5 Common Misconceptions About Self-Directed IRAs

 |  General Self-Directed IRAs

5 Common Misconceptions About Self-Directed IRAs

By J.P. Dahdah, Founder & CEO

Your investment dollars matter.

Whether you are adding money to a retirement account, buying a new rental property, or diversifying your portfolio, there’s critical information you need to know.

This is especially true as you take a step outside the traditional investment market and into the alternative investing space.

At Vantage, we work hard to make it easy for clients to invest their IRA savings outside the stock market and into alternative assets.

If you’re considering a Self-Directed IRA (SDIRA)-an individual retirement account that can hold alternative investments-it’s important to have the right information on hand.

Here are 5 common misconceptions about SDIRAs.

Misconception 1: SDIRAs are only for wealthy individuals.

In reality, SDIRAs work for a wide range of portfolio sizes.

As with traditional IRA accounts, SDIRAs are not limited to a minimum investment amount. This means the account type is available to every investor, offering alternative options to the stock market.

By venturing beyond the stock market, SDIRA investors at every level can take advantage of alternative investment benefits. These benefits include increased diversification not correlated to stock market fluctuations, more control over where your money is invested, flexible structuring options, and more.

For additional information on the benefits of alternative asset investing, see our Guide to Self-Directed IRAs.

That said, it’s important to understand some of the limitations that come with smaller SDIRA portfolio sizes. The main limitation is that a smaller portfolio can translate to a reduced array of non-traditional investment options. Investors at certain levels may not have enough retirement savings to, for example, purchase 100% of a rental property with their SDIRA account balance.

It’s also worth considering the impact of future taxation, account and investment fees/commissions, and liquidity when choosing the right investment option for your SDIRA portfolio.

We encourage investors at every level to consider the SDIRA a tool in their diversification toolbox. Looking at the accounts available, and the ways alternative investments can round out your portfolio, ensures you are taking an expansive view of your options.

Misconception 2: SDIRAs don’t require professional management or advice.

In reality, while retirement planning, you may want to consider professional financial advisory services.

Here, the term “self-directed” may throw some people off. Self-directed refers to the management of the account, which defaults to the account holder. But this doesn’t block the availability (or need for some clients) of financial management and/or investment advice.

Many investors choose to seek out investment advice for support with their SDIRA accounts. This advice can help you explore your alternative investment appetite, put together an alternative investment strategy, and set critical milestones. Some advisors (i.e. Fiduciary Registered Investment Advisors – RIAs) also have a wealth of knowledge in the alternative investment space, which enables many investors to consider plans they wouldn’t otherwise have known about.

We encourage investors to consider their needs, and not be limited by the name of the SDIRA account. If management or advice is the right option for you, it’s worth bringing on knowledgeable professional third parties.

Misconception 3: SDIRAs are not regulated by the government.

In reality, SDIRAs are regulated similar to other retirement accounts.

It’s important to recognize that, while SDIRAs allow for alternative investments to traditional retirement accounts, they are still bound by many of the same regulations. The IRS, SEC, and other government agencies set rules and regulations for the use of retirements accounts.

Here, the rules and regulations govern important factors such as: 1) how much you can contribute to an SDIRA, 2) when you can take withdrawals, 3) the tax implications of contributions and withdrawals, 4) which investment types can be held in an SDIRA, and 5) prohibited transactions.

As an investor, it’s critical to understand the IRA rules before investing in an SDIRA. Doing your homework, and potentially working with an advisor, ensures you know all the IRA guidelines upfront.

Misconception 4: SDIRAs can be used for personal gain.

In reality, the funds in your SDIRA are earmarked for retirement.

As a retirement account, a SDIRA is specifically designed to help you save for the future. That means, there are regulatory limits on how you use funds.

For starters, income generated through an SDIRA must be re-invested back into the account or distributed as a withdrawal. If you have not reached retirement age, withdrawals may be subject to a sizeable withdrawal penalty. This essentially means SDIRAs cannot be used for personal gain.

Consider your retirement time horizon and your financial goals. An SDIRA is a strong investment option for future retirement. But it doesn’t offer the same opportunities for short-term personal gain as, for example, a standard non-qualified brokerage account.

Misconception 5: SDIRAs are not subject to annual reporting requirements.

In reality, failing to meet SDIRA reporting requirements can result in penalties or disqualification.

As noted in Misconception 3, all IRAs are regulated by the government, and SDIRAs are no exception. As such, they have clear annual reporting requirements like many other investment accounts. This means investors are responsible for gathering and providing annual reporting documents.

If you don’t meet the reporting requirements, the consequences can be financially damaging, inclusive of penalties issued by the government. They can also include disqualification from the SDIRA account, at which point your funds are disbursed and taxed at a high rate.

When considering a SDIRA, it’s important to recognize and understand the annual reporting requirements. Make sure you are up-to-date on your paperwork and keep your account humming along nicely.

To Wrap Up

Information is powerful.

By knowing the rules, regulations, and strategies associated with SDIRAs, you can accurately assess your investment options. You can set up a retirement plan that will work for your financial goals.


  • SDIRAs work for a wide range of portfolio sizes.
  • You may want to consider professional services if you don’t feel confident of doing it all yourself.
  • SDIRAs are regulated by the U.S. Government similar to other retirement accounts.
  • The funds in your SDIRA are earmarked for retirement so there are liquidity restrictions to consider.
  • Failing to meet SDIRA reporting requirements can result in penalties or disqualification of tax-favored benefits.


Interested in learning more? Schedule a call with one of our IRA Specialists.

Happy investing!