Tax Smart Wealth Series
Self Directed IRA Step By Step Guide
THE STEP‑BY‑STEP GUIDE TO OPENING, FUNDING & INVESTING THROUGH A SELF DIRECTED IRA (SDIRA)
A practical roadmap for diaspora professionals exploring alternative investments
Diaspora Financial Services helping you protect and grow your wealth
⭐ 1. Understand What a Self Directed IRA Is
A Self Directed IRA (SDIRA) is a type of retirement account that allows you to invest in a wider range of assets than a traditional brokerage IRA. It follows the same IRS rules as other IRAs but gives you more control over what you invest in.
Common SDIRA‑eligible assets include:
- Real estate
- Private lending
- Private equity
- Startups
- Precious metals
- Agricultural projects
- Fractional real estate abroad
- Certain types of business partnerships
What SDIRAs cannot invest in:
- Life insurance
- Collectibles (art, rugs, antiques, etc.)
- Investments involving disqualified persons (e.g., your own primary residence)
This foundation helps you avoid prohibited transactions.
⭐ 2. Choose the Right SDIRA Custodian
You cannot open an SDIRA at a traditional brokerage. You must use a custodian that specializes in self directed accounts.
When comparing custodians, look for:
- Experience with real estate or alternative assets
- Transparent fee structure
- Strong compliance support
- Good customer service
- Online dashboard for account management
Types of SDIRA accounts you can open:
- Traditional SDIRA
- Roth SDIRA
- SEP SDIRA (for self‑employed professionals)
- SIMPLE SDIRA (for small business owners)
Choose the account type based on your tax goals.
⭐ 3. Open Your SDIRA (The Application Process)
Opening an SDIRA is similar to opening any financial account. Typical steps:
- Complete the custodian’s online application
- Provide identification (passport, driver’s license, etc.)
- Select your SDIRA type (Traditional, Roth, SEP, etc.)
- Add beneficiary information
- Sign custodial agreements and disclosures
Once approved, your account is officially open — but empty. Next, you need to fund it.
⭐ 4. Fund Your SDIRA
You can fund an SDIRA in three main ways. Each method has different rules and timelines.
Option 1: Make a New Contribution
You can contribute up to the IRS annual limit (varies by year and account type).
General notes:
- Contributions must come from earned income
- Roth contributions depend on income eligibility
- SEP contributions are based on business income
This is the simplest funding method.
Option 2: Transfer From Another IRA
If you already have a Traditional IRA or Roth IRA, you can transfer funds directly to your SDIRA.
Key points:
- Transfers are not taxable
- No limit on how much you can transfer
- The transfer is custodian‑to‑custodian
- You never touch the money
This is the most common method for new SDIRA investors.
Option 3: Rollover From a 401(k) or Employer Plan
If you have a retirement plan from a previous employer, you can roll it into an SDIRA.
Important considerations:
- Most 401(k)s allow rollovers after leaving the employer
- Some 403(b) and TSP plans also allow rollovers
- Roth 401(k) funds must go into a Roth SDIRA
- Traditional 401(k) funds must go into a Traditional SDIRA
Rollovers are a powerful way to unlock capital for alternative investments.
⭐ 5. Identify the Investment You Want to Make
Before you invest, you must clearly define the asset. Examples:
- A rental property
- A private loan to a real estate investor
- A fractional real estate project in Nigeria
- A private equity stake in a startup
- A precious metals purchase
Your custodian will require documentation describing the investment.
⭐ 6. Perform Due Diligence
SDIRAs give you freedom — but also responsibility. Due diligence typically includes:
- Reviewing financial projections
- Verifying property ownership
- Checking legal documents
- Understanding risks
- Confirming compliance with IRS rules
- Ensuring no disqualified persons are involved
Custodians do not evaluate investments for you. You are responsible for making informed decisions.
⭐ 7. Direct Your Custodian to Make the Investment
Once you’re ready, you instruct the custodian to execute the investment on behalf of your SDIRA. This typically involves:
- Completing a “Direction of Investment” form
- Submitting supporting documents (purchase contract, loan agreement, etc.)
- Custodian reviews for compliance
- Custodian sends funds from your SDIRA to the investment
Important: The investment is made in the name of your SDIRA, not your personal name.
Example:
“Equity Trust Company FBO Tolu Adewale IRA #123456”
⭐ 8. Manage the Investment Properly
Once the investment is active, all income and expenses must flow through the SDIRA. This means:
- Rent goes into the SDIRA
- Loan payments go into the SDIRA
- Property taxes are paid from the SDIRA
- Repairs are paid from the SDIRA
- You cannot pay expenses personally
- You cannot receive income personally
This keeps the investment compliant.
⭐ 9. Track Performance and Maintain Records
Good record keeping protects you from compliance issues. Track:
- Income received
- Expenses paid
- Annual valuations (required for reporting)
- Investment documents
- Custodian statements
Your custodian will file required IRS forms, but you must provide accurate valuations.
⭐ 10. Plan Your Exit Strategy
Eventually, you may want to sell the asset or close the investment. When you exit:
- Proceeds return to your SDIRA
- Gains remain tax deferred or tax free
- You can reinvest into another SDIRA asset
- You can take distributions in retirement
A clear exit plan helps maximize long‑term returns.
⭐ 11. Understand Prohibited Transactions
To stay compliant, avoid transactions involving:
- Yourself
- Your spouse
- Your parents or grandparents
- Your children or grandchildren
- Any business you or your family control
Examples of prohibited actions:
- Living in a property owned by your SDIRA
- Paying SDIRA expenses personally
- Lending money to yourself or family
- Using SDIRA assets as collateral
Avoiding prohibited transactions protects your account from penalties.
⭐ 12. Work With Professionals When Needed
Because SDIRAs involve alternative assets, many investors benefit from professional support. Helpful professionals include:
- Tax advisors
- Real estate attorneys
- Cross‑border investment specialists
- Financial planners familiar with SDIRAs
This ensures your strategy aligns with your long‑term goals.
Summary Checklist
- ✔️ Choose an SDIRA custodian
- ✔️ Open the account
- ✔️ Fund it (contribution, transfer, or rollover)
- ✔️ Select your investment
- ✔️ Perform due diligence
- ✔️ Direct the custodian to invest
- ✔️ Manage income and expenses through the SDIRA
- ✔️ Track performance and maintain records
- ✔️ Plan your exit strategy
- ✔️ Avoid prohibited transactions
