75 Self-Directed Investing Terms You Need to Know

Estimated reading time: 20 minutes

Every industry, whether medicine, sports, engineering, or finance, has its own specialized terminology. 

But complex jargon shouldn’t stand in the way of understanding your retirement savings options. At Entrust, we believe in providing clear, straightforward information to help you make informed investment decisions.

That’s why we focus on plain, accessible language in our Learning Center. Our collection of articles, videos, FAQs, and webinars is designed to simplify self-directed investing, making it easy to grasp even for those new to the concept.

To help you get started, we’ve put together a concise glossary of 75 self-directed investing terms, covering everything from alternative assets to UBIT, all in clear, easy-to-understand terms.

Table of Contents

• Self-Directed IRA Basics
• Funding and Transactions
• IRS Rules and Compliance
• Real Estate Investment Terms
• Precious Metals Investment Terms
• Private Equity Investment Terms
• Private Lending Investment Terms
• Other Investment Terms
• Tax Forms and Reporting
• Account Management & Beneficiary Planning
  

Self-Directed IRA Basics

Self-Directed IRA

A self-directed IRA (SDIRA) is a retirement account that allows investors to go beyond traditional assets like stocks, bonds, and mutual funds, offering the ability to invest in alternative assets such as real estate, private equity, precious metals, private lending, and even cryptocurrency.

However, with this flexibility comes more responsibility. The IRA owner is in charge of due diligence, selecting investments, and ensuring compliance with IRS regulations.

Self-Directed IRAs: The Basics Guide Learn about your investment options, Self-Directed IRA rules, and much more! Download Now

Traditional IRA

A traditional IRA is a tax-advantaged retirement account that allows individuals to make pre-tax contributions, which may be deductible from taxable income. Investments grow tax-deferred, meaning you won’t pay taxes on earnings until you withdraw funds in retirement. However, withdrawals are taxed as ordinary income, and required minimum distributions (RMDs) begin at age 73.

Roth IRA

A Roth IRA is a tax-advantaged retirement account where contributions are made with after-tax dollars, meaning you won’t get an immediate tax deduction. However, investments grow tax-free, and qualified withdrawals in retirement (after age 59½ and meeting the five-year rule) are also tax-free. Unlike traditional IRAs, Roth IRAs have no RMDs during the account holder’s lifetime.

SEP IRA

A SEP IRA (Simplified Employee Pension IRA) is a tax-advantaged retirement plan designed for self-employed individuals and small business owners. Employers make tax-deductible contributions on behalf of themselves and their employees, up to 25% of compensation or $70,000 (for 2025), whichever is lower. Employees cannot contribute, and distributions in retirement are taxed as ordinary income.

SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees IRA) is a tax-advantaged retirement plan designed for small businesses with 100 or fewer employees. 

Both employers and employees can contribute: employers must either match up to 3% of an employee’s salary or contribute a fixed 2% for all eligible employees, regardless of participation. Employee contributions are tax-deferred, and withdrawals in retirement are taxed as ordinary income.

Self-Directed 401(k)

A self-directed 401(k) is simply a 401(k) plan that allows you to invest in a wider range of assets beyond traditional stocks and bonds, including real estate, private equity, and precious metals. 

It is typically used by self-employed individuals or small business owners who want more control over their retirement investments. While typically more expensive than a SEP IRA, a self-directed 401(k) can offer substantially higher contribution limits.

Health Savings Account (HSA)

An HSA is a tax-advantaged savings account designed for individuals with a high-deductible health plan (HDHP) to save for qualified medical expenses. Contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free when used for eligible healthcare costs. HSAs offer a unique triple tax advantage and can also serve as a supplemental retirement savings tool since unused funds roll over year to year.

Education Savings Account (ESA)

An Education Savings Account (ESA), or a Coverdell ESA, is a tax-advantaged investment account designed to help families save for a child’s educational expenses. 

Contributions are made with after-tax dollars, but funds grow tax-free and can be withdrawn tax-free for qualified education expenses, such as tuition, books, and supplies for K-12 schools and higher education institutions. However, contributions are limited to $2,000 per beneficiary per year and must be used before the beneficiary turns 30 years old to avoid penalties.

