What Exactly Is A Self-Directed IRA?

I just spoke with a taxpayer that asked, "Well, what exactly is a self-directed IRA.  This is actually a very good question; one that is often very misunderstood, because all individual retirement accounts or IRAs are self-directed! 

Self-Directed IRAs Allow Alternative Investments
The retirement services industry has loosely used the term self-directed IRA to describe IRAs that allow the taxpayer/investor to buy "alternative investment" such as real estate, Deeds of Trust, Mortgages, Tax Lien Certificates, and more, inside of their IRA. 

All IRAs Are Self-Directed IRAs
However, the taxpayer/investor always chooses what financial institution to place their individual retirement account with, so they are ALL self-directed IRAs.  The taxpayer/investor can choose to open, transfer, withdraw and close their IRA at, to or from any institution they wish to work with.  So, you can see that all IRAs are self-directed IRAs. 

IRA Custodians or Trustees Are The Key
The real difference is the investments that an IRA Custodian or Trustee will allow the taxpayer/investor acquire inside of their IRA.  The majority of financial institutions do not permit "alternative investments," but there are about ten or so nationwide that do so.  So, the key is to identify the right IRA Custodian to suit you.