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

Do you understand the difference between self-directed IRAs vs. traditional IRAs? Each plan is governed by the same IRS rules and enjoys tax-advantaged earning. 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. An African American young woman in a bright yellow shirt sitting with an IRA professional at a conference table discussing the difference between self-directed IRAs vs. traditional IRAs.In traditional IRAs, plan administrators make these decisions 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 are Governed by the Same IRS Rules

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

  • You must begin taking required minimum distributions (RMDs) when you are 72. But, if you turned 70 ½ in 2019 or earlier, you’re required to take them from that point forward.)
  • Early distributions taken before the age of 59 ½ will be taxed and may incur a 10 percent penalty.
  • Distributions taken in retirement are taxed as ordinary income.
  • There are no income limits to qualify for a self-directed or traditional IRA.
  • Contributions for 2021 are capped at $6,000 unless you’re 50 years or older, then you can contribute an additional $1,000.
  • 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), and individual 401(k)s.

You can also 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.

Free eBook

Self-Directed IRAs:
Take Control of Your Retirement Funds


About Scott Maurer

Scott is an attorney and a graduate of the University of Florida Law School. Scott started his career with Advanta IRA in 2006. His experience with various investment types and their unique processes makes him an invaluable asset. Scott holds the designation of Certified IRA Services Professional (CISP) and leads engaging seminars and webinars that educate the public on the intricacies of self-directed IRAs.