Roth IRA vs. Traditional IRA And Self-Directed IRAs
Individual Retirement Accounts (IRAs) are great options for people that want to save money or invest for retirement while enjoying significant tax advantages. Since specific needs tend to vary from one investor to another depending on their specific goals, there are two types of IRAs to choose from. You can choose from a traditional IRA or a Roth IRA, so it is important to understand the key differences between the two especially in regards to how the tax advantages apply.
Key differences between traditional IRAs and Roth IRAs
As far as the taxes are concerned, with a traditional IRA you can enjoy tax-free contributions in addition to not paying taxes on the earnings you will get from the contributions. These are known as pre-tax contributions. You will pay taxes later when you start making withdrawals after the age of 59½. Making withdrawals earlier than that attracts penalties in addition to the tax. A Roth IRA on the other hand will require you to pay tax on your contributions, which is known as a post-tax contribution. No taxes or penalties apply on withdrawals from a Roth IRA, even if you make the withdrawals before the age of 59½. You may choose a Roth IRA over a traditional IRA if you think the taxes you pay when making contributions are lower than the taxes that are paid in the future from withdrawals. Roth IRA accounts tend to be more attractive to young investors than old investors.
Self-directed traditional IRA & self-directed Roth IRA
To take advantage of more investment opportunities beyond stocks, bonds, mutual funds and ETFs, you can rollover a traditional IRA or a Roth IRA into a self-directed traditional IRA or a self-directed Roth IRA respectively. Everything to do with contributions, earnings, tax withdrawals before or after the age of 59½ will still be treated the same way as it was before rolling over to a self-directed IRA. But self-directed IRAs are more suitable for savvy investors that know how to choose from a variety of alternative investments while effectively diversifying to minimize risks and increase returns over the long term.