Self-directed IRA

What is a "self-directed IRA"? How is one established? Is there a penalty when an IRA in the form of bank certificates of deposit (CD) is rolled over into another type of IRA (mutual fund or self-directed) if the rollover is done as each CD matures? -- J. B.

A self-directed individual retirement account is one on which you, as the owner of the IRA, direct the investment of your funds. You establish a self-directed IRA with a custodian bank or brokerage house by signing the appropriate papers and depositing your cash. The deposit may be from rolled-over funds from another IRA. You manage your own IRA by directing the custodian to buy or sell specific securities at your direction. The trustee only keeps track and maintains control of the securities as trustee for your benefit.

Self-directed IRA and Keogh plans typically cost more in administration fees, because more work is involved for the trustee. However, you retain control and can invest your IRA or Keogh funds in a greater variety of securities -- gaining , you would hope, more income than if funds were invested in CDs, a bank's common trust fund, or a mutual fund. As for the penalties, you should ask your current trustee, as policies vary. Generally, if you transfer funds out of a bank or savings- and-loan before a CD matures into another IRA, you will be penalized. You should be able to roll over the funds as each CD matures.