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Self-Directed IRAs, Explained in Plain English
What they are, how the rules work, and what to know before you open one. Free PDF — no jargon, no sales pitch.
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What you’ll learn
- What makes an IRA “self-directed” — and what it isn’t
- The rules that matter most: contributions, distributions, and prohibited transactions
- How rollovers from a 401(k) or existing IRA actually work
- What a custodian does, and how to evaluate one
- The most common mistakes people make with self-directed accounts
Inside the guide — seven short sections
- What a self-directed IRA is (and isn’t)
- How it differs from a traditional or Roth IRA
- Rollovers, and the 60-day rule that catches people out
- Contribution basics and RMDs
- Prohibited transactions — the rule that disqualifies accounts
- Choosing a custodian: four questions to ask
- The most common mistakes
1 What is a self-directed IRA?
A self-directed IRA follows the same IRS rules as a traditional or Roth IRA — same tax treatment, same contribution limits, same distribution rules. The difference is breadth: where a standard IRA typically limits you to stocks, bonds, and mutual funds, a self-directed IRA allows a wider range of IRS-permitted assets, held through a specialized custodian.
“Self-directed” doesn’t mean “no rules.” It means you make the investment decisions — and you’re responsible for staying inside the IRS lines.
2 How is it different from a regular IRA?
The tax advantages are identical. What’s different is control — and responsibility. A standard IRA usually offers a broker’s fund menu; a self-directed IRA lets you choose from a broader IRS-permitted range, but requires a specialized custodian and puts compliance on you.
3 Rollovers: moving money without triggering taxes or penalties
Most people fund a self-directed IRA by rolling over an existing 401(k) or IRA.
- Direct rollovers move funds custodian-to-custodian. Simplest path, no withholding.
- Indirect rollovers put the money in your hands first — then you generally have 60 days to redeposit it, or the IRS treats it as a distribution (taxes plus a possible early-withdrawal penalty under 59½).
When in doubt, choose the direct route and confirm each step with both custodians in writing.
4 Contribution basics
Self-directed IRAs follow the same annual IRS contribution limits as traditional and Roth IRAs. Limits change most years — check current IRS figures before contributing; excess contributions trigger penalties. You need eligible earned income to contribute, and pre-tax accounts still face required minimum distributions (RMDs).
5 Prohibited transactions (the rule that bites)
The IRS prohibits “self-dealing” — using account assets for personal benefit before retirement, or transacting with certain related parties. A violation can disqualify the entire account, making everything in it immediately taxable. Most violations happen by accident. Read this part twice.
6 Choosing a custodian: questions to ask
- Do you specialize in self-directed IRAs?
- What are your setup, annual, and transaction fees — in writing?
- How do you handle IRS reporting for my account?
- What is your process if I have a question about a transaction’s compliance?
If a custodian can’t answer these clearly, keep looking.
7 Common mistakes
- Funding the account before understanding the prohibited-transaction rules
- Missing the 60-day window on an indirect rollover
- Over-contributing above the annual IRS limit
- Assuming “self-directed” means “no custodian needed” — it doesn’t
- Making decisions without consulting a tax professional first
FAQ
Is this financial advice?
No. This page and the guide are educational only — not financial, tax, or legal advice.
Does Eight Twelve Holdings sell financial products?
No. We publish education. We don’t offer accounts, investments, or advisory services.
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