The Difference between a Traditional and Self Directed IRA

If you’ve heard about self-directed IRAs you’re probably wondering how they are different from traditional or Roth IRAs. The answer is they are different in many different ways such as the investment opportunities that they allow, their fee structures and the amount of time that you have to invest in managing your account.

One of the major differences between traditional IRAs and self-directed IRAs is the range of investment options that you have available to you. The standard IRA account will let you invest in many stocks, bonds or mutual funds. You will often get a choice of what you want to invest in, but only the things listed by the custodian you are dealing with. The self-directed IRA gives you many more options to choose from and often lets you choose an investment type that isn’t on a list of items at all. With a self-directed account you can invest in real-estate, precious metals, tax liens, currency or a new business down the road as long as you don’t have a stake in the company. As you can see you get a lot more variety in the investments that you can make using a self-directed option.

You will be charged fees with either IRA type that you decide to use, but there is a good chance that one type will charge more in fees than the other. Traditional IRAs usually charge you to set up the account and then they will charge a yearly maintenance fee for all the work that is done on your behalf.  Self-directed IRAs charge those fees and you also have to pay transaction fees to your custodian each time that you want to make a new investment. These fees can really start to add up if you are making investments on a regular basis. You can avoid most of these fees by relying on a checkbook style self-directed IRA, but many industry professionals are concerned that the IRS is going to begin penalizing these types of accounts because it doesn’t like them.

The last difference that you will notice between the two types of IRAs is your level of involvement. When you use a traditional form of the IRA you are picking out the investments that you like and leaving it at that. From there on out the professionals handle the account and you just put more money into it. This isn’t how a self-directed IRA works. Instead you will be picking out your investments and then deciding how to precede every step of the way. You will have to make investment decisions down the road and you will need to be very careful with what you choose to do because you are the professional in charge of your money.

A traditional IRA is very different from the more modern self-directed option. Some people prefer one to the other, but each has its own purpose and can be very useful when utilized properly.

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The Difference between a Traditional and Self Directed IRA