Ask the IRA Expert: Should I Get a Traditional IRA or a Self-Directed IRA?

By John Bowens0 Comments

Question:
 
Dear Mr. Bowens,
 
First I should admit that I’m not an Equity Trust client but I’m thinking about opening an account. I’m pretty new to all this and I see your firm offers many options including both a self-directed IRA and a traditional IRA. Can you help me understand the difference between these two?
 
Alex M.
 
Answer:
 
Thank you for your question, Alex.
 
The terminology regarding IRAs can be a bit confusing and counter-intuitive at first glance. That being said, all accounts Equity Trust offers are “self-directed”.  This means you will have the option to invest in numerous asset types beyond stocks, bonds, and mutual funds.  A few of the more popular assets our clients invest in, include; real estate, tax liens, promissory notes, and even entities.
 
The type of an account opened may vary from traditional IRA, Roth IRA, or even more. Let’s start by defining a traditional IRA. A traditional IRA has a tax-deferred status. This means that taxes are not paid on contributions but taxes are incurred on qualified distributions down the road. An alternative to the traditional IRA is the Roth IRA. Roth IRAs incur taxes on the initial contributions; however taxes are not paid on distributions or gains. There are other differences and important details, but most important to know is both of these IRAs are available through Equity Trust.
 
This means you can have a self-directed traditional account or a self-directed Roth account; you can even have both (many clients do). Traditional or Roth distinguishes the type of tax environment for the account, whereas “self-directed” distinguishes the investment options and control you have over your account.
 
There are important IRS rules and regulations, but as far as diversity of investment options, there’s really nothing better than a self-directed IRA, whether you choose a traditional, a Roth, or any of the other accounts we offer. Equity Trust Company is a passive custodian and as such does not provide tax, legal or investment advice.  Whenever making an investment decision, please consult with a legal, tax, or accounting professional.
 
I hope that clarifies the terminology, Alex. Thank you again for your question!
 
John Bowens

 
Do you have a question about self-directed IRAs? Submit it to iraexpert@trustetc.com and it could appear in this blog!