Types

• There are two types of self-directed traditional IRAs: regular self-directed accounts and limited liability corporation self-directed IRAs. In standard self-directed accounts, the account owner appoints a trustee, normally a trust department representative of a bank, who handles the record keeping. In an LLC self-directed IRA, the trustee or custodian creates an LLC entity on behalf of the account owner. The account owner must maintain the financial records for the LLC as well as make all investment decisions.
  
  

Benefits

• Self-directed IRAs appeal to individuals who wish to have greater control over their IRA accounts. Traditional IRA investments limit investors to certain investment vehicles such as CDs, annuities, stocks, bonds and mutual funds. The Internal Revenue Service allows people with self-directed IRAs to invest in nontraditional investment vehicles such as businesses, rental homes, apartment complexes and land. People can even invest in land and property outside the U.S. The diversity offered by self-directed IRAs protects investors from economic downturns.
  
  

Features

• People who invest in self-directed traditional IRA accounts must meet IRS eligibility guidelines for investing in traditional IRAs. As of 2010, the IRS allows people below the age of 50 to invest up to $5,000 per year in traditional IRAs. People over the age of 50 can invest up to $6,000. The IRS limits the contributions that people can make if their employer has a 401(k) plan. The IRS also imposes restrictions on investments in traditional IRAs for high earners. The guidelines change each year.
  
  

Considerations

• Self-directed IRAs are often costly because custodians and trust administrators assess a variety of fees to the account holders. Account holders also have to pay fees associated with buying mutual funds, stock and bonds and all the costs associated with real estate purchases. Generally, self-directed IRAs work best for people rolling over existing 401(k) or IRA accounts. People with substantial balances in IRAs enjoy breakpoints when buying mutual funds that help to offset the cost of the custodian fees. People with larger balances can also use cash to buy property at discount prices.
  
  

Warning

• There are a number of restrictions on the types of investments people can make with funds held in self-directed IRAs. People cannot buy a piece of real estate with the accounts if they intend to live in it, use it or allow family members to reside in it. Investors cannot buy additional shares of companies that they already own with money from self-directed IRAs. If investors violate these rules, their investments are classified as taxable distributions by the IRS.