Self-Directed IRAs vs. Traditional IRAs: Which Plan Is Best for You?

Do you understand the difference between self-directed IRAs vs. traditional IRAs? The IRS governs each plan, and both enjoy tax-advantaged earnings. A self-directed IRA is a traditional IRA, but it’s more powerful than the conventional traditional IRA. Self-directed IRAs give plan owners control over their own retirement funds and investing decisions. This article explains how that freedom provides self-directed plan owners the potential to build retirement wealth at a faster pace than with mutual funds or bonds—and in a much less volatile arena than the stock market.

Self-Directed IRAs vs. Traditional IRAs: The Differences

There are two main differences between self-directed IRAs and the more traditional or conventional IRAs housed with banks and plan administrators.

  1. You control your self-directed account’s funds and investing decisions. In traditional IRAs, plan administrators make these decisionsA calculator and pen on a desk, with a piece of paper that says self-directed IRA, illustrating a person exploring the benefits of self-directed IRAs vs traditional IRAs. for you—and plan assets are limited to the ones they sell. But, with a self-directed IRA, you make these decisions and you can invest in tangible assets off the stock market. This means you can invest in assets you personally know and understand. Why is this important? Because when you understand your investments, the better your chances are of building the wealth you need to reach financial security in retirement.
  2. Self-directed plans can invest in alternative assets off the stock market. Traditional IRAs are typically restricted to conventional stocks, bonds, and mutual funds. Self-directed IRAs can use alternative assets like real estate, private equity, gold, private lending, and much more. This broad category of investments allows you to diversify your portfolio and gives you the potential to earn income at a faster pace within your comfort zone. For example, you can step off the stock market roller coaster to buy and sell real estate in your IRA, which historically doesn’t lose its value at the drop of a hat like stocks can.

Alternative Investments Allowed in a Self-Directed IRA

When evaluating self-directed IRAs vs traditional IRAs, you’ll see that access to alternative investments is the greatest advantage self-directed plans have over traditional accounts. There are so many options in this asset class it’s impossible to name them. But, below are a few popular choices. These assets are not available in your conventional IRA.

  • Residential real estate (rentals, rehabs, duplexes, mobile homes)
  • Commercial real estate (multifamily condos, office and retail space)
  • Private lending (notes and mortgages)
  • Improved and unimproved land (timberland, farmland)
  • Private equity and stock (buy/invest in existing companies)
  • Venture capital (invest in startup companies)
  • Digital currency and blockchain technology

Both Plans Follow the Same IRS Rules

Self-directed and traditional IRAs do have the same benefits and restrictions as set forth by the IRS.

  • If you turned 70 ½ after December 31, 2019, your required minimum distributions (RMDs) began at age 72. However, the SECURE Act 2.0 passed at the end of 2022 moved the RMD age up to 73 for people who turn 73 in 2023 or later.
  • Early distributions before the age of 59 ½ are taxed and may incur a 10 percent penalty.
  • Distributions in retirement are taxed as ordinary income.
  • There are no income limits to qualify for a self-directed or traditional IRA.
  • For 2024, the contribution limit is $7,000, or $8,000 if you’re 50 or older and make a catch-up contribution.
  • Your contributions might qualify for a tax-deduction in the year they are made, depending on your situation. (Discuss this with your tax professional.)

Types of Self-Directed Plans

As we mentioned earlier, you can self-direct a traditional IRA. You can even rollover your 401(k) funds from former employer into a self-directed IRA. And, there are several other plans you can self-direct:

Individuals can self-direct traditional IRAs and Roth IRAs.

If you’re self-employed, you can self-direct simplified employee pensions (SEP IRAs), savings incentive match plans for employees (SIMPLE IRAs), solo 401(k)s.

Additionally, you can self-direct education savings accounts (ESAs) and health savings accounts (HSAs). And you can even rollover your 401(k) funds from a former employer into a self-directed IRA.

How to Decide between a Self-Directed IRA or a Traditional IRA

The decision is truly up to you. But, ask yourself a few questions first.

Would you like more control over your investing decisions? Can you sleep at night worrying about how the market may react the next day? Do you want to explore alternative options that can present less risk and potentially help offset market losses?

If your answer to any of those questions is “Yes,” contact Advanta IRA for a complimentary consultation today. We enjoy speaking with individuals who want to expand their retirement planning horizons. Our team can answer your questions and help you decide if self-directed plans are a good fit for you.

This article was first published on January 27, 2023, and has been updated.

Additional resources:

Roth IRAs vs. Traditional IRAs: A Comparison of the Benefits and the Differences

Invest in Real Estate with an IRA: A Beginner’s Guide

Solo 401(k)s vs. SEP IRAs vs. SIMPLE IRAs: Retirement Plans for Small Business Owners

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About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.