Traditional IRA vs. Self-Directed IRAs

All IRA’s are held in a trust by a bank, credit union, savings and loan, or other IRS-approved institution that acts as a trustee or custodian of the IRA.  The trustee or custodian distributes, receives, and holds the account funds for the investor.

The main difference between a traditional IRA and a SD IRA is that while both are managed by the investor, only the SD IRA gives the investor the full range of investment choices allowed by the IRS including real estate.  While all IRAs are allowed to invest in anything except life insurance, collectibles, and S-Corps, most traditional IRAs stick to equities and mutual funds because other investments are more difficult and outside their area of expertise.

There are 3 main types of traditional IRAs, each of which can be converted to a SD IRA without losing their respective benefits:

• Standard – Contributions are tax deferred and there are not income limitations.  Withdrawals or distribution of the account’s funds are subject to regular income tax.  Early withdrawals (before age 59 ½) incur an additional tax.
• Roth IRA – Roth IRA’s do not allow tax deductions for contributions but qualified distributions  or withdrawals are tax free (after a 5-year period)  There are annual income limitations.
• SEP IRA – The Simplified Employee Pension, or SEP is a retirement account in which the employer makes tax-deductible contributions.  The SEP IRA contributions cannot exceed 25% of the employee’s income or $49,000 whichever is less.  Distributions or withdrawals are subject to same rules as the standard IRA

In general any retirement funds (401k, IRA) can be rolled over into a SD IRA, and a SD IRA may allow the format of any of the permutations above.  The only different will be that the investor will tell the SD IRA custodian where the account funds are to be invested.