What is a Self-Directed IRA? Your Complete Guide to SDIRAs and Alternative Assets

A self-directed IRA (SDIRA) is a retirement account that operates under the same tax rules as any traditional or Roth IRA, with one important difference: it can hold alternative assets that a standard brokerage account will not touch. Think real estate, private equity, promissory notes, and precious metals. The key to making that work is a specialized custodian who holds and administers those assets, while leaving every investment decision entirely up to you.

What is a Self-Directed IRA?

A self-directed IRA is a traditional, Roth, SEP, or SIMPLE IRA held by a custodian that permits investment in a broader set of assets than a conventional bank or brokerage will allow. The tax treatment is identical to a standard IRA. Contribution limits, distribution rules, required minimum distributions, and the prohibited transaction rules under IRC Section 4975 all apply in full.

What distinguishes a self-directed IRA is the custodian's role. SDIRA custodians are often called "passive" or "directed" custodians for good reason. They hold title to your assets, process transactions at your direction, and handle required reporting. They do not evaluate whether an investment is sound, legal, or appropriate for your situation. As the IRS makes clear in its IRA FAQs, the tax law permits a wide investment universe but does not endorse or approve specific investments. That responsibility falls entirely on the account holder.

Under IRC Section 408(a)(2), the custodian must be a bank or an IRS-approved non-bank trustee. You cannot simply open a checking account and call it an IRA.

What Can You Hold in a Self-Directed IRA?

The list of permitted investments is long. The IRS approach is to prohibit specific categories and specific transactions; everything else is generally fair game if handled correctly. Commonly held alternative assets in SDIRAs include:

Real estate: residential rental properties, commercial buildings, raw land, and vacant lots
Private equity and private placements: interests in private companies, venture-stage businesses, and limited partnerships
Private debt and promissory notes: mortgage notes, personal loans, and other debt instruments where the IRA acts as the lender
Precious metals: gold, silver, platinum, and palladium bullion that meets the purity standards under IRC Section 408(m)(3)
Cryptocurrency: digital assets, subject to your custodian's capabilities and internal policies
LLC interests: membership interests in limited liability companies
Tax lien certificates: county-issued liens on properties with delinquent taxes

What Is NOT Allowed in an SDIRA

Some assets are expressly prohibited under the Internal Revenue Code, regardless of what your custodian might be willing to hold.

Life insurance contracts are prohibited under IRC Section 408(a)(3). No exceptions.
Collectibles are prohibited under IRC Section 408(m). The statute specifically names artwork, rugs, antiques, gems, stamps, alcoholic beverages, and most coins. Bullion and coins that meet the purity and custody requirements of Section 408(m)(3) are excepted, but the default is prohibition. If your IRA acquires a collectible, the IRS treats the acquisition amount as a taxable distribution in that year.
S-corporation stock cannot be held in an IRA because IRAs are not permissible S-corporation shareholders under the tax code. Holding S-corp stock would terminate the S-election for the entire company.

Prohibited Transactions and Disqualified Persons

Even when an asset type is permitted, the wrong transaction can blow up the entire IRA. The IRS prohibited transactions rules under IRC Section 4975 restrict dealings between the IRA and "disqualified persons," a category that includes:

The IRA account owner
The account owner's spouse
Lineal descendants and ascendants (children, grandchildren, parents, grandparents)
Entities in which the above persons hold a controlling interest
Fiduciaries and service providers to the IRA

Specific transactions that are prohibited include selling, exchanging, or leasing property between the IRA and a disqualified person; lending money or extending credit from the IRA to a disqualified person; and using IRA assets for the personal benefit of any disqualified person (for example, living in a house your IRA owns).

Watch out: The consequences are severe. A prohibited transaction causes the IRA to be treated as if it distributed ALL of its assets at fair market value on the first day of that tax year. The full account balance becomes ordinary income in that year, and if you are under 59½, the 10% early distribution penalty applies on top of that.

Self-Directed IRA Custodian vs. Checkbook Control

There are two structural models most SDIRA investors choose between.

