Pros & Cons of a Self-directed Roth IRA

You should thoroughly research a company before openining a self-directed IRA.

Three little pigs guarding a safe image by Scott Hales from

A self-directed Roth IRA is a retirement account that places an investor in charge of making investment decisions. A self-directed IRA is established through a custodian at a bank or a broker-dealer. Investors of self-directed Roth IRAs receive the same tax benefits as those of regular Roth IRAs.

If you desire to open a self-directed Roth IRA, you should understand how alternative assets work. The flexibility provided by self-directed IRAs is highly beneficial, but inexperienced investors can potentially lose a great deal of money if investment decisions are not made wisely. Understanding common self-directed IRA pros and cons can help you make an informed decision.


Self-directed Roth IRAs can offer you the benefits of being able to choose from a larger selection of assets and using your funds for as venture capital for a startup. However, be aware of the disadvantages of a self-directed IRA, including greater potential of fraud and increased risk of losing money fast.

Broader Selection of Assets

A primary advantage of a self-directed Roth IRA is that you can choose from a broader selection of assets to place in your retirement account. Traditional and regular Roth IRAs limit the types of assets available for investment, but some of the investment options available for a self-directed IRA include real estate, private stock offerings, mortgages and deeds of trust and tax liens. Investors can also purchase traditional investments, such as stocks, bonds and mutual funds, but typically this is not the goal for opening a self-directed IRA.

Can Fund a Startup

A self-directed IRA allows you to act as a venture capitalist for startup companies. The ability to financially back a company from the ground up can possibly lead to a high return on your investment if the company is profitable. When you invest in a company, you usually receive shares of the company’s private stock. However, the IRS prohibits you from using your IRA funds to invest in a company in which you are an officer or own a controlling interest, which is known as self-dealing.

Many investors with self-directed IRAs choose to invest in rental real estate properties. You can receive regular income and also benefit from the appreciation of your assets by investing in the right real estate project.

Self-Directed Roth IRA Fraud

The flexibility of a self-directed IRA makes them open to fraudulent schemes. According to the SEC, fraud promoters who desire to engage in Ponzi schemes target owners of self-directed IRAs in an attempt to lure money into other accounts.

Individuals who participate in fraudulent activity usually convince investors that IRA custodians are responsible for validating the legitimacy of investments, which discourages some investors from further researching investments. In actuality, custodians are not responsible for investigating investment vehicles, but simply hold and administer the assets in your account.

Can Quickly Lose Money

Alternative investments are typically high-risk, high-reward assets. A major disadvantage of a self-directed Roth IRA is the increased risk of losing money. Unlike traditional investments in public companies, which are required to provide full disclosure, alternative investments sometimes lack disclosure and liquidity.

Investors who fail to properly research an investment are at risk of losing a great deal of money. You can also find yourself in trouble with the IRS if you do not know the rules of a self-directed Roth IRA and invest in assets that are prohibited, such as life insurance contracts.