A self-directed IRA functions like other Individual Retirement Accounts (Traditional, Roth, or SEP IRA) but offers greater flexibility in investment options. While standard IRAs managed by brokerages or banks are limited to public stocks, bonds, and mutual funds, self-directed IRAs allow for investments in alternative assets such as private company stock, real estate, and notes. Like other IRAs, gains from investments made through a self-directed IRA are tax-deferred or tax-free, depending on the account type.
All IRAs, including self-directed ones, must be held by a trustee or custodian. The custodian safeguards the account’s assets, processes transactions according to the IRA owner’s instructions, keeps detailed records, submits required IRS reports, and provides account statements. Additionally, the custodian ensures compliance with IRS rules, including those related to prohibited transactions, but does not offer investment advice. It’s the account holder’s responsibility to select investments that comply with regulations and meet their financial goals.