Top 3 Differences Between Self-Directed And Roth IRA's

Most people are introduced to the concept of retirement saving through the traditional IRA. A traditional IRA is a special savings account that is used for setting aside some income for use after retirement. This account is approved by the government and are also tax-deferred. This means that the money placed in the IRA would remain free from tax until it is distributed at a later time. After exploring more of their options, people come across other types of retirement accounts like Roth IRAs and self-directed IRAs. But what is the difference between these two less common IRAs? Read on to find out.

Account Set-up

Typically, Roth IRAs are held by brokerage houses who, apart from the investment platform, also perform the duties of custodians. The Roth IRA funds are held by the custodian or the brokerage house and any transaction done on the account has to be approved by them. For a self-directed IRA account holder, there is an option whether or not they want to opt for custodian.

In the custodian model of the self-directed IRA, the brokerage house will take care of the transactions on behalf of the owner of the account. The checkbook model, on the other hand, gives a lot more freedom to the self-directed IRA account holder because ever transaction is executed personally by the investor. This results in the elimination of transaction fees.

Asset Choice

The products in which you can invest in with a Roth IRA are almost exclusively Wall Street products, namely stocks, bonds and mutual funds. Generally, the brokerage firm will give the investor a list of those products that they can choose as a destination for their IRA money. With a self-directed IRA, the investor has far greater choice. The investment can be made in any venture that appears to be profitable, whether it is a franchise or a private business. If you think that stocks and bonds are the way to go, you can choose those too with a self-directed IRA.

Fees

According to the rules of the US government, all IRAs are held by custodians. This is also true for both Roth and self-directed IRAs. As a result, every IRA holder will be liable to pay an annual custodian fee, which is meant to cover the holding and maintenance charges of the retirement account. As mentioned above, the self-directed IRA is broken down into two main models: the checkbook model and the custodian model. With the custodian model, there will be additional fees for every transaction. Those fees would cover the approval and verification by the custodian. With the checkbook model, no transaction fees are needed because the account-owner is his own boss.

Conclusion

Dollar for dollar, Roth IRAs are easier to set up but the heavy fees here and there tend to accumulate and in many cases defeat the purpose of a retirement savings account. Self-directed IRAs with checkbook control provide practically unlimited investment choices under a model that minimizes the amount of external fees. It wouldn’t take a rocket scientist to make a choice between a Roth IRA and a self-directed IRA.

Top 3 Differences Between Self-Directed And Roth IRA's