A self directed IRA is simply an IRA opened with a broker as opposed to one opened through a Mutual Fund company that is limited to mutual funds. A self directed IRA allows you to buy and sell stocks within the IRA. I lucked into a self directed IRA. I already had a regular brokerage account with BuyAndHold.com, and saw they offered Roth IRAs. I had some money to invest. I was already investing the maximum into my 401k. So I decided to open a Roth IRA account. I bought some ETFs, and a couple Canadian Enerhy Royalty Trusts. It wasn’t until later while I was doing research, that I found that my Roth IRA was in fact a self directed IRA.
There are other types of self-directed IRA’s that allow you to buy and sell other stuff such as real estate within the IRA. For this type of self-directed IRA, you will need a custodian. You cannot be the custodian of your own self-directed IRA. You will need to find a custodian that will handle real estate.
There are strict IRS rules regarding real estate within a self directed IRA. You cannot use the property! You cannot let friends for family use the real estate. If you do, you are in for stiff penalties, and taxes. The property placed into the IRA may not have been previously owned by you, or any linial relatives such as your parents, or your children. You can sell the property, but not to a family member.
Any funds made from the property such as rents must be paid into the self directed IRA. Also, any operating expenses must also come out of the self directed IRA. If your IRA does not have sufficient funds to operate the property, you will need to withdraw the property from your IRA, paying taxes, and possible penalties.
You can take posession of the property at age 59 1/2. If the self directed IRA is a traditional IRA, then you will have to pay income tax on the property. If the self directed IRA is a Roth IRA, then you will not have to pay taxes.
Because self-directed IRA’s can be tricky, and making a mistake can be expensive, work with an expert on setting one up, and running it.