====== Self-Directed IRA (SDIRA) ======
A Self-Directed IRA (SDIRA), sometimes written as SD-IRA, is a special type of [[Individual Retirement Account (IRA)]] that gives the investor exceptional control over their investment choices. Think of it as the off-road vehicle of retirement accounts. While a standard IRA from a typical [[Brokerage Firm]] usually keeps you on the paved roads of stocks, bonds, and mutual funds, an SDIRA lets you venture into the wilderness of "alternative assets." This includes tangible assets like [[Real Estate]], precious metals, and even more exotic investments like stakes in private companies ([[Private Equity]]), [[Tax Lien]]s, or [[Cryptocurrency]]. The term "self-directed" is the key. You, the investor, are in the driver's seat. You are responsible for finding the opportunities, performing the [[Due Diligence]], and instructing a specialized SDIRA [[Custodian]] to purchase the assets on behalf of your retirement account. This freedom offers a powerful way to diversify and apply unique expertise, but it demands a higher level of knowledge and responsibility than a conventional IRA.
===== How Does an SDIRA Work? =====
An SDIRA operates under the same contribution limits and tax advantages (either tax-deferred like a Traditional IRA or tax-free growth like a Roth IRA) as a standard IRA. The primary difference is the administrative setup.
To open an SDIRA, you need to find a specialized Custodian or [[Trustee]] that permits alternative assets. These firms are different from your average Wall Street broker. Their job is not to provide investment advice but to act as the account administrator. They perform two critical functions:
  * //Asset Custody:// They legally hold the title to the assets on behalf of your IRA. For example, if you buy a rental property, the deed will be in the name of "ABC Custodian FBO [Your Name] IRA," not your personal name.
  * //Record-Keeping and Reporting:// They ensure all transactions are documented and reported to the [[IRS]] correctly, helping you stay compliant with complex tax laws.
You, the account holder, make all the investment decisions. When you find a property to buy or a private business to invest in, you complete the custodian's paperwork, and they wire the funds from your SDIRA to complete the purchase. All income, like rent from a property, must flow directly back into the SDIRA, and all expenses must be paid from it.
===== The Value Investor's Perspective =====
For a value investor, an SDIRA can be an indispensable tool. The philosophy of value investing is to buy assets for less than their intrinsic worth, which often involves looking where others don't. An SDIRA blows the doors open to a universe of such opportunities.
==== Investing in Your Circle of Competence ====
The SDIRA allows you to leverage your professional expertise—your [[Circle of Competence]]—in a tax-advantaged way.
  * A real estate agent can use their deep local knowledge to identify and purchase undervalued rental properties.
  * An experienced entrepreneur can invest in promising startups that aren't yet available on the public stock market.
  * A farmer can purchase income-producing farmland.
This aligns perfectly with the principle of investing in what you understand. Instead of trying to decipher the complex financials of a global conglomerate, you can invest in a tangible duplex down the street that you can inspect, manage, and understand intimately. This is the small-scale version of how investors like [[Warren Buffett]] prefer to buy entire businesses rather than just flickers on a stock ticker.
===== Navigating the Risks and Rules =====
With great power comes great responsibility. The freedom of an SDIRA is balanced by strict rules and significant risks that you must manage yourself.
==== The Golden Rule: No Self-Dealing ====
The IRS has a strict set of "prohibited transaction" rules designed to prevent you from personally benefiting from your IRA's assets before retirement. A violation can have catastrophic consequences, potentially causing the entire IRA to be treated as a taxable distribution. The core principle is no //self-dealing//. This means:
  * You cannot buy a property from your SDIRA for your own use (e.g., a vacation home).
  * You cannot sell a property you personally own to your SDIRA.
  * You cannot lend money from the SDIRA to yourself or certain family members (like parents or children).
  * You cannot personally perform services on an asset and get paid (e.g., personally renovating a rental property).
==== The Due Diligence and Liquidity Burden ====
In the world of private investments, there is often no [[SEC]] watching your back. You are solely responsible for vetting every deal. Fraud is a real risk in the private markets. Furthermore, alternative assets are often highly illiquid. Selling your stake in a local pizzeria or a plot of raw land is much harder and slower than selling shares of Apple, a critical factor to consider for [[Liquidity]] needs.
==== The Tax Trap: UBIT ====
If your SDIRA uses debt ([[Leverage]]) to buy an asset (e.g., getting a mortgage for a rental property) or engages in an active trade or business, some of the profits may be subject to the [[Unrelated Business Income Tax (UBIT)]]. This is a complex area of tax law that can create a surprise tax bill //inside// your otherwise tax-sheltered retirement account. It’s crucial to consult a qualified professional if you plan to use leverage in your SDIRA.