Summary4 min read

Podcast Summary: Optimal Finance Daily

Episode 3473: "Are Self-Directed IRAs a Good Idea?" by Cynthia Meyer (Financial Finesse)
Host: Diania Merriam
Date: February 28, 2026

Overview

This episode tackles the growing interest in self-directed IRAs (SDIRAs) and scrutinizes whether they’re a wise choice for retirement planning. Diania Merriam reads and comments on an article by Cynthia Meyer, which explores the rules, risks, fees, tax complications, and appropriate uses of self-directed IRAs. Diania also ties in her own insights, referencing advice from tax expert Sean Mullaney about why placing certain assets like real estate inside retirement accounts may not be optimal.

Key Discussion Points & Insights

1. What Is a Self-Directed IRA?

Definition: SDIRAs are simply traditional or Roth IRAs where the custodian allows investments beyond standard stocks, bonds, and mutual funds (01:00). Rather than defaulting to typical investment options, some custodians permit a broader range of "alternative" investments.
Examples: Precious metals, real estate, loans, private equity, tax lien certificates, and even unconventional assets like dairy cows (02:20).

Notable Quote

"The self directed IRA is a traditional or Roth IRA in which the custodian...permits the full range of investments allowed by law in retirement accounts."
— Cynthia Meyer (01:15)

2. Risks Associated with SDIRAs

High Risk of Loss: Alternative investments tend to lack diversification and liquidity, increasing the chance of substantial loss (03:10).
Fraud & Complexity: With complex alternative assets, investors themselves must perform due diligence, which leaves room for mistakes or scams.
Due Diligence Burden: The responsibility to investigate and understand investments rests entirely on the account holder (03:50).

Memorable Moment

"Beware of investing in anything you don't understand and can't explain easily to others."
— Cynthia Meyer (04:30)

3. Costs and Fees

Much Higher Fees: Expect setup, custodial, and annual fees, while valuation can become particularly expensive for hard-to-price assets (05:05).
Less Direct Control: The IRA technically owns the investment, not you, meaning extra fees for the custodian to manage tasks like collecting rent (05:45).
Suggestions: Shop around for a custodian that specializes in your asset type and compare costs carefully (06:00).

4. Tax Pitfalls

Unexpected Tax Consequences:
- Distributions from traditional IRAs are taxed as ordinary income
- Some investments (e.g., real estate, business ownership) can generate “unrelated business income” subject to high trust tax rates, even in a Roth (06:30).
Loss of Favorable Tax Treatment: Real estate housed inside an IRA may miss out on depreciation benefits and loss deductions otherwise available in taxable accounts (07:00).

Notable Quote

"Depending on the type of investment income, a self-directed IRA may not be completely tax deferred and a Roth IRA may not be completely tax free."
— Cynthia Meyer (06:55)

5. Prohibited Transactions & Restrictions

No Self-Dealing:
- IRS prevents you or your immediate family from conducting business between yourselves and the IRA (e.g., buying your own business or living in an IRA-owned rental property) (07:40).

Checklist: Who Should Consider SDIRAs?

Cynthia Meyer lists six criteria; SDIRAs suit those who can answer “yes” to at least four:

Accredited Investor? (08:00)
Do not need IRA for future retirement income (08:10)
Well-diversified outside retirement accounts (08:18)
Professional expertise in the targeted alternative asset (08:26)
Desire to add a small allocation of precious metals for diversification (08:34)
Want to take a small bet on private equity in a Roth account (08:42)

6. Diania Merriam’s Commentary & Real-World Example

(Starting at 09:34)

Diania references Sean Mullaney’s concept of “tax basketing”: The most tax-efficient account types for various assets.
Cites that, for real estate, holding it outside retirement accounts is often better for immediate tax advantages like depreciation and deductibility of losses.
Leverage example: Jack and Jill invest $50,000 in a $250,000 rental via borrowing, gaining almost $19,000 in deductions their first year—benefits they’d lose in a retirement account (10:10).

Notable Quote

“Why put an asset that can generate a tax loss into a retirement account?”
— Sean Mullaney via Diania Merriam (10:39)

Memorable Quotes

On Due Diligence:

“Beware of investing in anything you don't understand and can't explain easily to others.”
— Cynthia Meyer (04:30)
On Tax Surprises:

“Depending on the type of investment income, a self-directed IRA may not be completely tax deferred and a Roth IRA may not be completely tax free.”
— Cynthia Meyer (06:55)
On Real Estate and Retirement Accounts:

“Real estate in a retirement vehicle isn’t optimal for a few reasons...your tax basis goes to work for you right away [in a taxable account].”
— Sean Mullaney via Diania Merriam (10:23)

Important Timestamps

01:00 — What is a self-directed IRA?
02:20 — Examples of “alternative investments”
03:10 — High risk and liquidity concerns
04:30 — Due diligence and fraud warning
05:05 — Fee structures and custodial control
06:30 — Potential tax problems
07:40 — Prohibited transactions
08:00–08:42 — SDIRA suitability checklist
09:34 — Diania Merriam’s commentary and real estate example
10:39 — Key point: tax loss benefit in taxable accounts

Takeaways for Listeners

SDIRAs allow a wider range of investment options but come with far greater risk, expense, and complexity than standard IRAs.
They are only appropriate for highly experienced, well-capitalized investors with specific expertise and no immediate need for the funds.
Certain asset classes—especially real estate—often offer more favorable tax treatment outside of retirement accounts.
Due diligence is absolutely critical; if you don’t fully understand an investment, steer clear.

