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Roth IRA or Traditional IRA: Which Self-Directed IRA is Right For You?

John-Rothans

Written by John Rothans

Feb 28, 2018

Tax season is a great reminder to review your retirement savings strategies and make changes that will enhance your prospects for long-term financial security. It's also a good time to start an Individual Retirement Account (IRA) if you don't already have one.

A Self-Directed IRA, in particular, is ideal for savers who want to call the shots and play an active role in managing their portfolios. It can be set up as either a Roth IRA or a Traditional IRA, both of which can hold the same array of non-paper based assets like real estate, livestock, franchise interests, and IRA-approved precious metals, in addition to stocks, bonds, and mutual funds.

Since you can hold the same diverse array of assets whether you choose a Traditional or Roth Self-Directed IRA, does it matter which one you choose? Yes. The two account types have different eligibility requirements, contribution guidelines, and distribution rules. Understanding these key differences will help you choose the best Self-Directed IRA for you. Scan the table below for a quick comparison and read on for more in-depth information.

 

Roth IRA vs. Traditional IRA

Roth IRA Traditional IRA
Taxes Tax-free growth, tax-free qualified withdrawals Tax-deferred growth, tax-deductible contributions
Income Eligibility Income cannot exceed certain amount Income does not impact eligibility
Age Eligibility Contribute at any age Contribute until you’re 70.5
Contributions Contributions are not tax deductible

$5,500 (under age 50)

$6,500 (over age 50)

Contributions are tax-deductible

$5,500 (under age 50)

$6,500 (over age 50)

Withdrawals Not required to take distributions during your lifetime Must take required minimum distribution the year you turn 70.5

 

 

Self-Directed Roth IRA

Roth IRAs are special retirement accounts that you fund with post-tax income, so you can't deduct your contributions on your income taxes. When it's time for retirement, though, your withdrawals are tax-free as long as they follow Roth IRA regulations set forth by the IRS. This type of Self-Directed IRA makes the most sense if you anticipate that your tax rate will be higher during retirement than your current rate.

Eligibility

You can contribute to a Self-Directed Roth IRA at any age as long as you have a taxable income and your income is below the IRS limits for Roth IRAs. For 2018 contributions, you must earn less than $120,000 if you're single or head of the household or less than $189,000 if you're married filing jointly.

A working spouse can contribute to a non-working spouse's IRA as long as A) the couple files a joint tax return and B) the working spouse has earned income that equals or exceeds the sum of the non-working spouse's contribution plus the working spouse's contribution. Read more about spousal IRA contributions and eligibility at IRS.gov.

Contributions

You can contribute to a Roth IRA at any age, even if you are over 70.5. Roth IRAs must be established by the tax filing deadline for the tax year in which your qualifying contributions will apply. Contributions are not tax deductible.

Tax Year Max. Contribution (under age 50) Max. Contribution (over age 50) Contribution Deadline
2018 $5,500 $6,500 4/15/2019
2017 $5,500 $6,500 4/17/2018

Distributions

Qualified distributions (withdrawals) in retirement are tax-free since you already paid taxes on the contributions. Unlike Traditional IRAs, there are no required minimum distributions on Roth IRAs during the owner’s lifetime. That means if you don't need your Roth money, you can leave it in the account and let it grow for future generations to enjoy. However, a Roth IRA is subject to required minimum distribution rules after the death of the account owner. If distributions aren’t made, there’s a 50 percent penalty. Read up on Roth IRA required minimum distributions rules on RothIRA.com to better avoid this potentiality.

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Self-Directed Traditional IRA

Traditional IRAs are tax-deferred retirement savings accounts. You pay taxes on your money only when you make withdrawals. A Traditional IRA may be best for you if you believe your tax rate will be lower at retirement than it is right now.

Eligibility

Who can contribute to a Traditional IRA? You (or your spouse) can contribute to a Traditional IRA as long as you earn taxable income and are under the age of 70.5. Unlike Roth IRAs, there are no income limits for Traditional IRAs. No matter your income right now, you can contribute to a Traditional IRA. Going with a Traditional IRA is an easy choice to make if your income level makes you ineligible for a Roth IRA!

Contributions

You can make regular contributions to a Traditional IRA until you turn 70.5 years old. Your traditional IRA contributions may be tax-deductible, depending on whether you (or your spouse) are covered by a retirement plan at work and your income level. (See more on qualifying on deductions from the IRS.)

In general, the same contribution limit applies to both Roth and Traditional IRAs.

Tax Year Max. Contribution (under age 50) Max. Contribution (over age 50) Contribution Deadline
2018 $5,500 $6,500 4/15/2019
2017 $5,500 $6,500 4/17/2018

Distributions

You can take money out of a Traditional IRA whenever you want, but you'll pay regular income taxes on the full amount. If you are under the age of 59.5 when you make the withdrawal, you'll pay an additional 10% penalty on top of regular income taxes.

You must take “required minimum distributions” starting the year you turn 70.5, says CNN Money. The “required minimum distribution” amount depends on how much you have in the account and your life expectancy, per the IRS.

Partner with your own IRA Account Executive

A Self-Directed retirement account, whether it is a Traditional or Roth IRA, provides you with a wide array of retirement asset options and lots of chances to diversify. In both cases, you have the ability to manage your account, your way; to include the assets you believe in most, like physical gold and silver; and to build your best financial future how you see fit. When you're in control, there's no limit to how successful you can be! U.S. Money Reserve's dedicated team of IRA Account Executives are standing by to help you choose the right Self-Directed IRA for you. Call 1-844-307-1589 with Self-Directed IRA questions and to learn more today!

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