How to Contribute to a Self-Directed IRA

A self-directed IRA is no different from any other type of IRA in a legal sense, in that there aren't separate IRS governances for this type of individual retirement account. The difference is that self-directed means that you have freedom to decide where the money goes when you contribute it to your IRA. You can still work with a brokerage firm, but you decide how to invest the money.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Account custodian

1. Appoint a trustee or custodian to your IRA whom you trust implicitly, since the IRS disallows the owner of the plan to hold his own assets. This has to be someone who can maintain all transactions and records as well. Even though your investments will be self-directed, the custodian must be responsible for all the management thereof.

2. Discuss your investment goals with the custodian of your IRA. Though the IRS has rules limiting the amount of money you can contribute to an individual IRA, depending on how you direct the funds of your IRA, you can maximize contributions by taking advantage of other types of IRAs. For example, if you invest in real estate, you may also be able to set up a SEP IRA as a small business owner and contribute a significantly higher amount of money to that fund.

3. Know the upper limit of contributions to a traditional IRA. The IRS allows a contribution of up to $4,000 per year, with an additional $1,000 per year allowable upon reaching the age of 50.

4. Research your options and decide where you want your money to work. What makes a self-directed IRA significantly different from any other is that you are truly making the calls as to where your money is invested. Your investment can be as risky or as safe as you wish.

5. Familiarize yourself with the rules and regulations of self-directed IRAs, especially those regarding what types of investments are prohibited. Not only are some investments are off limits, such as collectibles and insurance, but there are also strict guidelines governing who may benefit from the investment revenue of your IRA.

Tips & Warnings

• If your IRA is managed by a brokerage firm, be certain that your institution will allow you complete control of your investments. Some firms will discourage or even disallow clients to invest in certain ventures.
• Common investments directed by individuals include the typical CDs, stocks and mutual funds as well real estate, franchises and business partnerships.