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Important Distinctions To Make With Regular IRAs, Roth IRAs and Self-Directed IRAs

Dec 4

Planning for retirement is something you want to do the right way while taking advantage of all the tax benefits and returns you can possibly get. That will make it possible for you to live a comfortable life once you retire even if you will no longer be earning any more income. The earlier you can start planning and making contributions for your retirement the better. Individual Retirement Accounts (IRAs) offer some of the best options to take advantage of to make contributions and earn enough money to retire without financial worries. 

In order to take more advantage with IRAs, you need to understand what the different types of IRAs have to offer and all the options available. While regular or traditional IRAs and Roth IRAs are limited to common stocks, bonds, mutual funds and other securities, self-directed IRAs allow much more control and flexibility to invest in precious metals, real estate, commodities, and other alternative investments that normally require taking initiative and doing due diligence.

Traditional or Regular IRAs

With the regular or traditional IRAs all the contributions made are deductible from current income, meaning they are pre-tax contributions. For that reason, the distribution of the contributed amount and earnings will be taxable. If any withdrawals are made from a traditional IRA before the age of 59 ½, tax and penalty are applicable. These type of IRAs are highly recommended for older folks if they are likely to be in zero or low tax brackets upon retirement so they can make withdrawals without taxes.

Roth IRAs

With the Roth IRAs your contributions are not deductible from current income, meaning that you have to pay tax when making the contributions. They are known as post-tax contributions, so for that reason, the distribution of your contributed amount and earnings will not be taxable. With Roth you can make withdrawals even before the age of 59 ½ without attracting tax and penalty. It makes sense for young investors to choose Roth IRAs over traditional IRAs.

Self-directed IRAs

SDIRAs can either be regular IRAs or Roth IRAs, which determines the treatment given to contributions and withdrawals in respect to applicable tax or penalty. Unlike traditional IRAs and Roth IRAs, self-directed IRAs require account owners to make investment decisions. These are therefore meant for savvy investors that know more about the alternative investments that they should make. However, just like regular IRAs and Roth IRAs, SDIRAs still require a custodian or trustee to administer the plan.