The passive custodian model keeps all assets titled in the IRA's name. Every transaction requires the custodian's sign-off, which slows execution and adds per-transaction fees. The upside is an additional layer of oversight and a clear paper trail showing the IRA, not the account holder, is the party to every transaction.
The checkbook control structure routes things differently. The IRA invests in a single-member LLC, and the account holder manages the LLC directly, writing checks from the LLC's bank account. Execution is faster, and per-transaction costs drop. The tradeoff is higher prohibited-transaction risk: because the account holder has direct access to the assets, any personal use or disqualified-person dealing is easier to trigger accidentally.

Checkbook control does not eliminate the prohibited-transaction rules. It just gives you more rope. Work with a tax attorney before setting up this structure.

How Alternative Assets Get Valued in an SDIRA (and When You Need an Appraisal)

This is where self-directed IRAs diverge sharply from conventional retirement accounts, and where many account holders are caught off guard.

The IRS requires the IRA custodian to report the year-end fair market value of every IRA asset on Form 5498 annually. For publicly traded stocks and bonds, that value comes from a quoted market price. For a rental property, a private equity interest, or a promissory note, there is no ticker. The custodian cannot determine these values on their own. The account holder must supply a supportable, independent valuation.

Two situations make an independent qualified appraisal especially critical:

Roth conversion. When you convert a traditional SDIRA holding an alternative asset to a Roth IRA, the converted amount is treated as ordinary income in the year of conversion. That income is based on the fair market value of the asset at the time of conversion. An inflated value means you over-report income and overpay taxes. An understated value draws IRS scrutiny and potential penalties. A defensible, independent appraisal is the protection in both directions.

In-kind distribution. When the IRA distributes an alternative asset directly to you rather than selling it first, the fair market value of that asset on the distribution date is the taxable amount reported on Form 1099-R. If that value is wrong, the tax reporting is wrong.

There is a third scenario worth noting. If a prohibited transaction causes the IRA to be treated as fully distributed, the IRS values all assets at fair market value on the first day of that tax year. Accounts that have never had an independent valuation done are in a difficult position when that calculation happens.

The custodian cannot provide this valuation. That responsibility belongs to the account holder, and the IRS expects it to be supported by a qualified, independent appraisal for hard-to-value assets.

Our appraisers at Horizon Business Valuations prepare USPAP-compliant fair market valuations for SDIRAs, covering Roth conversions, in-kind distributions, and annual Form 5498 reporting. If you need a valuation for any of these purposes, reach out to start your appraisal.

Top Self-Directed IRA Custodians

Choosing a custodian means matching their asset capabilities to your investment strategy. Fees vary across all providers, and you should confirm current pricing directly on each firm's website before opening an account. Here are five well-established options:

Equity Trust Company - Best for investors who want a broad alternative asset menu covering real estate, private equity, precious metals, and crypto. Fee model: account-value-based annual fee plus per-asset fees.
The Entrust Group - Best for real estate, private lending, and private equity. Fee model: annual recordkeeping fee with an AUM component for larger accounts.
STRATA Trust Company - Best for precious metals and physical alternative assets. Fee model: clear annual fee structure, popular with metals-focused investors.
Alto IRA - Best for platform-based alternatives including crowdfunding, venture, and crypto. Fee model: tiered subscription model with lower minimums for newer investors.
IRA Financial - Best for checkbook control structures, IRA LLCs, and Solo 401(k) accounts. Fee model: flat annual fee with minimal per-transaction costs.

Pro tip: Fee structures vary widely across custodians. Compare setup fees, annual custody fees, per-asset holding fees, and any storage or insurance costs for physical metals before you open an account. A low annual fee can be offset quickly by high per-transaction charges if you are an active investor.

