IRA Showdown: Traditional vs ROTH vs Self-Directed IRAs. Who wins?

The best type of IRA might surprise you, especially if you’ve only heard of traditional IRAs.

If you’re a real estate investor, you know that saving for your future is crucial. But with so many options out there, it can be tough to know which retirement savings plan is right for you. That’s why we’ve put together this comparison of Traditional IRA, ROTH, and SDIRA accounts.

The Products: Traditional IRA, ROTH, and SDIRA

Before we dive into the comparison, let’s first define each product:

Traditional IRA

A traditional IRA is a retirement account that allows you to contribute pre-tax dollars, meaning you don’t pay taxes on the money you contribute until you withdraw it in retirement. Once you turn 72, you are required to start taking required minimum distributions (RMDs).

ROTH

A ROTH IRA is a retirement account that allows you to contribute post-tax dollars, meaning you pay taxes on the money you contribute upfront, but your withdrawals in retirement are tax-free. There are no RMDs with a ROTH IRA.

SDIRA

A self-directed IRA (SDIRA) is a retirement account that allows you to invest in a wider range of assets beyond traditional stocks and bonds, such as real estate, private equity, and even cryptocurrency. With an SDIRA, you can choose your own investments, but there are certain rules and regulations you must follow.

The Features: What We Will Evaluate

In this comparison, we will evaluate each account based on the following features:

• Tax Benefits
• Contribution Limits
• Investment Options
• Withdrawal Rules and Penalties
• Income and Eligibility Requirements

Accessing the Products

Before we begin the comparison, it’s important to note how you can access these retirement savings plans. Traditional and ROTH IRAs are typically offered by banks, brokerage firms, and other financial institutions. SDIRAs, on the other hand, are offered by select custodians that specialize in self-directed retirement accounts. You’ll need to do your research to find a custodian that fits your needs and offers the investment options you’re looking for.

The Comparison: Traditional IRA vs ROTH vs SDIRA

Tax Benefits

One of the biggest differences between these retirement accounts is the way they are taxed. With a Traditional IRA, you contribute pre-tax dollars, which reduces your taxable income for the year. However, when you withdraw the money in retirement, you’ll pay taxes on both your contributions and the earnings they’ve generated.

With a ROTH IRA, you contribute post-tax dollars, meaning you pay taxes on the money you contribute upfront. However, once you reach retirement age, you can withdraw your contributions and earnings tax-free.

SDIRAs can be either Traditional or ROTH, so the tax benefits will depend on which type of account you choose.

Contribution Limits

Another important factor to consider is the contribution limits for each account. In 2023, the contribution limit for a Traditional or ROTH IRA is $6,000 if you’re under 50, and $7,000 if you’re 50 or older. SDIRAs have the same contribution limits as Traditional and ROTH IRAs, but keep in mind that there may be additional fees associated with self-directed investments.

Investment Options

With a Traditional or ROTH IRA, you’ll typically have access to a range of investment options, such as mutual funds, stocks, and bonds. However, with an SDIRA, you have the ability to invest in alternative assets, such as real estate, private equity, and precious metals. This can be an attractive option for real estate investors looking to diversify their portfolio.

Withdrawal Rules and Penalties

When it comes to withdrawing money from your retirement account, each type of account has its own rules and penalties. With a Traditional IRA, you can start taking penalty-free withdrawals at age 59 and a half, but you’ll be required to start taking RMDs at age 72. If you withdraw money before age 59 and a half, you’ll typically be subject to a 10% early withdrawal penalty.

With a ROTH IRA, you can withdraw your contributions tax-free at any time, but you’ll face penalties and taxes if you withdraw earnings before age 59 and a half.

SDIRAs follow the same rules and penalties as Traditional and ROTH IRAs, but keep in mind that there may be additional restrictions on self-directed investments.

Income and Eligibility Requirements

Finally, it’s important to consider the income and eligibility requirements for each type of retirement account. Anyone can contribute to a Traditional IRA, but the tax benefits may be limited based on your income. With a ROTH IRA, your ability to contribute is also based on your income, and there are income limits for tax-free withdrawals.

SDIRAs have the same eligibility requirements as Traditional and ROTH IRAs.

Conclusion: Our Choice

As a real estate investor, we believe that a self-directed IRA (SDIRA) is the best option for maximizing your investment opportunities. With an SDIRA, you can invest in a wider range of assets beyond traditional stocks and bonds, including real estate, private equity, and even cryptocurrency.

However, it’s important to note that self-directed investments come with their own risks and challenges, so it’s crucial to do your research and work with a reputable custodian.

Other Options to Consider

That being said, Traditional and ROTH IRAs can also be great options for retirement savings, depending on your individual financial situation and goals. It’s important to weigh the pros and cons of each option and determine what’s best for you.

Which One Will You Choose? Why?

So, which retirement account is right for you? Are you looking to diversify your portfolio with alternative assets, or are you more comfortable sticking to traditional investments? Let us know in the comments below! And remember, no matter which option you choose, it’s important to start saving for your future today. We use Quest IRA for the self-directed IRAs, but if you only want a traditional IRA most major banks have investment advisors that will help you. As always your comments and feedback are welcome, we would love to hear from you.