How can investors choose the right Self-Directed IRA for them? It might be a bit more subtle than you thought. A Self-Directed IRA is a general term for a range of retirement accounts that can be used as the owner directs. This gives you a tremendous amount of freedom—provided, of course, that you stick to the rules established by the IRS. But that doesn’t mean there is a specific “Self-Directed IRA account” that you’ll be signing up for.
What is there instead? There are all sorts of different types of accounts. For example, a Self-Directed Solo 401(k) might fall under the generic term “Self-Directed IRA,” even though it’s a 401(k) plan. And understanding the difference between plans can be tremendously beneficial for investors with specific retirement strategies in mind.
Let’s look at some of the most common account types and how they might fit into a Self-Directed IRA plan:
Self-Directed Traditional IRA and Roth IRA
A Self-Directed Traditional IRA is pretty straight-forward. Traditional IRAs are the oldest types of plan, which means that they’ve been available for the longest time. That gives them a track record, but depending on your individual strategy, you may want to think about its specific quirks. For example, a Traditional IRA uses pre-tax money for its contributions, which is also known as a tax-deferred basis. As we note at our site, “Contributions to Self-Directed IRAs – Traditional IRAs may be made until you are 70½ years of age.”
Generally, many people will opt for a Roth IRA because of its after-tax contribution plan, which means that investors will not have to pay taxes when taking distributions in retirement. However, it’s also worth noting that for all retirement plans, there is going to be some sort of age requirement.
Self-Directed Solo 401(k)
Many people are familiar with the idea of a 401(k), a retirement plan that allows for high contribution totals every year. In fact, for many people, this is their retirement plan, as they often have 401(k) plans established through their employer.
But what if you don’t want to work through an employer? Or if you’re self-employed? Then you might start a Self-Directed Solo 401(k) plan, which has many similar benefits, but can work even if you own your own business or are self-employed. With high contribution limits on a pre-tax basis, this can greatly help your flexibility for putting money aside for investments.
Also popular among the self-employed is the Self-Directed Simplified Employee Pension IRA, or SEP IRA. This is a low-cost, highly flexible style of plan that’s great for many solopreneurs or contractors who work for themselves, but need a way to establish a retirement plan anyway. Like the Solo 401(k), it has high contribution limits for pretax contributions, which means that it can help add to the flexibility of an investor’s budget.
With all of these accounts, Self-Direction is key, because it gives retirement investors the opportunity to expand beyond the traditional assets available (stocks, bonds) and allows them to move to nontraditional assets, such as real estate and precious metals. With that expanded diversification come more choices. But it’s important for investors to choose the right Self-Directed IRA for their individual situation. We recommend visiting our page on individual IRA accounts, where you can click on the unique features of each one, better learning which one may be right for you and your situation.