Optimal Finance Daily continues to blend practical advice and nuanced insights, making complicated financial products like SDIRAs both accessible and understandable for everyday investors.

Loading summary

Transcript7 lines

[00:00]
A
Starting a business means juggling a lot and not just what customers see. There's operating agreements, compliance filings and legal paperwork that all make up your business identity. That's a lot to manage on your own. Start your business with Northwest Registered Agent. They help you get more for your business, more privacy, more guidance and more resources. Northwest has been helping small business owners launch and grow their businesses for nearly 30 years. They're the largest registered agent and LLC service in the US with over 1500 corporate guides, real people who know your local laws and can help you every step of the way. With Northwest, privacy is automatic. They never sell your data and they give you free tools like operating agreements, meeting minutes and thousands of how to guides. Don't wait, protect your privacy, build your brand and get your complete business identity in just 10 clicks and and 10 minutes. Visit northwestregisteredagent.com ofdfree and start building something amazing. Get more with Northwest registered agent@northwestregisteredagent.com ofd free this is Optimal Finance Daily Are Self Directed IRAs a Good Idea? By Cynthia Meyer of financialfence.com if you could buy a private business, a rental property or racehorses in your individual Retirement Account or ira, would you do so? Even if you could, would that be a wise Choice? Self directed IRAs offering non traditional investments have become increasingly popular and more broadly available. The self directed IRA is a traditional or Roth IRA in which the custodian, the financial institution which keeps records and reports to the irs, permits the full range of investments allowed by law in retirement accounts. Many types of investments are permitted in IRAs, but there are certain things you can't do like buy collectibles such as art and coins and life insurance, as well as investment strategies that require borrowing such as shorting stock or certain option strategies. However, the reality is the vast majority of financial institutions limit retirement account investments to the more traditional ones like stocks, bonds, mutual funds, CDs and exchange traded funds. Self directed really means alternative investments accepted the term self directed is a bit off base. What it means is that alternative investments are accepted or offered by the IRA custodian. Technically, at most financial institutions, IRAs default to the more literal interpretation of self directed in that the account owner makes the final decisions on what investments to buy or sell unless they've given discretion in writing to an investment advisor. A custodian who offers self directed IRAs agrees to keep required records of your non traditional investments in the IRA and report them to the irs. The custodian may or may not offer physical custody of the investment, depending on type or may just house the records of investment activity and valuation. Common alternative investments available in self directed IRAs are precious metals, real estate loans and private equity. Certain custodians of self directed IRA accounts will accept just about anything allowed by the irs, including tax lien certificates and dairy cows. Very High Risk Many alternative investments available in self directed IRAs carry a high risk of losing all or most of your money due to lack of diversification or the inherent risk of the investment itself. You may not be able to sell the investment later. Lack of liquidity meaning that you won't be able to access the value of it to make distributions in retirement. Keep in mind that the entire burden of investigating the investment, doing your due diligence is on you, the account holder. This could be a benefit when you're investing in an area of your professional expertise such as the experienced real estate investor. However, it can also lead to fraud when investors are duped into Ponzi schemes or other types of investment scams through slick offerings and piles of legal paperwork. Beware of investing in anything you don't understand and can't explain easily to others. If you're considering an investment with a self directed IRA, first read the SEC's pamphlet and do your homework. Use the checklist at the end of this post. Remember, if it sounds too good to be true, it probably is. High Fees Fees in self directed IRAs are generally much higher than more traditional types of IRAs. Expect to pay setup fees, custodial fees and and annual fees to value the investment. Many of the types of alternative investments offered in self directed IRAs are hard to value, so this can get quite pricey. Keep in mind that the IRA or Roth IRA is the owner of the investment, so you don't have direct control over it. With investments like real estate or a business, for example, that means you have to pay the custodian to do things like collect rent or business income, per a Bankrate article. Some custodians propose that you set up an IRA LLC to address this issue, which may give you checkbook control, but it's costly to establish and has legal risk no matter what. Make sure you do some comparison shopping for a custodian who specializes in the type of investment you want to own in your self directed ira. Potential Tax Problems Investors often get tripped up by unexpected tax consequences in self directed IRAs. Most importantly, in a traditional IRA, distributions in retirement are taxed as income, not the lower capital gains rate. The investor may have been better off holding the asset outside of a retirement account. Additionally, investors miss out on ongoing favorable tax treatments for some common types of investments such as real estate. Depending on the type of investment