What is a Self Directed IRA?

A Self-Directed Individual Retirement Account is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. IRS regulations require that either a qualified trustee or custodian hold the IRA assets on behalf of the IRA owner. Generally the trustee/custodian will maintain the assets and all transaction and other records pertaining to them, file required IRS reports, issue client statements, assist in helping clients understand the rules and regulations pertaining to certain prohibited transactions, and perform other administrative duties on behalf of the Self-directed IRA owner for the life of the IRA account. Self-directed IRA accounts are typically not limited to a select group of asset types (e.g., stocks, bonds, and mutual funds), and most truly self-directed IRA custodians will permit their clients to engage in investments in most, if not all, of the IRS permitted investment types (an almost unlimited array of possibilities including foreign real estate). Some of the additional investment options permitted under the regulations include, but are not limited to, real estate, stocks, mortgages, franchises, partnerships, private equity and tax liens. Self-directed IRAs, by allowing a wide range of investment choices, improve the account owner's opportunities to diversify their IRA portfolio(s). Also, if real estate or any other investment asset held in a self-directed IRA has been employed for personal use, or to gain any other personal benefit (other than a return for the IRA), in the view of the IRS or the Department of Labor, the IRA(s) may become immediately taxable. In addition, if the IRA owner is younger than 59 1/2, the IRA will be subject to an early withdrawal penalty of 10%. It is important, however, to understand that the IRA accountholder is responsible for compliance with all codes and regulations. While a custodian's job is to follow the directions of the accountholder as a non-discretionary trustee, a custodian cannot ensure compliance or give legal or tax advice. Therefore, those interested in self-directed IRAs should seek education offered by an unbiased source.

In an effort to reduce fees, paperwork, and processing delays, some self-directed IRA investors choose to employ an IRA LLC structure. In such a structure the accountholder directs his IRA custodian to invest into a limited liability company that he manages himself. The accountholder can then execute transactions on the LLC level without the involvement of the IRA custodian, thus reducing fees and eliminating custodian transactional fees and delays. The profits of the LLC pass through to the IRA with nearly identical tax favorable treatment. This IRA LLC strategy has been legitimized through a tax court case: Swanson v. Commissioner, 106 T.C. 76 (1996). Some refer to this structure as "checkbook control" because the IRA accountholder often has sole signing authority for the LLC and its bank accounts. Similar checkbook control for a self-directed 401(k) plan would not require an LLC because Internal Revenue Code Section 401 does not mandate the use of a custodian.

Taken From: http://en.wikipedia.org/wiki/Self-Directed_IRA

For more information on a Self-Directed IRA you can view this link:
http://www.theentrustgroup.com/elc/knowledge/article/11/135/