Does a Self-directed IRA have Extra Advantages over the Traditional IRA?

It is always a good idea to plan ahead for the future. It is quite difficult to predict where you are going to be in a few years after your retirement. It may be an equally difficult decision to make to select which retirement plan to go for to save up for a comfortable post-retirement life. Among the options available to most people are the traditional IRA, the 401(k) and the self-directed IRA. In this article, we are going to discuss whether you would be better off with the traditional IRA or a self-directed IRA.

First of all, it is important to understand the difference between the traditional and the self-directed IRA. The latter is essentially a specialized for of the former. The most well-known difference between the two is that a custodian is required for the simple IRA and your only options of investment are the conventional brokerage accounts (bonds, stocks and mutual funds). With the self-directed IRA, on the other hand, you can make your own choices on the areas where you would like to invest, including bonds, stocks and funds.

Many people consider it a risk to open a self-directed IRA account because of the possibility of losing assets by investing in an unstable business. However, such a situation can easily be avoided by you if you know a thing or two about where you are about to invest.

The catch is that the money put into a self-directed IRA cannot be withdrawn until the account-holder reaches the retirement age (59.5 years), after which the withdrawals will be subject to federal taxes. Transactions that take place within the account (profits, interest and dividends) will not be affected by any taxes. If you decide to withdraw the money from your self-directed IRA account, you will be charged a 10% fee.

Another difference between the traditional and the self-directed IRA is that the account holder cannot use the assets in their self-directed IRA for personal benefit. This means that if you are the owner of a self-directed IRA and have invested in real estate, you or your lineal family members cannot live on that property.

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Does a Self-directed IRA have Extra Advantages over the Traditional IRA?