Not only can investments themselves be opaque, but the Securities and Exchange Commission (opens in a new tab) warns that criminals take advantage of people who have self-managed IRAs or encourage people to create one to sell them a fraudulent investment. A self-directed IRA is a type of individual retirement account that can be used as an investment vehicle. The Internal Revenue Service (IRS) allows individuals to transfer retirement funds from a traditional retirement account to a self-directed IRA. Once that step is completed, the funds can be used to invest in several categories.
One of the allowed investment options is real estate. Other options include stocks, partnerships, mortgage debt and precious metals. Collectibles include a wide range of items, including antiques, works of art, alcoholic beverages, baseball cards, souvenirs, jewelry, stamps and rare coins (note that this affects the type of gold a self-directed Roth IRA can store). Using a self-directed IRA to invest in residential or commercial real estate and other investments not allowed through normal IRAs has some significant benefits, but it also has drawbacks that could make it less attractive to many investors.
A self-directed IRA is a traditional or Roth type of IRA, meaning that it allows you to save for retirement with tax advantages and has the same IRA contribution limits. Advocates of self-managed IRAs claim that their ability to invest outside the mainstream improves their diversification, but a self-directed IRA can just as easily lack diversity as any other retirement account. Given the complexity of self-managed IRAs, you may want a financial advisor with experience managing investment transactions for self-directed IRAs to help you make investments with due diligence. If a normal IRA seems more appropriate to you, here's a comparison between the brokers we've selected as the top IRA account providers.
A common ruse is to say that the IRA depositary has examined or approves the underlying investment, when, as the SEC points out, custodians generally do not assess “the quality or legitimacy of any investment in the self-directed IRA or its promoters.” Self-directed IRAs allow you to invest in a wide variety of investments, but those assets are often illiquid, meaning that if you're faced with an unexpected emergency, you may have difficulty getting money out of your IRA.