With so much uncertainty surrounding retirement savings, it may be time to take the reins on your future investments. The traditional forms of retirement are becoming less reliable, but with self-directed investments, it’s possible to take control of your funds and explore alternative ways to invest.

When considering self-directed investments, there are many options to choose from. However, the most common account options are self-directed traditional IRAs and Roth IRAs. If you are thinking of building your own retirement fund, it’s beneficial to look at the pros and cons of each option. Whether you are looking for tax-deferred contributions or an account you could freely deposit funds into for as long as you wish, you can plan for the future with your individual retirement account.


Similarities Between Traditional and Roth IRAs


Before diving into the differences between both options, there are a few points where these investments are similar. When investing in either IRA, account holders cannot contribute more than $5,500 per year.

In addition to a limitation in contributions, you cannot put in more than 100% of your total earnings. Participants 50 years or older can contribute or add “catch-up” amounts of up to $1000, and deadlines are the same for all contributions. While these points are the same, each IRA option has different options.


What are Self-Directed Traditional IRAs?


Like traditional IRAs, self-directed IRAs are traditional investment accounts. The benefits of being self-directed account holder, however, allow you to take advantage of alternative assets like real estate and precious metals. With these open investment options, it’s possible to have a broader portfolio that can exponentially grow your nest egg.

Traditional IRA investments grow on a tax-deferred basis. This allows an immediate tax break that leads to greater overall growth. Once you start withdrawing these funds, they are added to the taxable income for that year. In order to contribute to your traditional IRA, you must have earned income.


Traditional IRAs: Pros


The greatest overall benefit for the traditional IRA is the tax-deferred status. The max contribution allows for better long-term growth. The contribution is tax deductible for the same year, on both state and federal, depending on your income amount, tax filing and active-participant status. If you have the funds upfront, this option can be the right one for you.



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Traditional IRAs: Cons


While account holders get the immediate tax break, they must pay taxes on their withdrawals. Though this could be beneficial for lower tax bracket participants, the hit still needs to be absorbed. Another factor is that participant contributions cannot continue after the age of 70 ½ years. Depending on your personal situation, this SDIRA may or may not be the perfect choice.


What Are Self-Directed Roth IRAs?


Unlike traditional IRAs, Roth IRA withdrawls are tax-free. While account holders may miss out on the upfront tax-break, they get to withdraw money without taxation. Depending on your filing status (married separately, married jointly, or single) contributions for your Roth IRA may need to slow, or you may become ineligible. All qualified distributions, including distributions of earnings are tax-free.


Roth IRAs: Pros


The obvious benefit of the Roth IRA is the tax-free withdrawals. Though there is a five year aging period from when you make your contribution, any funds taken are tax-free. Another positive point for Roth IRA is the lack of an age limit for contributions. As long as you have earned income within the limits, you can deposit funds into your account. This can be beneficial if you aren’t able to put the maximum amount into your retirement account, or if you had a late start building your fund.


Roth IRAs: Cons?


The major drawback of using a Roth IRA is that there is no up-front tax break. Though it is beneficial to go tax-free, this type of account also misses out on the long-term growth that tax-deferred money allows. Also, unless an exception applies, non-qualified distributions from Roth IRAs will be taxed as earned income and additional 10% tax. Whether you prefer adding more money over the life of your account, or want less hassle with taxes, Roth IRAs may be the investment choice for you.


Choosing the Best Option for Your Retirement Account


When considering investing in a self-directed retirement plan, it’s crucial to perform your due diligence. Depending on your financial situation, your asset options, your tax bracket, or whether you can make the required minimum distribution, these two options can prove to be very beneficial. Whether you are aiming for faster long-term growth, or a tax-free contribution you can make through your golden years, your investment choices are endless. With a self-directed IRA, you control your financial future.