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Traditional Self-Directed IRA: Opening an IRA Account

A Traditional IRA is an Individual Retirement Account (IRA) that is held at a custodial institution and may be invested in anything that the IRS allows (see Investments). If your employer does not offer a retirement plan, then a traditional IRA is generally your best option for saving pre-tax money for retirement. Depending on whether or not you are married, and if your spouse is covered by a retirement plan at work, you may be subject to income limitations. If you are not currently self-directed, you can take your current IRA or 401(k) and roll it over into a Self Directed IRA. It is a simple process, and there is no penalty for doing it. You are not taking a distribution; you are simply changing the administrator so that you are allowed to decide where your money goes.

A difference from the Roth IRA, the only criterion for being eligible to contribute to a Traditional IRA is sufficient income to make the contribution. However, the best provision of a Traditional IRA — the tax-deductibility of contributions — has strict eligibility requirements based on income, filing status, and availability of other retirement plans (mandated by the Internal Revenue Service). Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while still in the account, but upon withdrawal from the account, withdrawals are subject to federal, state, and local income tax, if applicable. The money in the account grows tax-deferred. Any interest or capital gains from the investments are not taxed when the gains are realized. Instead, they are deferred until money is withdrawn from the IRA, at which point the money is taxed as ordinary income. This is in contrast to a Roth IRA, in which contributions are never tax-deductible, but qualified withdrawals are tax free. The Traditional IRA also has more restrictions on withdrawals than a Roth IRA. With both types of IRA, transactions inside the account (including capital gains, dividends, and interest) incur no tax liability. The primary benefit of a traditional IRA is that you can contribute up to $5,500 a year ($6,500 if you are age fifty or older) to this account, which for many people is tax deductible.