A Self-Directed IRA (SDIRA) is a retirement account that allows investments beyond traditional stocks and bonds. Unlike standard IRAs, SDIRAs let investors put their funds into real estate, private businesses, private lending, tax liens, and more.
SDIRAs provide greater investment control, but they must be held by an IRS-approved custodian and follow strict compliance rules to avoid penalties.
Pros of a Self-Directed IRA
1. Greater Investment Diversification
Unlike traditional IRAs, which focus on stocks and bonds, SDIRAs allow investments in:
- Real estate – Rental properties, multifamily syndications, commercial real estate
- Private lending – Issuing loans to real estate investors
- Tax liens – High-interest-yielding investments secured by property taxes
- Private businesses – Investing in startups or established businesses
This diversification helps investors reduce reliance on the stock market and build long-term wealth.
2. Potential for Higher Returns
By investing in alternative assets, SDIRA holders often achieve higher returns than traditional retirement accounts.
A 2022 study by Rocket Dollar found that real estate investments in SDIRAs outperformed traditional 401(k)s by an average of 3 to 5 percent annually due to cash flow and appreciation.
3. Tax-Advantaged Growth
SDIRAs offer the same tax benefits as traditional and Roth IRAs:
- Tax-Deferred Growth (Traditional SDIRA) – Investments grow tax-free until withdrawal.
- Tax-Free Growth (Roth SDIRA) – Pay taxes upfront, but enjoy tax-free withdrawals in retirement.
For example, if a real estate investment within a Roth SDIRA appreciates from $200,000 to $400,000, all profits are 100 percent tax-free upon withdrawal.
4. Protection Against Market Volatility
Stocks are subject to economic downturns, while SDIRAs allow investments in hard assets like real estate, which are less volatile.
During the 2008 financial crisis, real estate-backed SDIRAs experienced less volatility than stock-based retirement accounts.
5. Estate Planning Benefits
With a Roth SDIRA, heirs can inherit assets tax-free, making it a powerful wealth transfer strategy for families.
Cons of a Self-Directed IRA
1. Complex Rules and Compliance Risks
SDIRAs follow strict IRS regulations to avoid penalties. Violations include:
Prohibited Transactions – You cannot personally use IRA-owned property (e.g., living in a house purchased with your SDIRA).
Self-Dealing – Transactions that directly benefit you or family members are illegal.
IRS Penalties – Breaking SDIRA rules can disqualify your account and trigger taxes and penalties.
In 2021, the IRS disqualified a $300,000 real estate investment in an SDIRA due to self-dealing, forcing the investor to pay back taxes and penalties.
Read the IRS guidelines on prohibited transactions.
2. Limited Liquidity
Unlike stocks, real estate and private investments take time to sell, making SDIRAs less liquid.
If an investor owns a rental property in their SDIRA and needs cash quickly, they may not be able to sell immediately without incurring losses.
3. No Investment Guidance from Custodians
SDIRA custodians do not provide investment advice, leaving investors responsible for researching and vetting their investments.
Solution: Work with experienced investment sponsors who specialize in SDIRA-friendly assets like real estate syndications.
4. Higher Fees
SDIRAs often come with higher costs than traditional IRAs, including:
Custodian fees – For account setup and compliance oversight
Transaction fees – Charges for purchasing alternative assets
Administrative costs – Record-keeping and tax reporting expenses
Comparing SDIRA custodians can help minimize fees and maximize returns.
5. Requires Active Management and Due Diligence
SDIRAs require investors to:
Thoroughly research investment opportunities
Manage real estate or private equity assets
Keep strict records to ensure compliance
For passive investors, working with trusted investment sponsors simplifies SDIRA investing.
Is a Self-Directed IRA Right for You?
A Self-Directed IRA is best suited for investors who:
Want diversification beyond stocks and bonds
Are comfortable managing investments or working with experts
Have long-term retirement goals and don’t need quick liquidity
At Aarcstone Capital Partners, we specialize in SDIRA-friendly real estate investments that generate passive income and long-term appreciation.
What Sets Us Apart?
Proven Track Record – Over 450+ units under management, with strong investor returns
Data-Driven Market Selection – Investing in high-growth, recession-resistant locations
Tax-Efficient Strategies – Helping investors maximize Roth & Traditional SDIRA advantages
Take the Next Step Toward Passive Real Estate Investing
At Aarcstone Capital Partners, we make multifamily syndication simple, transparent, and profitable.
📞 Schedule a Call Today – Learn how syndication can fit your investment strategy.
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