How to Open a Self-Directed IRA

The process is straightforward once you know the steps. Here is how it works:

Choose a custodian. Select an IRS-approved SDIRA custodian that supports your target asset class. Not every custodian handles every asset type.
Open and fund the account. Complete the custodian's application. Fund by direct contribution (subject to annual IRA contribution limits under IRS Publication 590-A), by trustee-to-trustee transfer from an existing IRA, or by rollover from a 401(k) or other qualified plan. If you take a rollover distribution directly, you have 60 days to deposit it into the new IRA or the distribution becomes taxable.
Identify the investment. Conduct your own due diligence. The custodian will not evaluate the merits of the investment. That work is yours entirely.
Direct the purchase through the custodian. All funds must flow from the IRA account, never from personal accounts. Title is held in the name of the IRA, typically formatted as: "[Custodian Name] FBO [Your Name] IRA."
Maintain annual valuations and compliance. Provide the custodian with a supportable year-end fair market value for each alternative asset annually for Form 5498 reporting. Keep all transactions at arm's length from disqualified persons. Consult IRS Publication 590-B for distribution and RMD rules.

Frequently Asked Questions about SDIRAs

Is a self-directed IRA legal?

Yes. A self-directed IRA is a standard IRA structure that is fully recognized under the Internal Revenue Code. The broad investment latitude is permitted by law; the rules on prohibited transactions and disqualified persons are what keep the account operating within its tax-advantaged status. Following those rules is the account holder's responsibility.

What is the difference between a self-directed IRA and a regular IRA?

The tax treatment, contribution limits, and distribution rules are identical. The difference is the custodian and the investment menu. A conventional IRA custodian, such as a brokerage firm or bank, limits holdings to publicly traded securities. A self-directed IRA custodian permits alternative assets including real estate, private equity, promissory notes, and precious metals, as long as those assets comply with IRS rules.

Do I need an appraisal for my SDIRA?

For hard-to-value alternative assets, yes. The IRS requires your custodian to report the year-end fair market value of every IRA asset on Form 5498. For assets without a quoted market price, that value must come from the account holder, and a qualified independent appraisal is the defensible way to support it. Appraisals are especially important at Roth conversion, in-kind distribution, and any time a prohibited transaction might be alleged. Our team at Horizon Business Valuations handles SDIRA appraisals for all of these situations.

Can I hold real estate in an IRA?

Yes, with conditions. The property must be titled in the name of the IRA, not in your personal name. All income (rent) and all expenses (repairs, taxes, insurance) must flow through the IRA account. You and other disqualified persons cannot live in or personally use the property, and you cannot perform compensated work on it. Financing is possible through non-recourse loans, but that may trigger Unrelated Debt-Financed Income (UDFI) tax and a Form 990-T filing requirement.

What is a prohibited transaction in an SDIRA?

A prohibited transaction is any direct or indirect dealing between the IRA and a disqualified person (the account owner, their spouse, lineal family members, or entities they control) that benefits the disqualified person personally. Common examples include buying a property from yourself and selling it to your IRA, personally using a property your IRA owns, or having your IRA lend money to your child. If a prohibited transaction occurs, the IRS treats the entire IRA as distributed on the first day of that tax year, triggering full income tax on the account balance and potentially the 10% early distribution penalty.

Get Your SDIRA Valuation Right

If you hold real estate, private equity, or other alternative assets in a self-directed IRA, our appraisers prepare USPAP-compliant fair market valuations for Roth conversions, in-kind distributions, and annual Form 5498 reporting. Get in touch to start your SDIRA appraisal.

Sources and Further Reading

IRS rules on permitted IRA investments and custodian requirements: IRS Retirement Plans FAQs Regarding IRAs
IRS prohibited transaction rules and disqualified persons: IRS Retirement Topics: Prohibited Transactions
Annual fair market value reporting for IRA assets: IRS About Form 5498
IRA contribution rules and funding mechanics: IRS Publication 590-A
IRA distribution rules and required minimum distributions: IRS Publication 590-B
General IRA framework including IRC Section 408 requirements: IRS Individual Retirement Arrangements

This article is provided for general informational purposes only and does not constitute legal, tax, or financial advice. Readers should consult a qualified attorney or CPA regarding their specific circumstances.