Pros & Cons of a Self-Directed Roth IRA

by Gregory Hamel

An individual retirement account is an investment plan you open with a custodian, such as a bank or mutual fund company, that holds your assets and takes care of certain record keeping requirements set by the government. Companies that act as IRA custodians often limit you to choosing from a selection of approved investments, such as stocks, bonds or mutual funds. A self-directed IRA lets you invest in a broader range of assets.

Investment Options

The main benefit of a self-directed IRA is that it gives you the freedom to invest in assets that may not be allowed in normal IRAs. For example, a self-directed IRA can own a rental property, a house, certain precious metals, and interest in small businesses. A wide range of investment options can allow you to invest in assets that meet your investment goals.

Tax Benefits

A self-directed IRA is not a type of IRA separate from traditional IRAs or Roth IRAs. "Self-directed" simply means your IRA custodian doesn't limit your investment options. You can have a self-directed traditional IRA or a self-directed Roth IRA. With a traditional IRA you can deduct your annual contributions if you meet certain income requirements, and with a Roth IRA you can withdraw money during retirement tax-free. IRAs also offer tax deferral, which means you don't pay taxes on investment gains.


Self-directed IRAs give you the freedom to manage your own investments. This may be an advantage for experienced investors, but it can be risky for the average person. For example, buying a rental property with a self-directed IRA might not be a good idea if you have never owned or operated one before. In addition, assets like real estate tend have low liquidity, meaning it can take a while to find a buyer and convert such an asset into cash.


Self-directed IRAs can be much more expensive than ordinary IRAs. According to SmartMoney, custodians of self-directed accounts may impose fees ranging from $50 to thousands of dollars per year to maintain your account and execute transactions on your behalf. Normal IRA accounts often do not require any fees for maintaining your account, although they may have transaction fees when you buy or sell investments.


Opening a self-directed IRA may increase the risk of being the victim of fraud. According to the U.S. Securities and Exchange Commission, U.S. investors held around $94 billion in self-directed IRAs in 2011, which makes them attractive targets for fraud promoters. Fraud promoters can misrepresent the responsibilities of self-directed IRA custodians and exploit the lack of information about alternative investments to engage in Ponzi schemes and other fraudulent activities.

About the Author

Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.

Photo Credits

  • Thinkstock Images/Comstock/Getty Images