income, a self directed IRA may not be completely tax deferred and a Roth IRA may not be completely tax free. For example, if the investment generates unrelated business income, the IRA or Roth IRA would be taxed at the high trust rates for the tax year in which it occurs. Those taxes must be paid by the ira, not the account owner. Separately can't invest in yourself or your family? Don't get too excited about selling the family business to your ira. Certain transactions are prohibited in retirement accounts to prevent self dealing, including transactions with people within your linear family such as your spouse, your parents, your children, your grandchildren and their spouses. Most of your family could not work in or on behalf of the investment or live in a property held by the IRA. When to consider a self directed IRA Self directed IRAs are not suitable for many people. Use this checklist to see if you might be a good candidate for self directed IRA accounts. Aim for at least 4 out of 6 1. I'm an accredited investor. If you don't know what that is, you probably aren't one. While you don't need to be an accredited investor to open a self directed ira, being one means you have the income and net worth to consider alternative investments. Number two, I don't need my IRA or Roth IRA for future retirement income. Either I'm fully on track to completely fund my retirement with my employer sponsored retirement plan such as a 401k, 403b, etc. Or I have a pension or other investments such as rental income which will fully cover my retirement income needs. Number three I have well diversified traditional investments in my work sponsored and non retirement brokerage accounts that can be liquidated to pay future living expenses if needed. Number four I have professional expertise and experience in the self directed IRA investment which I'm considering. Number five, I want to add a target percentage of precious metals to my retirement portfolio for diversification. And number six, I'm considering making a small private equity investment that might pay off big. A possible strategy in a Roth self directed IRA but could also go bust. You just listened to the post titled are self directed IRAs a good idea? By Cynthia Meyer of financial finesse.com lifelock how can I help? The IRS said I filed my return, but I haven't.
[09:09]
B
One in four taxpaying Americans has paid the price of identity fraud.
[09:13]
A
What do I do? My refund though. I'm freaking out. Don't worry I can fix this.
[09:16]
B
Lifelock fixes identity theft guaranteed and gets your money back with up to $3 million in coverage.
[09:22]
A
I'm so relieved. No problem. I'll be with you every step of the way.
[09:25]
B
One in four was a fraud. Paying American. Not anymore. Save up to 40% your first year. Visit lifelock.com podcast terms apply imagine you're
[09:35]
A
a business owner who has to rely on a dozen different software programs to run your company. Each one is expensive, overly complicated, and worst of all, none of them are connected. Now imagine a platform that could tackle all of your business management needs in one place. That platform you're imagining, it's Odoo. Odoo has all the programs you'll ever need and they're all connected on a single, simple, easy to use software, giving you peace of mind that your business is always being taken care of from every angle. Odoo assists in accounting, marketing, inventory, hr, CRM, manufacturing, and everything in between through its user friendly interface and open source applications. Basically, if your business needs it, Odoo's got it. Odoo sounds pretty amazing, right? So stop wasting your time and money on those expensive disconnected platforms and let Odoo harmonize your business with simple, efficient software that can handle everything for a fraction of the price. It doesn't get much better than that. So what are you waiting for? Discover how Odoo can take your business to the next level by visiting odoo.com that's o d o o.com odoo modern management made simple this article reminded me of a presentation I saw from my friend Sean Mullaney, also known as the FI tax guy. He was exploring the most optimal location from a tax perspective for different assets known as tax basketing, and I remember him being very clear that holding real estate in a retirement vehicle isn't optimal for a few reasons. It's more beneficial to keep your real estate portfolio as a taxable investment because you can immediately depreciate your rental real estate and you may be able to deduct some or all of any rental real estate losses against other taxable income. When it comes to investing in stocks, the basis or gain or income of selling an asset is great, but those benefits are realized far into the future. When you invest in rental real estate in taxable accounts, your tax basis goes to work for you right away. Shawn further explains that you can use leverage to increase the tax value of rental real estate. He provides this illustrative example. Jack and Jill have $50,000 of cash to invest in a taxable account. They've decided to invest in a $250,000 fifth floor condo to rent out. They borrow $200,000, purchase the property, and rent out the condo in the first year. They rent out the condo for a full year and get $9,091 in depreciation deductions and assuming a 5% loan, almost $10,000 in interest deductions. Jack and Jill leveraged $50,000 into almost $19,000 in tax deductions in one year alone. In some cases, depreciation combined with other deductions causes rental real estate to produce a loss for tax purposes. Why put an asset that can generate a tax loss into a retirement account? End quote. If you'd like to dig into this more, check out the article titled Real Estate and Retirement Accounts on phytaxguy. Com. And that brings us to the end of today's episode. Thanks so much for listening all the way through and I'll catch you tomorrow where your optimal life awaits.