Lack of knowledge is a major reason many Americans don’t open an IRA. Research from the LIMRA Secure Retirement Institute found that of those who don’t have an IRA, 46 percent feel they do not understand enough about IRAs to contribute to them.
Where do you fall on the IRA-knowledge spectrum? If you’re still in research mode, check out these seven common questions for an introduction to one of the most powerful tools for retirement savings.
1. What types of IRAs are there?
There are five types of IRAs:
- Traditional IRA. Contributions typically are tax-deductible. You don’t pay taxes on IRA earnings until you retire. At that time, IRA withdrawals are taxed as income.
- Roth IRA. Contributions are made with after-tax funds; they are not tax-deductible. Earnings and withdrawals are tax-free, however.
- SEP IRA. A simplified employee pension (SEP) IRA enables an employer, usually a small business or self-employed person, to make retirement contributions through a traditional IRA that’s in the employee’s name.
- SIMPLE IRA. This IRA is similar to an employer-sponsored 401(k). It’s offered to small businesses that lack a retirement savings plan. A Savings Incentive Match Plan for Employees (SIMPLE) IRA lets both an employer and an employee make contributions. Simple IRAs are less complicated than 401(k) plans and come with lower contribution limits.
- Self-Directed IRA. In many ways, a Self-Directed IRA is like a traditional or Roth IRA. However, there’s one big difference. A traditional or Roth IRA typically has restrictions on the type of assets that can be included. A Self-Directed IRA, on the other hand, provides more freedom by allowing alternative assets to be included. As defined by Investopedia, alternative assets are those that cannot be categorized as stocks, certificates, or bonds.
2. What can you include in a Self-Directed IRA?
Here are some of the assets you can include in a Self-Directed IRA:
- Precious metals
- Rental real estate
- Undeveloped land
- Tax lien certificates
- Promissory notes
- Mineral rights
- Water rights
- Oil and gas
- Livestock
- Stock in a small business
- Cryptocurrency
3. What are the advantages of a Self-Directed IRA?
Among the benefits of a Self-Directed IRA are tax breaks on earnings and diversification of asset types. With the help of physical gold, a Self-Directed IRA can also offer a hedge against inflation and a devaluing dollar.
“The primary benefit of using a Self-Directed IRA,” claims Adam Gower, Ph.D., “is diversification. Instead of [your assets] being tied up in traditional stocks, bonds, ETFs, and mutual funds, [you] can gain exposure to other sectors that most retirement accounts have no presence in or a limited presence.”
4. Can a Self-Directed IRA be a Roth or a traditional IRA?
A Self-Directed IRA can be either a Roth or traditional IRA. Thus, you can buy a mix of traditional and alternative assets. The same contribution limit applies to Roth and traditional IRAs. The main differences relate to taxes, income and eligibility, and withdrawal requirements.
| Roth IRA | Traditional IRA | |
|---|---|---|
| Taxes | Tax-free growth, tax-free qualified withdrawals | Tax-deferred growth, tax-deductible contributions |
| Income Eligibility | Income cannot exceed a certain amount | Income does not impact eligibility |
| Age Eligibility | Contribute at any age | Contribute until you’re 72 |
| Withdrawal Requirements | Not required to take distributions during your lifetime | Must take required minimum distribution the year you turn 72 (applies only if you turn 70½ after December 31, 2019; if you turned 70½ in 2019, you must take these distributions) |
5. How much can I contribute to a Self-Directed IRA?
Contribution limits for Self-Directed IRAs are the same as other IRAs. In 2020, you can contribute as much as $6,000. The contribution limit rises to $7,000 if you’re at least 50 years old.
6. Is a precious metals IRA different from a Self-Directed IRA?
A precious metals IRA is a special kind of Self-Directed IRA. Sometimes called a gold IRA, a precious metals IRA lets an account owner hold physical coins or bars within their retirement portfolio.
To start a precious metals IRA, you can roll over money from another retirement account or deposit cash. However, you can’t put precious metals you already own—or those from friends or relatives—into the IRA.
You also can own physical gold, silver, platinum, and palladium bars and coins through a more diversified traditional, Roth, SEP, or SIMPLE IRA. If you own precious metals through an IRA, the metals are stored at a depository.
7. Can I start an IRA even if I already have a 401(k) at work?
Yes, you can have both an IRA and a 401(k). Many people find that they need to save more than what they’re allowed to put into their employer-sponsored retirement plan.
“Contributing to an additional retirement account can help you make sure you’re saving enough, as well as provide the tax benefits that come with accounts that are specifically used for retirement purposes,” Fred Egler, CFP®, advises.
However, note that if you do have both types of retirement accounts, your tax advantages might be restricted.
Take the next step in advancing your IRA knowledge. Call 855-889-5111 for a free no-obligation IRA consultation.
