Getting started with self-directed IRAs:
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What is a self directed IRA?
A self-directed individual retirement account (SDIRA) is an individual retirement account that allows investors to hold a broader range of assets than those permitted in traditional IRAs.
While most IRAs are limited to publicly traded securities such as stocks, bonds, and mutual funds, a self-directed IRA hold a broader range of assets than those permitted by traditional custodians.With a self-directed IRA, investors can use their retirement savings to invest in private market assets such as real estate, startups, private equity and venture capital.
As a result, a self-directed IRA gives investors the flexibility to invest in a wider range of investment options than what are typically available in tax-advantaged retirement accounts. Some potential benefits of using a self-directed IRA to invest in private markets include:
Tax advantages
Opening a self-directed IRA to invest means you can benefit from the tax-deferred or tax-free growth of an IRA, meaning you’re able to keep more of what you earn.
Diversification
Because self-directed IRAs can open the door to investing in private markets and alternatives, investors can diversify beyond public markets, potentially fostering greater long-term portfolio durability.
Control
A self-directed IRA allows account holders to invest directly in deals they believe in. This gives investors greater autonomy on how and when their capital is deployed.
Duration matching
Private market investments are known for longer periods of illiquidity. Rather than tying up cash, investors can leverage retirement dollars that are also decades away from use.
Regulatory considerations for self-directed IRAs
While self-directed IRAs offer greater flexibility, they, like all IRAs, are subject to certain regulations that investors must adhere to in order to stay compliant:
- Typically require a custodian, subject to IRS regulations, to hold and manage the assets
- Must comply with IRS rules regarding distributions, including certain required minimum distributions in line with that of other IRA accounts
There are a variety of other rules and regulations that govern IRAs. It is important that account holders keep in mind the applicable laws that their accounts must abide by.
How can self-directed IRAs be funded?
SDIRAs can be funded via a few different methods:
From an existing IRA
Initiate a fund transfer from another IRA account to the new, self-directed IRA
From a 401(k):
Generally, funds in 401(k) accounts can be rolled into an IRA.
With cash
Cash can be contributed directly to fund a self-directed IRA, but it is subject to the same annual contributions limits across your IRA accounts.
Comparing Roth, Traditional and SEP IRAs
When opening a self-directed IRA, you can choose a Roth, Traditional or SEP IRA structure. Finding the right IRA type will depend on a variety of factors, including your current and anticipated tax liability. Keep in mind, there are income restrictions that apply to Roth IRA contributions.
Here are some of the broad differences between Roth, Traditional and SEP IRAs:
| Feature | Traditional IRA | Roth IRA | SEP IRA |
|---|---|---|---|
Contributions | Tax-deductible (if eligible) | After-tax (no immediate tax deduction) | Tax-deductible + employer funded (if eligible) |
Growth | Tax-deferred | Tax-free | Tax-deferred |
Withdrawals in retirement | Taxed as ordinary income | Tax-free (qualified withdrawals) | Taxed as ordinary income |
Required minimum distributions | Begin at age 73 | No RMDs during investor's lifetime | Begin at age 73 |
Intended for | Reducing taxable income today | Maximizing tax-free retirement income | Reducing taxable income today for self-employed individuals & small business owners |
IRS rules and regulations apply to each account type. Consult a tax professional for questions about aligning a vehicle with your retirement objectives.
What can I invest in with a self-directed IRA?
One of the key benefits of self-directed IRAs is the ability to potentially invest in private market opportunities. Investing in alternatives can offer increased diversification, growth, portfolio resilience and hedging against inflation due to a low correlation to public markets. An SDIRA can unlock access to asset classes found in the private markets like venture capital and real estate. These are some of the well-known private market segments that may be accessible through an SDIRA:
Private equity (PE)
Obtaining ownership of an established, income-producing business.
Venture capital (VC)
Funding early- or growth-stage companies. Venture capital investments are often viewed as high risk/high reward. It’s not uncommon to see many losses offset by one or a couple winners in a VC portfolio.
Private credit
Servicing loans to businesses outside the traditional banking system.
Real assets
Includes investments in tangible assets like private real estate, infrastructure, farmland and natural resources.
Keep in mind that each segment comes with its own set of considerations and risks, as well as varying return potential. Investors should evaluate each before determining if these asset types might be a fit for their portfolio.
What kinds of fees are associated with SDIRAs?
There are a few kinds of fees that come with utilizing a self-directed IRA. Common types of fees include:
Setup fees
One-time charge to cover the administrative costs associated with opening a new account; not all providers charge this
Annual fees/account maintenance fees
Charged on an ongoing basis to cover services like recordkeeping, reporting and compliance; typically charges as a flat rate or based on the value of the account
Transaction fees
Incurred each time an asset is bought or sold using the account
Fee structures can vary significantly across providers, so it’s important to read the specifics from each. For more on Alto’s fees, visit our pricing page.
Questions?
Well, we've got answers. Can’t find the answer you’re looking for? Please visit our FAQ page
Yes, in many cases, you can roll over a 401(k) into a self-directed IRA, especially if you’ve left the employer who sponsored the plan. Rolling over into an SDIRA allows you to maintain the tax-advantaged status of your retirement funds while gaining access to a broader range of investment opportunities beyond traditional stocks and bonds. The process typically involves opening an SDIRA account and requesting a direct rollover from your old 401(k) provider to avoid taxes or penalties. It’s important to work with a custodian experienced in self-directed accounts to ensure a smooth and compliant transfer.
Rolling over into an SDIRA can be a strategic move for investors seeking greater control, diversification, and access to private market investments. Whether you're interested in private equity, venture capital, real estate, or other alternatives, an SDIRA can help you align your retirement strategy with these long-term, private market opportunities.
With Alto, opening a self-directed IRA is easy. Our user-friendly platform makes the process simple and straightforward. Within minutes, you’ll be able to begin funding your account. From there, you can explore our Marketplace of private market investment opportunities, find an investment opportunity with one of our partners (link to partners) or raise capital for your own investment opportunity.
Many companies in these asset classes are staying private longer, often 5 to 10 years or more, before considering a public listing. This shift means that much of their growth and value creation is happening while they're still private, limiting access for traditional public market investors.
By using a self-directed IRA, individuals may be able to tap into these opportunities earlier and participate in potential upside that would otherwise be unavailable until much later. This can be especially attractive for long-term retirement portfolios looking to capture value beyond the public markets.
Open an SDIRA
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