Individual retirement accounts are restricted savings accounts intended to provide a source of income for retirement. Contributions to IRAs are made by the individual account owner and, depending on the particular type of IRA, by the employer. The funds are held by a financial institution, which invests those funds in traditional portfolio options such as stocks and mutual funds. With a self-directed IRA, which can be either a traditional IRA or Roth IRA, the account owner directs all the investment decisions and thus has a much greater degree of flexibility in choosing investment options.
The Internal Revenue Service (IRS) creates the rules for all retirement accounts, and all IRAs are prohibited from certain transactions regardless of the specific type of IRA. Account holders cannot take a personal loan against their funds or participate in other self-dealing activities, such as business transactions in which they or family members are personally involved.
Within the IRS restrictions against prohibited transactions, self-directed IRA funds may be used to invest in a diversified portfolio beyond traditional stocks and bonds; the owner of a self-directed IRA can invest in partnerships, real estate and the gold market. Self-directed IRAs cannot be used to purchase insurance instruments or collectibles, though, so an account holder can direct the custodian of the self-directed IRA account to invest in the silver market but cannot order the purchase of collectible silver coins.
A popular investment choice for those with self-directed IRAs is real estate. Funds from the IRA can be used to purchase foreclosed property, for example, which will then be held in the name of the IRA custodian. The self-dealing restrictions apply, though, prohibiting the account holder from living on that property.