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Step 1
Find someone to act as the custodian (trustee) for the IRA. This is the only step that makes a self-directed IRA different from other IRAs. The IRS does not allow you to have an IRA without someone designated to keep records and take responsibility for the proper administration of the account. You can do this in two ways. One is to have a person you trust to act as custodian. Trust is paramount because the custodian will have access to your money. Alternatively, you can get a self-directed IRA with a broker, bank, or investment company that offers them and will act as custodian.
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Step 2
Decide on the type of IRA you need. The two basic types are the traditional and the Roth IRA. Both provide tax advantages but the specific rules differ. A traditional IRA allows you to contribute up to $6,000 (as of 2008) each year and deduct the contribution from your taxable income. As long as the money and any investment earnings stay in the IRA, they are not taxed. When you retire the money you withdraw then will be taxed. In a Roth IRA, you don't get a tax deduction up front. However, when you eventually withdraw funds, they are tax exempt. Also, a Roth IRA can be used for shorter-term projects like funding a college education.
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Step 3
Learn the rules that govern your IRA. When you get a self-directed IRA it is your responsibility to know what you can invest in and how to manage your account. If you fail to comply with IRS rules, you can lose tax benefits and incur penalties. Start by getting IRS Publication 590 (link below) which explains the rules for Individual Retirement Accounts.
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Step 4
Understand the terms before you open a self-directed IRA account with a broker, your bank, or other provider. Remember, if they are acting as custodian, they may have policies that limit what types of investment s you can make. Be sure that there are no terms or conditions that will prevent you from making the types of investments you desire. Also, know what the IRS limits are. IRAs have a lot of flexibility, but you can't use them for some things like investing in collectibles or in some forms of gold and other precious metals.
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Step 5
Develop a long-term investments strategy. You should clearly define what you want to accomplish and how you can reasonably expect to achieve your goals. Always research any investment, whether stocks, bonds, real estate, etc. Monitor every item in your portfolio on a regular basis to be sure it's performing adequately.
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Step 6
Consider some of the alternative types of investment that a self-directed IRA will allow you to make. One popular option is to use an IRA to invest in real estate. Another is as a tax shelter for investments in a small business venture. These normally require you to register as a LLC (limited liability corporation) with your state as a vehicle for your investments.