Self-Directed IRA LLC

An IRA LLC, also known as a checkbook control IRA, is a self-directed IRA that is structured with a limited liability company (LLC) to provide the account holder with greater control over their investments. Instead of going through a custodian for each transaction, the IRA owner, acting as the non-compensated manager of the LLC, can write checks and make investment decisions directly from the LLC’s bank account.

This structure is particularly useful for investors who frequently engage in real estate, private lending, or other alternative assets, as it allows for faster transactions and potentially lower custodial fees. However, it also comes with strict IRS compliance rules, and improper use of funds can result in prohibited transactions and penalties.

Self-Directed IRA Custodian

A self-directed IRA (SDIRA) custodian is a regulated financial institution responsible for holding and administering the assets within a self-directed IRA. Unlike traditional brokerage firms that limit investments to stocks, bonds, and mutual funds, SDIRA custodians allow account holders to invest in alternative assets like real estate, private equity, and precious metals.

While an SDIRA custodian facilitates transactions, maintains records, and ensures IRS reporting compliance, they do not provide investment advice, vet opportunities, or guarantee returns. It is the responsibility of the account holder to conduct due diligence and ensure compliance with IRS regulations.

Certified IRA Services Professional (CISP)

The Certified IRA Services Professional (CISP) designation is a credential awarded by the American Bankers Association (ABA) to financial professionals who demonstrate expertise in IRA rules, regulations, and administration. 

Earning the CISP requires passing a comprehensive exam that covers topics such as IRA contributions, distributions, tax implications, and compliance requirements. Many Entrust team members hold the CISP designation, underscoring their mastery of advanced IRA topics.

Funding and Transactions

Funding an IRA

To fund an IRA simply means adding money to your IRA so you can invest and grow your retirement savings. There are three main ways to fund an IRA: contributions, transfers, and rollovers. 

Contribution

A contribution is the money you deposit into your IRA each year to save for retirement. The IRS sets annual contribution limits, which can vary based on your age and income.

Transfer

A transfer is the process of moving funds directly from one IRA to another without incurring taxes or penalties. Unlike rollovers, transfers are typically between the same type of IRA and do not involve taking possession of the funds.

For example, if you want to move funds from your traditional IRA from Custodian A to Custodian B, you can initiate a transfer, ensuring that the funds are transferred seamlessly without triggering taxes.

Rollover

A rollover is the process of moving funds from one retirement account to another, either between IRAs or from an employer-sponsored plan (like a 401(k)) into an IRA. Rollovers can help investors consolidate accounts, gain more investment flexibility, or transition funds when leaving a job.

There are two types of rollovers:

• Direct Rollover: The funds move directly from one retirement account to another without the account holder taking possession. There are no taxes or penalties.
• Indirect Rollover: The funds are paid to the account holder, who must deposit them into a new IRA within 60 days to avoid taxes and penalties. If coming from a 401(k), 20% is withheld for taxes, which must be replaced to complete a full rollover.

For example, if you leave your job and have a traditional 401(k) with your employer, you can roll it over into a traditional IRA to maintain tax deferral and gain more control over your investment choices. A direct rollover avoids immediate taxation and penalties.

IRS Rules and Compliance

Accredited Investor

An accredited investor is an individual or entity that meets specific financial criteria set by the SEC, allowing them to invest in private placements, hedge funds, and other restricted securities.

To qualify as an accredited investor, an individual must meet at least one of the following criteria:

• Income: Earn at least $200,000 per year (or $300,000 jointly with a spouse) for the past two years, with an expectation of maintaining that income.
• Net Worth: Have a net worth of $1 million or more, excluding the value of their primary residence.
• Professional Credentials: Hold specific financial certifications (such as Series 7, 65, or 82 licenses).

Accredited investors gain access to private market opportunities but also take on higher risk and less regulatory protection compared to public investments.

Disqualified Person

A disqualified person is an individual or entity prohibited from engaging in certain transactions with an SDIRA due to potential conflicts of interest. The IRS prohibits direct or indirect transactions between an SDIRA and these individuals to prevent self-dealing and abuse of tax-advantaged accounts.

Disqualified persons include:

• You (the account holder)
• Your spouse
• Your parents, grandparents, children, and grandchildren (and their spouses).
• Anyone providing services to the IRA, including custodians, advisors, or managers.
• Any business, partnership, or corporation where you (or another disqualified person) own 50% or more.
  
  

Prohibited Transaction

A prohibited transaction is any improper use of an IRA by the account holder, a disqualified person, or any entity they control. The IRS enforces strict rules to prevent self-dealing and abuse of tax-advantaged retirement funds.

