Individual retirement accounts (IRAs) allow you to invest your money in various assets. These accounts are tax-advantaged, allowing you to reduce your tax liability. Various types of IRAs exist, including traditional IRAs and self-directed IRAs. Both accounts can have advantages, but the best choice depends on your preferences. We'll compare these two types of IRAs to help you decide.
A traditional IRA is a tax-advantaged retirement savings account. These accounts offer tax-deductible contributions and tax-deferred growth. While distributions are taxed as regular income, these accounts are still advantages if you expect to be in a lower tax bracket in retirement.
A traditional IRA is maintained by a custodian, such as a bank or investment firm. While you may have control over your investment selections, your choices are usually limited to traditional investments, such as stocks, bonds and investment funds.
In 2024, the contribution limit to traditional IRAs is $7,000. For those aged 50 and over, the limit is $7,500. This is the combined limit for contributions to traditional and Roth IRAs. However, unlike Roth IRAs, traditional IRAs don't have income limits.
Self-directed IRA
A self-directed IRA (SDIRA) is one over which you have broader discretion to select and manage the investments it holds. This opens the possibility of pursuing alternative investments beyond what most traditional IRAs allow.
For instance, an SDIRA enables you to invest in assets like:
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Real estate
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Private equity (shares in private companies, startups or venture funds)
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Precious metals (gold, silver, platinum, etc.)
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Cryptocurrency (Bitcoin, Ethereum, etc.)
These accounts have the same tax advantages as regular IRAs, including pre-tax contributions and tax-deferred growth. An SDIRA can also be a Roth account, with after-tax contributions but tax-free qualified withdrawals.
The reasons for choosing a self-directed IRA include portfolio diversification, greater control over investment selection and the potential for higher returns. However, this can also mean greater risk, as is often the case when choosing alternative investments.
Comparisons between self-directed and traditional IRAs
While IRAs and SDIRAs share many similarities, they also have more differences than may initially seem. Here is how the two account types compare:
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