How does a self-directed account work?

A self-directed brokerage account (SDBA) is a brokerage window designed to allow participants to select investments outside the main retirement offering while staying within the plan and receiving the associated tax benefits. In simple terms, a self-directed brokerage account is one where you have full control over how you invest your money. That means you're not limited to a limited selection of funds chosen by a financial advisor or your employer. Instead, you can buy stocks, bonds, individual options and even bet on orange juice futures, if you so wish.

If you want to open a self-directed IRA, you'll need a qualified IRA depositary who specializes in that type of account. The main difference between an SDIRA and other IRAs are the types of investments you can keep in the account. For new investors who aren't familiar with the self-directed process, these advantages can also turn into disadvantages if they don't have the appropriate depositary or resources to make informed investment decisions. Next, I'll explain the advantages of self-directed brokerage accounts, why people use them, and how you can open your own self-directed account.

The biggest difference between self-directed investment and conventional investment is who makes the decisions. Self-directed brokerage accounts allow you to choose from virtually every investment option available, from funds to individual stocks. Since the purpose of a self-managed brokerage account is to invest your money as you see fit, you don't need to pay for owning a brokerage firm that offers full services. To get started with self-directed investment, do some research and learn the basics of choosing a self-directed IRA depositary.

Available as a traditional IRA (to which tax-deductible contributions are made) or Roth IRA (from which tax-exempt distributions are obtained), self-directed IRAs are best suited for experienced investors who are already familiar with alternative investments and want to diversify into a tax-advantaged account. However, keep in mind that the two types of accounts have different tax treatments, eligibility requirements, contribution guidelines, and distribution rules. Basically, you design a plan to strategically create and manage your own investment portfolio using a self-directed IRA depositary and your knowledge of assets. Although the account is managed by a custodian or a trustee, it is managed directly by the account holder, which is why it is called self-directed.

If you open an account with an online discount broker, you can invest in thousands of different funds, buy or sell individual stocks and bonds, and venture into options if you want.

Kenneth Bley
Kenneth Bley

Alcohol trailblazer. Avid travel trailblazer. Award-winning zombie aficionado. Devoted food practitioner. Incurable internet geek.