The consequences of committing a prohibited transaction are severe, including:

• Immediate Taxation: The entire IRA may be treated as a distribution, subjecting it to income tax and early withdrawal penalties (if under age 59½).
• IRS Penalties: Could include additional excise taxes and disqualification of the IRA’s tax-advantaged status.
  
  

Required Minimum Distribution (RMD)

An RMD is the minimum amount that an IRA account holder must withdraw annually from their retirement account once they reach a certain age. The IRS enforces RMDs to ensure that tax-deferred retirement savings are eventually taxed.

If you have a traditional IRA or 401(k), SEP IRA, or SIMPLE IRA, you must start taking RMDs at age 73 to avoid penalties. If you fail to take your entire RMD, a 25% excise tax on the amount not withdrawn (can be reduced to 10% if corrected within two years).

If you’ve inherited an IRA, RMD rules vary depending on the relationship to the deceased account owner.

Restricted Investments

While SDIRAs offer a wide range of investment opportunities, the IRS prohibits certain types of investments. Specifically, there are three types of assets that cannot be held in an SDIRA:

• Life Insurance
• S Corporations
• Collectibles

The IRS defines collectibles as tangible assets that are generally not permitted in an SDIRA, including, but not limited to:

• Artworks
• Rugs
• Antiques
• Gems
• Stamps
• Coins (except specific U.S. Treasury-issued gold and silver coins)
• Alcoholic beverages
• Certain other tangible personal property
  
  

Self-Dealing

Occurs when an IRA owner, or another disqualified person, uses IRA assets for personal benefit, violating IRS rules. This includes actions like living in a property owned by the IRA, personally managing IRA-owned real estate, or loaning money from the IRA to oneself or family members. 

Engaging in self-dealing can trigger severe tax penalties, including the immediate disqualification of the IRA’s tax-advantaged status.

Unrelated Business Income Tax (UBIT)

UBIT is a tax imposed on certain income generated by tax-exempt entities (including IRAs and 401(k)s) when they engage in business activities unrelated to their tax-exempt purpose, which is to grow retirement savings.

Unrelated Debt-Financed Income (UDFI)

UDFI is a term that applies to income generated by debt-financed investments within an IRA or other tax-exempt entities. If an IRA borrows money to purchase an investment, any income or gains from that investment may be subject to UBIT.

For example, your SDIRA buys a $400,000 rental property. Your IRA puts down $200,000 in cash and uses a $200,000 non-recourse loan. Therefore, 50% of the investment is financed by debt. If the property generates $20,000 in net rental income, then 50% ($10,000) is subject to UBIT.

To learn more about UBIT and UDFI, check out our full UBIT blog post.

Real Estate Investment Terms

Earnest Money Deposit

An earnest money deposit (EMD) is a good faith deposit made to secure a real estate purchase. Since all funds for the investment must come from the SDIRA, the EMD must also be paid directly from the IRA to avoid a prohibited transaction. The deposit is typically held in escrow and applied toward the purchase price at closing.

Escrow

Escrow is a financial arrangement where a neutral third party holds funds or assets on behalf of two parties involved in a transaction until certain conditions are met. In real estate transactions using an SDIRA, escrow ensures that funds from the IRA are properly handled and only released when the purchase terms are satisfied.

Improved and Unimproved Land

Improved land refers to real estate that has been developed or enhanced with infrastructure such as roads, utilities, buildings, or landscaping, making it ready for use or construction.

Unimproved land, on the other hand, is raw land that lacks significant infrastructure or development, often requiring additional work and investment to prepare it for building or other uses. 

Offshore Real Estate

Property investments located outside an investor’s home country. These properties can include residential, commercial, or undeveloped land in foreign markets.

Investing in offshore real estate can provide diversification, potential tax advantages, and access to emerging markets, but it also comes with unique legal, regulatory, and tax considerations that vary by country. 

Preliminary Title Report

A document issued by a title company that outlines the legal status of a property’s title before a sale or transfer. It includes details such as ownership history, existing liens, easements, encumbrances, and any potential title issues that could affect the transaction. Reviewing this report is crucial for buyers and lenders to ensure the property has a clear title before proceeding with the purchase.

