A Self-Directed Individual Retirement Account (SDIRA) is a retirement account that can be directly managed by the account holder. However, the account is required to be administered through a custodian or trustee (often through a Bank or Broker). Self-Directed IRAs are very similar to regular IRAs, except that they allow non-traditional investment types.
An Individual Retirement Account (IRA) is best to be thought of not as an investment, but rather as a vehicle (or basket) in which to keep your capital assets. This can include traditional investments like mutual funds, stocks, bonds and property.
The mechanics of an IRA are that it operates through a separate entity, such as a limited liability company (LLC). The LLC functions as a distinct legal entity for your investments and is separate from the investor, allowing for tax preferences.
There are many types of retirement accounts including Simple IRAs, Traditional IRAs, Roth IRAs and SEP IRAs. However, these IRAs are generally restricted to only traditional investment types.
Non-Traditional Investment Types
A self-directed IRA is a special type of IRA account that allows non-traditional investment types — These are investments that fall outside the traditional stock, bonds, certificates of deposits and other traditional market instruments.
Self-directed IRAs allow the individual to directly trade and participate in the new investments, however, an additional safeguard has been added which is that these accounts also require either a custodian or trustee to oversee the management of the account.
Self-directed IRAs have become the go-to vehicle for trading cryptocurrencies as they provide the maximum tax savings.