Investing Using a Self-Directed Brokerage Account | Portfolio Management | US News – U.S News & World Report Money

Instead of leaving your investments on autopilot, you can take a self-directed approach to investing.

While self-directed brokerage accounts can be used for a range of investing horizons, where they offer value to many investors is as retirement accounts. They can allow investors access to a broader range of retirement investment options and more control over how and where they invest.

Many people tend to keep their long-term retirement investing plans consistent, making few or no changes throughout there life cycles. But self-directed brokerage accounts provide the investor with autonomy, flexibility and a plethora of investment options when it comes to making investing decisions for retirement.

“Think of it like a supermarket where you choose what you want with no restrictions in terms of product choice,” says William Rhind, founder and CEO of GraniteShares, an exchange-traded fund issuer based in New York City.

“This differs from a lot of advisory platforms where you can only select from a curated offering, so you’re only getting access to a limited selection of investment products,” he says.

If this investing option sounds appealing to you, here’s what you need to know about self-directed brokerage accounts for retirement:

  • What are self-directed brokerage accounts?
  • Self-directed 401(k)s and IRAs.
  • Benefits of a self-directed retirement investing approach.
  • Disadvantages of self-directed brokerage accounts for retirement.

What Are Self-Directed Brokerage Accounts?

Self-directed brokerage accounts allow investors to take control of their investment decisions. This way, you pick your preferred investments and carry out your own investment strategy. This hands-on approach to investing for retirement gives you more responsibility in managing your investments throughout their life cycles.

A self-directed brokerage account provides investors with a variety of investment selections including mutual funds, exchange-traded funds, stocks, bonds and many other asset classes. With a typical 401(k), you are limited to the funds available. But Andrew Meadows, senior vice president of human resources, brand and culture at Ubiquity Retirement + Savings, based in San Francisco says, “Others may want to kick up their investment game a notch.”

Self-Directed 401(k)s and IRAs

Meadows says the main difference between a traditional 401(k) and self-directed brokerage account “is the ability to use your retirement funds to access hundreds of new funds and thousands of combinations to make the most of your savings as a savvy investor.”

The setup is simple. You open an account, transfer cash and start investing into the fund. A self-directed brokerage account allows investors to access different types of investments. You have more asset options to choose from that best align with your goals.

A self-directed or solo 401(k) is similar to an employer-sponsored 401(k). But this plan is specifically for the self-employed individual. To be eligible for a self-directed 401(k), you have to be a business owner with no employees and must earn taxable income. In this scenario, you are acting as both the employer and employee, and contributions can be made as both.

Here’s how it works: You make pretax contributions, similar to those in a traditional 401(k), which can then be invested toward retirement. Investments are not limited to stocks, bonds, mutual funds and other traditional retirement investment vehicles but may be in a variety of asset classes such as real estate, precious metals and cryptocurrency. This way, you can customize your assets as you see fit instead of picking a standard retirement fund.

A self-directed individual retirement account, or IRA, is held by a custodian and follows a similar concept. This account allows you to own a wide range of assets, including alternative assets such as real estate or private equity. This could be a good option for investors who want to take a portion of their retirement account outside of the stock market. This account allows you to own investable assets with tax deferrals, but you can incur penalties if you withdraw early, just like with a traditional retirement account.

Benefits of a Self-Directed Retirement Investing Approach

There are many advantages that come with investing with a self-directed brokerage account. First and foremost, you are the sole decision-maker who steers the direction of your investments. Instead of picking conventional investment vehicles such as mutual funds or ETFs, you have the option to tailor your investment portfolio to assets with which you resonate.

With traditional and Roth IRAs, you may feel limited in your choice of assets. Self-directed IRAs, however, allow you to expand your investment horizons.

“The investment world is literally your oyster in a self-directed brokerage account,” says Robert Johnson, professor of finance at Heider College of Business at Creighton University.

This flexibility of options allows you to invest in alternative asset classes including, but not limited to, private equity, precious metals, investment properties, individual securities or startups.

“If you contrast that with the limited offerings within many company 401(k) plans, you will see that a self-directed account provides you with many more choices. Or if you contrast that with going through a financial advisor, that advisor may be constrained in her choices of investments,” Johnson says.

More investment options provide portfolio diversification that may help hedge your portfolio against market risks. Alternative assets tend to be uncorrelated to assets traded in the stock markets, which may be subject to volatility or inflation. You could also increase the possibility of returns and stable income.

The IRS does not permit certain investments in a self-directed IRA such as artwork and antiques.

In a self-directed IRA, since the participant acts as the employer and the employee, this retirement plan allows you to have high contribution limits. A self-directed 401(k) allows annual contributions for 2021 up to $19,500 or $26,000 if you’re 50 years old or older. In terms of total contributions, the amount cannot exceed $58,000 for those aged 50 or older in 2021.

The purpose of going the self-directed route is to take full ownership of your investment. This option can also help you dodge the kinds of fees incurred when working with an investment professional who would buy investments and manage them on your behalf.

“Anything you can do yourself is typically the least expensive option,” Rhind says.

“Individuals can now invest through a variety of discount brokers, many of which offer commission-free trading for stocks and ETFs,” he says.

The reality is that fees associated with investing can be onerous and can bog down your overall returns. The more money you save, the more there is available to invest.

By choosing the assets that work best for your personal retirement plan, you are building tax-deferred wealth that may increase your returns faster compared to a standard investment approach.

Disadvantages of Self-Directed Brokerage Accounts for Retirement

If you decide to open a self-directed brokerage account, you must be familiar with the potential downfalls of this approach.

The goal of investing is to have a portfolio that generates returns and has positive performance over time. This is difficult to achieve without years of experience, knowledge of the global markets and knowing how to position and allocate assets effectively in your portfolio.

If you are lacking in some of these areas or prefer to take a passive “set it and forget it” investing approach, you may not be able to afford the risk of controlling your retirement planning. In this case, the self-directed approach may not suit your investing goals.

“Frankly, most investors do not have the discipline or expertise to direct their own investments,” says Trevor Ward, vice president of business development at BetterWealth, a financial planning service.

This is a hands-on approach to retirement investing where the planning and management squarely rests with you. This will require you to craft your own investment plan, do your due diligence on the investments you choose, stay informed on market dynamics and make changes to your portfolio accordingly.

“Yes, there may be an opportunity for higher returns, but the tax rules surrounding these accounts can be very complex and the penalties for noncompliance severe,” Ward says.


Investing through a self-directed brokerage account, Rhind says, means you play the role of an advisor or portfolio manager.

“This is an advantage for an investor who prefers to do their own investing but a potential disadvantage for someone who is less experienced and needs more guidance,” he says.

Taking control of your retirement through a self-directed brokerage account can add to the possibilities of building wealth on your own terms. But knowing what role you play throughout the process may help you take the right track.