Titling

The legal process of establishing ownership of an asset, such as real estate, vehicles, or financial accounts. It determines who holds the rights to the property and how ownership is structured, which can impact estate planning, taxes, and asset protection.

Assets must be titled in the name of the IRA (not the individual investor) to maintain tax-advantaged status. For example, real estate purchased within an SDIRA would be titled as, “Entrust FBO [Investor’s Name] IRA #XXXXXX."

Warranty Deed or Grant Deed

A legal document used in real estate transactions to transfer ownership of a property from the seller to the buyer.

A Warranty Deed provides the highest level of protection, guaranteeing that the seller holds clear title to the property and will defend against any future claims. A Grant Deed also ensures that the seller has not transferred the property to another party but does not provide the same level of warranty against title defects.

Private Equity Investment Terms

C Corp

A legal business structure in which the company is taxed separately from its owners. It provides limited liability protection to shareholders, meaning their personal assets are not at risk for business debts or liabilities. 

C Corps are subject to corporate income tax, and any dividends paid to shareholders are taxed again at the individual level, leading to potential double taxation. However, they offer advantages like unlimited shareholders, easier access to funding, and no restrictions on ownership types.

Factoring

A financial transaction where a business sells its accounts receivable (unpaid invoices) to a third party, known as a factor, at a discount in exchange for immediate cash. This helps businesses improve cash flow without waiting for customers to pay. While factoring provides quick access to capital, it reduces the total amount collected from invoices due to fees charged by the factoring company.

Hedge Fund

A pooled investment fund that employs diverse and often aggressive strategies, such as long and short positions, leverage, and derivatives, to maximize returns for accredited investors.

Unlike mutual funds, hedge funds have fewer regulatory restrictions, allowing them to invest in a wide range of assets, including equities, debt, real estate, and commodities. These funds typically require high minimum investments and charge management and performance fees.

Limited Partnership

A business structure with at least one general partner (GP) who manages operations and assumes full liability, and limited partners (LPs) who are passive investors with liability limited to their investment. LPs are commonly used for real estate, private equity, and venture capital, offering tax advantages and asset protection.

Private Placement

A private placement is a sale of securities to a select group of investors rather than through a public offering on the stock market. These investments are typically offered by private companies, startups, hedge funds, or real estate ventures and can include stocks, bonds, or other equity stakes. 

Private placements are usually available to accredited investors and often provide opportunities for higher returns, but they also come with higher risks, less liquidity, and limited regulatory oversight compared to publicly traded investments.

Real Estate Investment Trust (REIT)

A company that owns, operates, or finances income-producing real estate across various sectors, such as residential, commercial, or industrial properties. REITs allow investors to gain exposure to real estate without directly owning properties, offering potential dividends and portfolio diversification. They are typically traded on major stock exchanges, but private and non-traded REITs also exist.

Small Business

An independently owned and operated company with fewer employees and lower revenue than larger corporations. The specific definition varies by industry and is often determined by the Small Business Administration (SBA), which sets size standards based on employee count or annual revenue. 

Small businesses can take various legal forms, such as sole proprietorships, partnerships, LLCs, or corporations, and they play a vital role in the economy by driving innovation, creating jobs, and serving niche markets.

Startup

A newly established business focused on developing a unique product or service, often with the goal of rapid growth and scalability. Startups typically operate in uncertain markets, rely on innovation, and seek funding from investors such as venture capitalists, angel investors, or crowdfunding. While they carry high risk, successful startups can achieve significant market impact and financial returns.

Precious Metals Investment Terms

Precious Metals Dealer

A company that buys, sells, and trades physical precious metals such as gold, silver, platinum, and palladium. These dealers source metals from mints, refineries, and secondary markets, offering them to investors, collectors, and institutions.

When selecting a precious metals dealer, investors should conduct due diligence, checking for industry credentials, customer reviews, and compliance with regulatory bodies such as the U.S. Mint Authorized Purchasers Program or the Professional Numismatists Guild (PNG).

Precious Metals Depository

A secure facility designed to store and safeguard physical precious metals, such as gold, silver, platinum, and palladium. These depositories provide high-level security, insurance, and auditing to ensure the safety and integrity of stored assets.

The IRS mandates that metals must be stored in a depository; they cannot be kept at home or in a personal safe and maintain their tax-advantaged status.

