What are Self-Directed IRAs?

Unlike conventional IRAs, a self-directed IRA provides individuals with full control of their financial future.  The term ‘self-directed’ simply means that you, as an individual, have complete control over how your retirement funds are invested.

Permitted in 1974 under the Employee Retirement Income Security Act (ERISA), this powerful financial tool empowers individuals to select and direct their own investments, opening the door to much more than stocks, bonds and mutual funds.

Like all retirement accounts, self-directing requires a financial institution to “custody” the account, provide tax reporting, and facilitate investment transactions on behalf of the account holder. By working with a licensed, regulated custodian like Preferred Trust Company, you can protect your the tax-free or tax-deferred status of your retirement account.

Why Self-Direct?

Traditional IRA and 401ks are limited to broad investment vehicles like stocks and mutual funds. By selecting assets and opportunities based on your individual knowledge, research, and experience, you can make your savings work for you and open the door to higher returns – all with the tax-free and tax-deferred benefits of investing through a retirement account.

A self-directed IRA (SDIRA) enables investors to diversify, break free of conventional investments, and explore higher returns from alternatives like:

  • Real Estate –
  • Cryptocurrency
  • Precious Metals
  • Private Lending – you act as the bank, earning interest with your dollars
  • Natural Resources –


Investing in one type of investment asset is potentially disastrous. By diversifying your portfolio, you can mitigate risk and limit losses from market fluctuation. Integrating a self-directed IRA into your wealth strategy can help diversify your portfolio, mitigate risk, and limit your loss potential during major market changes.

Tax Deferred or Tax Free Income

Income and gains generated by self-directed IRA investments are tax-deferred. Therefore, a self-directed IRA claims 100% of the income generated by your investments and grows without restriction.

A self-directed IRA permits tax free withdrawals of contributions, interest, and earning after the age of 59 ½. Opening an SDIRA account and transferring funds from another retirement account is a simple transfer of funds, and is NOT taxable.

Offset Higher Tax Rates

Consult your tax professional about possibly reducing your taxable income based on your filing status and individual or household income.

  • Traditional IRA Maximum Annual Contribution Limit – in 2023 under 50 years $6,500, over 50 years $7,500 (in 2022 under 50 years $6,000, over 50 years $7,000).
  • Roth IRA Maximum Annual Contribution Limit – in 2023 under 50 years $6,500, over 50 years $7,500 (in 2022 under 50 years $6,000, over 50 years $7,000).
  • SEP IRA Maximum Annual Contribution Limit – lessor of $66,000 or 25% of compensation (which is an increase from 2022 lessor of $61,000 or 25% of compensation).
  • IRA allows all taxpayers under 72 years to contribute to an IRA.

If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on joint return. It doesn’t matter which spouse earned the compensation. If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.

You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. (Roth IRA contributions may be limited based on income level.)

Consult with a qualified CPA or tax specialist to verify your maximum contribution limits. See IRS Publications 560 and 590 for further details.

Asset Protection

Under US Bankruptcy law, self-directed IRA assets are exempt from bankruptcy in amounts up to $1,000,000.


Build for Your Beneficiaries

Certain self-directed IRAs allow the passing of assets to beneficiaries after death with little or no tax liability.

Properly designating your beneficiary can be an important part of your lifetime plan. Without this designation, your heirs may have to pay more income and estate tax than necessary after you are gone.

Beneficiary Options:

  • The most common beneficiary designations are spouses, children, grandchildren or other relatives.
  • A trust, charity or combination of individuals can also be named.
  • Multiple individuals can be named as beneficiaries however additional rules apply as to how the required minimum distribution is determined.
  • Name a Living Trust. When you name a living trust as either a primary or contingent beneficiary, work with a professional to ensure the trust agreement is established properly to make certain you have the most advantageous tax results.
  • Name a contingent beneficiary should your primary beneficiary predecease you. Without a designated beneficiary your IRA could go into probate and produce unfavorable tax results for your loved ones.


Diversification Types of IRAs Transparency

Traditional IRA

A traditional IRA enables you to fund your tax deferred (funded with pre-tax dollars) account by making a contribution or by transferring funds from an existing qualified retirement plan, such as a former employer 401k, pension plan, or another traditional IRA. Contributions to this account are tax deductible and profits earned in your IRA from assets of your choice grow tax-free.

  • By contributing to a traditional IRA, you may be able to lower your current tax bracket as your contributions are tax-deductible.
  • A traditional IRA will allow you to invest more money because taxes are not deducted from the original investment capital.
  • Investors who are in too high of a tax bracket to qualify for a ROTH IRA can still choose to contribute to a traditional IRA.
  • Investors should consider choosing a traditional IRA if they anticipate their tax rate at retirement to be lower than their current tax rate.

Roth IRA

A Roth IRA allows you to fund a retirement account with after-tax dollars that grow tax-free. Qualified distributions are also tax-free. Investors may set aside after-tax income up to a specified amount each year.

  • If you satisfy the requirements, qualified distributions are tax free.
  • You can make contributions to your ROTH IRA after the age of 72.
  • Minimum distributions are required only after the original IRA owners death.
  • You should consider choosing a ROTH IRA if you anticipate your tax rate at retirement to be higher than your current tax rate.

SEP (Simplified Employee Pension) IRA

A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. Any business owner with one or  more employees or anyone with freelance income, can open a SEP IRA.

  • Easy to administer, no government reporting required and no annual fund requirement.
  • Contributions allowable for employer and on behalf of employees as a substantial tax-free benefit.
  • Employers may contribute up to 25% of compensation or $66,000, whichever is less. (An increase from the 2021 IRS limit of $61,000)
  • Eligibility provisions stated in SEP plan document must apply equally to owners and employees.

SIMPLE (Savings Incentive Match Plan for Employees) IRA

A SIMPLE IRA plan provides small employers with a simplified method to contribute toward their employees’ and their own retirement savings.

  • Allows both employees and employers to contribute to a retirement plan set up specifically for employees.
  • It is an ideal start-up retirement savings plan for modestly-sized businesses of less than 100 team members not currently sponsoring a retirement plan.
  • Simple IRAs can be rolled over to a traditional or Roth IRA.
  • Employees can contribute up to $15,500 for 2023 (an increase from 2022 at $14,000)  if under 50 years, with a catch up contribution of $3,500 if over 50 years old.
  • Employers can match up to 3% of employee’s compensation per year.
  • Employees may elect to hold account at custodian of choice, if permitted.
  • Compare a SEP vs. SIMPLE plan

Full Transparency Means Peace of Mind

Preferred Trust Company is a licensed Trust Company in the State of Nevada and we follow both State and Federal regulations as a financial institution. We provide clients with access to their account 24/7 and all fees are fully disclosed.