A self-directed IRA (SDIRA) is an IRA that follows the same basic retirement-account structure as other IRAs, yet it can hold a wider mix of investments that go beyond the typical stocks, bonds, and mutual funds menu. The account is still governed by IRS rules, still requires a qualified custodian, and still carries strict boundaries around prohibited transactions and disqualified persons.

This step-by-step guide explains how to open a self-directed IRA, what self-directed IRA requirements look like, and how to choose a self-directed IRA custodian.

What Is a Self-directed IRA?

A self-directed IRA is not a separate tax code category that escapes IRA rules. It is an IRA administered by a custodian that supports alternative assets and processes the paperwork and cash movements required to hold those assets inside an IRA wrapper.

The “self-directed” label describes the investor’s role in selecting and sourcing investments. Instead of choosing from a prebuilt list of funds, the investor identifies a property, a private note, a private company investment, or another permitted holding, then works through the custodian’s process to purchase and administer it within the IRA.

Why People Use an SDIRA

Self-directed IRAs attract investors who like hands-on control and want broader diversification. Many also like the idea of placing a familiar asset class, like real estate or private lending, inside a retirement account where growth can follow IRA tax treatment.

Common benefits include:

Broader diversification beyond public markets.
The ability to pursue niche strategies, such as rental real estate or private notes, using retirement dollars.
A more deliberate, research-driven investment process, since each deal tends to require documentation and review.

Risks That Come with Self-direction

Self-direction brings a different risk profile than a standard brokerage IRA. Alternative assets can be illiquid, hard to value, and slower to buy or sell, which affects cash management and reporting.

The largest risk is compliance risk. Prohibited transactions, disqualified-person rules, and personal benefit restrictions can trigger taxes and penalties if mishandled, so the operational side matters as much as the investment thesis.

Step-by-step: How Do I Open a Self-directed IRA?

A clean setup follows a predictable order: pick the IRA type, pick the custodian, open the account, fund it, then buy the asset through the custodian or through an SDIRA LLC structure.

Step 1: Choose traditional SDIRA vs Roth SDIRA

The first fork in the road is tax treatment. Traditional IRAs may allow deductible contributions for some taxpayers depending on income and workplace plan coverage, while Roth IRA contributions are not deductible, yet Roth IRAs can provide tax-free qualified withdrawals later under the rules.

Many investors choose a traditional SDIRA for current-year tax planning, and choose a Roth SDIRA when they want future withdrawals to be tax-free under qualifying rules. The investment flexibility can be similar, but the tax math is different, so the IRA type decision shapes everything that follows.

Step 2: Decide on funding method

Funding can happen in three common ways.

Annual contribution: New money added up to the yearly IRA limit.
Transfer: IRA-to-IRA movement from one custodian to another.
Rollover: Movement from an employer plan or another retirement account into the SDIRA, often used during job changes or consolidation.

The funding method influences timeline. A contribution can be quick, a transfer can take days to weeks depending on the releasing institution, and a rollover can take longer when employer plan paperwork and distribution timelines are involved.

Step 3: Choose a self-directed IRA custodian

A self-directed IRA custodian is the administrative anchor of the account. The custodian holds the IRA, processes purchases and sales, issues payments, receives income, and supports tax reporting.

Custodian selection is where many SDIRA outcomes are decided, because policies vary widely.

Custodian comparison criteria

Use these criteria as a practical checklist when comparing options.

Asset support: Real estate, private notes, private funds, metals, and other alternatives each have different documentation needs.
Transaction processing: Look at how instructions are submitted, how wires are sent, and what turnaround time looks like.
Documentation standards: Some custodians require deeper review before releasing funds, which can slow closings but reduce mistakes.
Cash management: Ask how bills are paid, how income is deposited, and how reserve cash can be held.
Reporting help: Alternative assets still need annual reporting values, and the custodian’s process will shape how smooth that is.
Service model: Some are built for high-touch deal flow, others are built for slower, long-hold investing.

Step 4: Open the SDIRA account (documents and setup)

Account opening is a paperwork stage that sets the legal structure for the IRA. Most setups involve an application, identity verification, disclosures, and beneficiary designations.

Plan to provide:

Personal identification and contact details.
Beneficiary information.
IRA type selection and, if contributing, the tax year designation.
Signed custodial agreements and fee schedule acknowledgments.

Step 5: Fund the account

Once opened, the IRA must have cash before it can buy assets or pay setup costs tied to investments. If funding by transfer or rollover, there is often a waiting period while funds move between institutions.

During funding, keep an eye on timing. Real estate contracts and private deal subscriptions run on deadlines, and SDIRA funding delays can cause missed closings if planning is too tight.

Step 6: Pick the investment and build the compliance file

In SDIRA investing, documents are part of the investment. Each asset needs a paper trail that shows the IRA, not you personally, is the buyer and owner.

A typical compliance file includes:

Purchase agreement or subscription documents naming the IRA as investor.
Directions to the custodian describing how to send funds and how to title ownership.
Supporting exhibits such as operating agreements, private placement memoranda, promissory note terms, or title documents.
Insurance and property management documentation for real estate holdings.
Invoices and receipts for IRA-paid expenses.

Step 7: Execute the purchase

Execution usually means the custodian sends funds and records the investment in the IRA. Titling and signing are handled in the IRA’s name, often with signature blocks that reflect the custodian’s administrative role.