Allocated Storage

Your precious metals are assigned to you but stored together with metals belonging to other investors. The depository keeps detailed records tracking your ownership, ensuring that you retain a specific amount of gold, silver, or other metals. 

When you request a distribution, the metals you receive may not be the exact bars or coins you originally purchased, but they will be of the same type, weight, and purity. Typically, it is more cost-effective than segregated storage due to shared vaulting.

Segregated Storage

Your metals are physically separated and stored in an individual container, ensuring you receive the exact bars or coins you purchased. This option provides greater security and control, as your assets remain untouched by other investors. However, it is usually more expensive due to the additional space and handling required.

Spot Price (Melt Value)

The current market price at which gold, silver, platinum, or palladium can be bought or sold for immediate delivery. It fluctuates throughout the day based on supply and demand, economic conditions, and geopolitical factors. Investors and dealers use the spot price as a benchmark for pricing bullion, coins, and other precious metal products.

Spot price is often referred to as the melt value. This approach ensures a consistent method of calculation for the reporting of market value of each asset to the IRS.

Private Lending Investment Terms

Secured Note

A loan or debt instrument backed by collateral, meaning the borrower pledges an asset (such as real estate, equipment, or other valuable property) as security for repayment. If the borrower defaults, the lender has the right to seize the collateral to recover the outstanding balance.

Unsecured Note

A loan or debt instrument that is not backed by collateral. Unlike a secured note, the lender does not have a specific asset to claim if the borrower defaults. Instead, repayment depends solely on the borrower’s creditworthiness and promise to pay.

Convertible Note

A type of short-term debt that can be converted into equity, typically in a startup or private company. Instead of receiving repayment in cash, the lender (or investor) has the option to convert the loan into company shares at a later funding round, often at a discounted rate. 

Investors may use convertible notes to invest in early-stage businesses, potentially benefiting from future equity growth while accepting the risks associated with startup investing.

Other Investment Terms

Alternative Asset

An alternative asset is any investment that falls outside traditional asset classes like stocks, bonds, and mutual funds. These assets often provide diversification, potentially higher returns, and lower correlation to public markets but may come with higher risk, lower liquidity, or additional due diligence requirements.

Common alternative assets include real estate, private equity, precious metals, and private lending.

Crowdfunding

Crowdfunding is a method of raising capital by pooling small amounts of money from a large number of investors, typically via an online platform. It allows individuals, businesses, and real estate developers to secure funding without relying solely on banks or venture capital firms.

Common types of crowdfunding include:

• Equity Crowdfunding: Investors receive an ownership stake in the company or project.
• Debt Crowdfunding (Peer-to-Peer Lending): Investors lend money in exchange for interest payments.
  
  

Cryptocurrency

Cryptocurrency is a type of digital or virtual currency that uses cryptography for security and operates on decentralized blockchain technology. Unlike traditional currencies issued by governments (fiat money), cryptocurrencies are typically not controlled by any central authority, making them decentralized and often resistant to government interference or manipulation.

The two most common cryptocurrencies are Bitcoin and Ethereum, though investors also value stablecoins and altcoins.

Due Diligence

Due diligence is the process of thoroughly researching and analyzing an investment, financial transaction, or business opportunity before committing funds. It involves verifying the legitimacy, risks, and potential returns of an asset, whether it’s real estate, private equity, private lending, or another alternative investment. 

Investors should review financial records, assess market conditions, and ensure compliance with IRS rules to avoid prohibited transactions and potential losses. Conducting due diligence helps protect investors from fraud, hidden liabilities, and poor investment decisions.

Non-Recourse Loan

A non-recourse loan is a type of financing that is secured solely by the asset being purchased, rather than the borrower’s personal credit or other assets. Non-recourse loans are the only type of financing allowed with an IRA because IRS rules prohibit IRA holders from personally guaranteeing a loan for their retirement account.

With a non-recourse loan, if the IRA defaults, the lender can only seize the property or asset used as collateral, but cannot pursue the IRA holder’s personal assets. These loans are commonly used when an SDIRA invests in real estate, allowing investors to leverage their retirement funds while maintaining IRS compliance.

Partnering

The process of combining your IRA funds with other funding sources to invest in an asset. This strategy allows investors to pool resources and gain access to higher-value investments while maintaining compliance with IRS rules. When structuring a partnership, each party must own a proportional percentage of the asset, and all income and expenses must be allocated according to ownership percentages.

