The key difference between a Self-directed IRA and a Traditional IRA is that you have more control over what you invest in with Self-directed IRAs.

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As you begin to plan your retirement, you may be wondering about the various types of IRA options available to you. Two of these options are Self-Directed IRA (SDIRA) and Traditional IRA (TIRA). While they may sound similar, there are significant differences you need to consider before making a decision. In this article, we will explore the differences and similarities between SDIRA and TIRA.

What is a Traditional IRA?

A TIRA is a retirement account that allows individuals to contribute pre-tax dollars to their account, meaning it reduces your taxable income. Once the funds are in the account, they can be invested in various assets, including stocks, bonds, and mutual funds. All of the earnings in a TIRA grow tax-free until you reach the age of 59 ½. Once you reach this age, all withdrawals from the account will be taxed as ordinary income.

What is a Self-Directed IRA?

An SDIRA is an IRA that provides more flexibility than TIRA. It allows investors to choose the types of investments made with their funds. For instance, with an SDIRA, you can invest in real estate, private companies, precious metals, and even cryptocurrencies that are not typically offered in a TIRA. Like the TIRA, SDIRA accounts can be either a Roth or Traditional account, meaning you can contribute pre-tax or post-tax dollars.

The Difference between a Traditional IRA and Self-Directed IRA:

1. Investment Options:

The primary difference between the two types of accounts is the range of investment options that they offer. A TIRA is far more limited in terms of asset classes than SDIRA. It offers a pre-selected list of investments such as stocks, bonds, and mutual funds. An SDIRA, however, allows you to invest in physical assets like real estate, alternative investments like cryptocurrencies, and other nontraditional asset classes.

2. Investment Control:

A TIRA is controlled by a custodian or a financial institution, and you do not have full control over your investments. Instead, they decide what investments are available for you. In contrast, an SDIRA gives you full control over the types of investments you want to make in your account.

3. Risk

When it comes to risk, SDIRA is potentially higher-risk and potentially higher-reward. You are free to invest in what you believe will provide the best return on investment based on your own analysis. With a TIRA, you are limited to the traditional asset classes, which typically have lower risk and lower returns.

4. Costs

SDIRA arguably more expensive than TIRAs. An SDIRA account requires more work to run, which means more administration costs. You may have to pay a higher custodian fee, transaction fees, or even setup fees. Traditional IRAs, on the other hand, have lesser fees.

5. Income Limits

Income limits apply to the type of IRA account you can open. If your income exceeds a certain amount, you are not eligible to open a Roth IRA, which is generally considered to be the most flexible type of IRA account. TIRAs, on the other hand, have no income limits for making contributions, making it accessible to more people.

Conclusion:

In conclusion, the significant difference between a Self-Directed IRA and a Traditional IRA lies in investment options, investment control, risk, costs, and income limits. To choose the right IRA account, you must fully understand your investment goals, and you need to know the investment options that are available for each type of account. It is always recommended that you consult with a financial advisor before deciding which IRA account to open.