roth ira

Traditional IRA, Roth IRA And Self Directed IRA

Overview

An IRA (Individual Retirement Account/ Arrangement) refers to a tax-advantaged financial account. These accounts are preferred over other accounts, for retirement and other long-term goals, due to their tax advantages. There are various financial accounts that a person can choose depending on his/ her financial status, future goals and the amount of time s/he has to achieve those objectives. Roth, Self Directed and Traditional IRA comprise some of the tax-deferred accounts a person can open.

Roth IRA

Roth account is a tax-deferred retirement account in which funds are only taxed at the point of deposit. The invested funds can, then, be invested and withdrawn without any further taxation. Roth account holders can contribute into their accounts as long as they like. Since the IRS does not tax this account’s withdrawals, it follows that people can withdraw their funds at will. However, the IRS stipulates that people only commence their account’s funds withdrawals after attaining 59 ½ years of age. Most account custodians limit the investment properties to traditional assets. However, a person can convert the account to a self-directed one that allows a variety of other preferred investment vehicles.

Traditional account

A traditional financial account allows investment funds into the account free of taxation. This account, also, allows the tax-free growth of the account funds (in whichever investment assets), but at the point and time of withdrawal, the funds are taxed at the current year’s taxation rates. Account holders must be over 70 ½ years old before they can get their funds. Any withdrawals, before a person reaches 70 ½ years, attract an early withdrawal penalty.

Self Directed IRA

Since 1974, the IRS (Internal Revenue Service) allows account owners to diversify their investment portfolio outside of the traditional investment options offered by custodians. A Self Directed arrangement refers to a tax-deferred account in which account owners have a direct and absolute say as to where the funds gets invested. Assets accommodated by these accounts go beyond the traditional stocks, mutual funds, real estates and bonds. Holders of these accounts can invest their funds in alternative assets that include precious metals, private equity investments, trust deeds and tax lien certificates.

 

Caution with Self-Directed Plans

Self-directed retirement accounts closely resemble non-tax-deferred private investments. The key difference between private accounts and self-directed retirement arrangements is that funds in the self-directed plan receive tax advantages and those in private accounts do not. The IRS, therefore, imposes regulations on the withdrawal and investment of self-directed account funds, as well as the reinvestment of the returns/ profits from such investments. Investors must comply with IRS regulations. Failure to comply with the IRS regulations may lose the funds their tax-deferred status.

Conclusion

Financial planning is important for retirement and other goals. Individual accounts enable people to save and or invest funds without the usual funds taxation. A traditional account taxes withdrawals whereas a Roth IRA taxes deposits. Account custodians restrict investment vehicles to traditional assets. However, self-directed accounts allow for the diversification of investment portfolio beyond traditional assets.

self directed ira

Taking Control Of Your Retirement With A Self-directed IRA

While a self-directed individual retirement account is very similar to a traditional IRA, the latter allows individuals to invest in a wide range of assets that are typically outside the scope of a traditional IRA. In other words, you can think of it as an IRA that puts a lot of responsibility on an investor. However, before you open a self-directed account, you should not only have a good grasp of the rules and regulations that govern these IRAs but also their tax implications. With that in mind, here is some more information about this topic:

State of SD-IRAs

According to the Securities and Exchange Commission (SEC), SD-IRAs account for about two percent of all IRAs in the US. These accounts have investments worth more than $100 billion. While SD-IRAs have been around since 1974 when the Employee Retirement Income Securities Act was established, they have become increasingly popular over the past few years due to the growing interest in alternative investments. More specifically, figures published by MarketWatch show that global alternative assets grew from $2.9 trillion in 2005 to $6.5 trillion in 2011. In addition, investors have become disappointed with the lack of transparency in the financial industry.

The Types of Investments You Can Hold in a Self directed IRA

This investment vehicle would enable yo to invest in assets such as real estate, tax lien certificates, limited partnerships, commercial notes, and private placements. Moreover, you can still invest in traditional IRA assets like bonds, stocks, and CDs.

How a Self-directed IRA works

Despite offering more investment flexibility, a SD-IRA account still requires a custodian. It is the work if the custodian to make investments based on directives given by clients. After identifying an asset, an investor must present this information to a custodian. This is in addition to documents related to the asset titled in the name of one’s IRA, not the name of the client. The custodian will process documents received and release funds to purchase the assets identified by clients. Once your custodian completes this process, profits and expenses related to these assets trickle back to your IRA. You can direct your custodian to dispose an asset at any point in time. Your custodian will deposit funds realized from such a sale in your IRA.

The Benefits of a SD-IRA

To start with, you can access a wide range of alternative assets such as precious metals and real estate. Secondly, you can use such an IRA to diversify your portfolio and protect against market volatility, high inflation rates, or economic and political uncertainties. Thirdly, you can use this type of IRA to grow your nest egg on a tax-deferred basis. Fourthly, you can make your own investment decisions instead of relying on others. All these are benefits traditional IRAs, brokerages, or banks do not offer.

In conclusion, a SD-IRA account would give you greater control over your investments. You can use such an account to buy/sell properties, precious metals, commercial notes, and outstanding tax certificates. All you have to do is instruct your custodian to release funds to pay for the assets you have identified. Benefits include tax-free profits and portfolio diversification.