 408) you need to follow, even though you won't find the terms "self" or "directed" in the text.
It is a great choice for those of you who are not comfortable with the volatility of the stock market and want more control over your money.
In the tax code that defines IRA's, the government has spelled out who can serve as a "custodian" for a retirement account.
But this definition can be misleading. How can something be self-directed if a "custodian" or "trustee" is making investing decisions for you?
The trustee or custodian acts as your investment broker. They handle all the assets, transaction records, submit IRS reports as required, create and deliver client statements, help you understand rules and regulations, and take care of administrative duties on your behalf (for the life of the IRA account!).
You still make the decisions. The custodian just makes it happen. This is called an "arm's length" transaction, and is one of the minimum requirements for an IRA to be classified as "self directed".
But before you start investing, you'll need to exercise your increased decision-making capability. There are different types of custodians, each providing a different level of service, and you need to pick one.
An IRA adviser does the work for you, and works well if you are looking for guidance throughout the entire process (finding investments, handling investments, and interacting with self-directed IRA custodians on your behalf, etc.)
You, as an investor, are still responsible for finding and making investments.
But you manage all other aspects of investing (including paperwork!).
A self-directed IRA can also be used as your traditional or Roth IRA, because the laws related to these two retirement investment accounts also apply to self-directed IRAs.
The IRS provides rules for the assets that can be held in a self directed IRA, which include the following:
The good news is that most self-directed IRA custodians and will give you access to all types of investments permitted by the IRS, including foreign real estate!
As far as contributions go, you make annual contributions to a self directed IRA based on the current year's limits.
You MUST get professional financial investment advice before creating a self directed IRA.
The second step is to create a planning document with the custodian. Afterward, you will roll over funds from an existing IRA or other "qualified plan" to the new self-directed plan.
Finally, you need to be select your asset classes and level of diversification. You can then instruct the trustee or custodian to buy and sell on your behalf.