Precious Metals IRA

Technically, there’s no such thing as a “precious metals IRA.” This term is often used for marketing purposes to highlight that you can invest in precious metals within your IRA. The correct account type is a self-directed IRA (SDIRA).

Private Equity

Private equity involves investing in privately held companies that are not traded on public stock exchanges. Investors typically gain ownership through venture capital, buyouts, or direct investments, aiming for long-term growth and high returns. These investments are often illiquid and require a longer holding period but can offer significant potential gains compared to traditional public market investments.

Private Lending

Private lending is a form of investing where an individual or entity acts as a lender, providing loans to borrowers outside of traditional financial institutions like banks. These loans are often secured by collateral, such as real estate, or can be unsecured based on the borrower’s creditworthiness.

Real Estate IRA

Similar to a precious metals IRA, this term is often used for marketing purposes to highlight that you can invest in real estate within your IRA. The correct account type is a self-directed IRA (SDIRA).

Tax Forms and Reporting

IRS Form 1099-R

Distributions from retirement plans (IRAs, 403(b), 457(b), and qualified plans) are reported on Form 1099-R. Your SDIRA custodian issues this form to document any withdrawals made during the year, including:

• Taxable amount of the distribution
• Income tax withheld
• IRS code indicating the type of distribution
  
  

IRS Form 5498

Form 5498 is a tax document filed by your SDIRA custodian (not the account holder) to report IRA contributions and account value to the IRS. While you may receive a copy for your records, it does not need to be filed with your tax return.

IRS Form 8606

IRS Form 8606 ensures that after-tax contributions to an IRA are not taxed again when withdrawn. This applies to:

• Non-deductible traditional IRA contributions
• After-tax rollovers from employer plans
• Roth IRA conversions

If this form is filled out incorrectly, you could end up paying federal income tax twice on the same funds.

IRS Form 990-T

If your IRA must pay UBIT, you must file IRS Form 990-T. However, passive income like interest, dividends, rents, and royalties is exempt from UBIT.

IRS Form 1040

If you’ve filed taxes before, Form 1040 should be familiar. It reports your taxable income and determines whether you owe taxes or qualify for a refund. For IRA holders, you will need IRS Form 1040 to report any distributions from a traditional IRA and deductible IRA contributions.

To learn more about these IRS tax forms, check out our full tax forms blog post.

Account Management & Beneficiary Planning

Buy Direction Letter (BDL)

A document submitted by an SDIRA holder to instruct their custodian to purchase an investment on behalf of their IRA. This form provides details about the asset being acquired, including the purchase price, seller information, and funding instructions.

Sell Direction Letter (SDL)

A document that instructs an SDIRA custodian to sell an asset held within the IRA. This form is required to authorize the liquidation of investments such as real estate, private equity, or precious metals.

Deposit Coupon

A deposit coupon is often required when depositing income from an investment into the IRA. It helps ensure that all funds generated by an IRA investment flow directly back into the IRA, complying with IRS regulations.

Distribution

A distribution is a withdrawal of assets from an IRA. Distributions can be taken in cash or in-kind (transferring assets instead of liquidating them). Depending on the type of IRA and the timing of the withdrawal, an IRA distribution may be taxable and/or subject to penalties.

Distributions differ depending on the type of IRA:

• Traditional IRA: Distributions after age 59½ are taxable as ordinary income but are not subject to a 10% penalty. Distributions taken before age 59½ are subject to income tax and a 10% penalty.
• Roth IRA: Distributions after age 59½ are tax-free if the account has been open for at least five years. Because Roth IRAs are funded with post-tax dollars, the original contributions may be withdrawn at any time. However, the earnings may not.
  
  

Employer Identification Number (EIN)

A unique nine-digit number issued by the IRS to businesses and entities for tax identification purposes. 

An EIN is often required when setting up an IRA LLC to facilitate investment transactions. The EIN allows the LLC to open a bank account, file tax documents if necessary, and operate as a separate legal entity from the IRA holder.

Fair Market Valuation (FMV)

FMV refers to the estimated worth of an asset based on what a willing buyer and seller would agree upon in an open market. For SDIRA holders, FMV reporting is crucial because the IRS requires annual valuations of non-traditional assets, such as real estate or private equity, held within an SDIRA. 

Accurate FMV ensures compliance with IRS rules, determines RMDs for account holders aged 73 and older, and helps maintain proper tax reporting for the account.