Income flows back to the IRA. Rental income, interest payments, or distributions should return to the IRA, not to your personal account.

Step 8: Operate the investment inside the IRA

After purchase, the SDIRA shifts into operational mode. Bills must be paid correctly, income must be routed correctly, and records must stay organized.

Operational practices that reduce headaches:

Maintain cash reserves inside the IRA for expected expenses.
Keep every invoice and receipt tied to the IRA, including proof of payment.
Set calendar reminders for annual valuations and reporting requests.

Self-directed IRA Rules: Prohibited Transactions and Disqualified Persons

SDIRA success often depends on avoiding prohibited transactions. These rules exist to prevent retirement accounts from being used for current personal benefit or for deals that blur the line between retirement investing and self-dealing.

Prohibited transactions

These examples are common in SDIRA education because they show how easy it is to cross a line by accident.

Personal use: Living in, vacationing in, or otherwise using IRA-owned real estate.
Self-dealing: Buying property you already own with IRA funds, or selling IRA property to yourself.
Paying expenses personally: Covering IRA-owned property expenses out of pocket, or reimbursing yourself later.
Mixing funds: Using personal money to improve an IRA-owned asset, or using IRA money to pay personal expenses.

Disqualified persons

Disqualified-person rules focus on transactions involving the IRA owner and certain related parties. The concept is simple in feel: when a deal starts to look like a personal arrangement with close family or controlled entities, the compliance risk rises fast.

Because definitions and fact patterns can be complex, many SDIRA investors treat related-party transactions as an area for professional review before any money moves.

Allowed vs disallowed investments

Many investors ask for a list of allowed SDIRA investments. The more accurate framing is that some investments are explicitly prohibited, and many others are permitted if structured correctly and if the custodian will administer them.

Often-used permitted categories (subject to structure)

These categories are commonly pursued through SDIRAs in the marketplace.

Investment real estate held strictly for retirement investing.
Private lending and promissory notes with documented terms.
Private placements and alternative funds that accept IRA capital.
Certain precious metals when held and stored in a compliant manner through acceptable channels.

Common disallowed areas and frequent red flags

Collectibles are widely treated as prohibited inside IRAs and frequently appear in SDIRA compliance education.
Life insurance inside an IRA is often flagged as disallowed in standard IRA rule discussions.
Any asset that produces current personal benefit is a recurring red flag, even if the investment itself sounds permissible.

Because custodians apply their own administration rules, “allowed” also depends on what the custodian will process and hold.

SDIRA LLC Option: Checkbook Control Explained

The SDIRA LLC option is popular among investors who want faster transaction speed. In this structure, the IRA owns an LLC, and the LLC holds a bank account that can be used for investment purchases and expense payments, which reduces the need to route each bill through custodian processing.

The convenience comes with sharper responsibility. With checkbook control, the investor has more direct access to the spending mechanism, so recordkeeping and rule awareness must be stronger, especially around personal benefit and related-party lines.

How to set up a self-directed IRA LLC

A common setup sequence looks like this:

Open and fund the SDIRA with a custodian that supports the LLC approach.
Form the LLC in a chosen state and draft an operating agreement that reflects IRA ownership and SDIRA rules.
Direct the custodian to invest IRA funds into the LLC so the IRA becomes the LLC owner.
Open an LLC bank account and fund it from the IRA’s investment into the LLC.
Use the LLC account for investment activity while keeping a transaction ledger, invoices, and deal documents organized for reporting.

Documents commonly needed for the LLC option

LLC articles of organization and operating agreement.
IRA investment authorization paperwork directing purchase of the LLC interest.
Bank account opening documents for the LLC.
A procedures file describing how expenses, income, and documentation will be handled.

Fee Structures: What SDIRA Investors Pay for

SDIRA fees vary because alternative assets require more administration than public securities. Many fee schedules include an account setup fee, an annual administration fee, and transaction fees tied to purchases, wires, document review, or asset servicing.

When comparing custodians, match the fee structure to your investing style. A long-hold real estate investor might care most about annual fees and valuation support, while an active private-lending investor might care most about per-transaction pricing and processing speed.

Setup Timeline: What to Expect

A self-directed IRA account opening can be relatively quick, but funding and deal execution can stretch the timeline. Transfers and rollovers can introduce waiting periods outside your control, and real estate closings can introduce their own document cycles.

A practical timeline often looks like this:

Account opening and verification: a few business days in many cases.
Funding by transfer or rollover: days to weeks depending on institutions and paperwork flow.
First investment closing: depends on the asset, the seller, and document readiness.

A Step-by-step SDIRA Pre-flight Checklist

This checklist is designed for readers who want a repeatable process:

Define the asset type and the return profile you are targeting.
Choose the IRA tax type, traditional or Roth, based on your tax planning goals.
Compare custodians using asset support, fees, processing, and reporting help.
Open the account and fund it with a realistic timeline.
Build the compliance file before money moves.
Keep cash reserves for expenses and maintain a clean paper trail.

How Nevada Trust Company® Can Help

Ready to take control of your retirement investments with a self-directed IRA? At Nevada Trust Company®, we provide trust, custody, escrow, retirement, and investment management services, guided by a client-first approach and a goal-based planning style.

Speak with a Trust Officer about opening and administering a self-directed IRA aligned with your long-term goals.