Payment Authorization Letter (PAL)

A document that authorizes an SDIRA custodian to disburse funds from an IRA to pay for investment-related expenses, such as property taxes, maintenance fees, or asset purchases. The letter ensures that all expenses related to the IRA-held investment are paid from the IRA. This maintains compliance with IRS regulations.

Interested Party Designation (IPD)

Allows an account holder to grant a trusted third party viewing access to their Entrust account. Unlike a Limited Power of Attorney (LPOA) authorization, an IPD does not allow the designated party to make investment decisions or execute transactions on behalf of the account holder. Instead, it simply permits them to view account details, statements, and other relevant information. 

This designation is often used for financial advisors, accountants, or other trusted individuals who help oversee the account.

Limited Power of Attorney (LPOA)

A legal authorization that allows a third party, such as a financial advisor or investment manager, to make transactions on behalf of an IRA account holder. 

Unlike a general power of attorney, an LPOA grants only specific, limited authority—typically restricted to executing investment decisions rather than making withdrawals or changing account ownership. The account holder retains control over their SDIRA and can revoke the LPOA at any time.

Qualified Charitable Distribution (QCD)

A QCD allows individuals aged 70½ or older to donate up to $100,000 per year directly from their IRA to a qualified charity tax-free. 

QCDs count toward RMDs but are not included in taxable income, making them a strategic way to support charitable causes while reducing tax liability. However, they can only be made from traditional IRAs (not employer-sponsored plans like 401(k)s) and must be sent directly to the charity.

Roth Conversion

A Roth conversion is the process of transferring funds from a traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA. This conversion allows retirement savings to grow tax-free, but the converted amount is subject to ordinary income tax in the year of the conversion. 

Once in a Roth IRA, qualified withdrawals (after reaching age 59½ and meeting the five-year rule) can be taken tax-free, offering potential long-term tax advantages. A Roth conversion is often used as a strategy to manage future tax liabilities, but it’s important to consider the immediate tax impact before converting.

Recharacterization

A recharacterization is the process of reversing or changing a contribution from one type of IRA to another. Most commonly, it refers to recharacterizing a Roth IRA contribution to a traditional IRA contribution (or vice versa) if the investor decides they made the wrong type of contribution based on eligibility or tax strategy. This must be done by the tax filing deadline, including extensions, and involves transferring the contribution plus any associated earnings.

Recharacterizations were previously allowed for Roth IRA conversions, but this option was eliminated under the 2017 Tax Cuts and Jobs Act.

Beneficiary

An IRA beneficiary is the individual or entity designated to inherit an IRA upon the account holder’s death. The beneficiary gains control over the account and must follow specific IRS rules for withdrawals and distributions.

There are two main types of IRA beneficiaries:

• Primary Beneficiary: The first in line to inherit the IRA.
• Contingent Beneficiary: Inherits the IRA only if all primary beneficiaries are deceased or have disclaimed the inheritance.
  
  

Inherited IRA

An inherited IRA is an account that is passed on to a beneficiary after the original account holder’s death. The beneficiary, whether a spouse, non-spouse, trust, or entity, must follow IRS distribution rules, which may require taking required minimum distributions (RMDs) or withdrawing the full balance within 10 years (per the SECURE Act). 

While some spousal beneficiaries can roll the funds into their own IRA, all non-spouse beneficiaries must keep the account as an inherited IRA and follow specific distribution rules.

Explore More Self-Directed Investing Education

This list is just a small sample of the straightforward investor education available in the Entrust Learning Center. Whether you’re just starting out or looking to refine your investment strategy, our Learning Center is packed with valuable resources to help you navigate the world of self-directed IRAs with confidence.

From in-depth articles and expert-led webinars, we provide the tools you need to make informed investment decisions. But understanding the basics is the first step to success.

To get a solid foundation in self-directed investing, download our free SDIRA Basics Guide. Inside, you’ll find:

• A breakdown of what you can and cannot invest in with an SDIRA
• Key IRS rules and guidelines to keep your investments compliant
• A simple, three-step process to get started

Self-Directed IRAs: The Basics Guide Learn about your investment options, Self-Directed IRA rules, and much more! Download Now

Note: The content provided here is for informational purposes only and should not be considered financial, tax, or investment advice. Always consult with a trusted tax or financial advisor to determine what is best for your unique situation.