subject: How a Self Directed Traditional IRA Works [print this page] The most common type of retirement plan is the Traditional Individual Retirement Account. The traditional IRA is commonplace. But the self directed IRA is becoming a bit of a buzzword in the financial world even though it has coexisted with the traditional IRA since 1974. Few realize that there is a middle ground with a self directed traditional IRA.
You can invest in the same things as a traditional retirement account such as stock, mutual funds, bonds, and CDs; however, you can be the one to have the final decision of what goes into your financial portfolio.
It is estimated that 40% of households have an Individual Retirement Account, accounting for $3 trillion. A very small portion of this percentage has invested in a self directed individual retirement account.
Does Your Conventional IRA Allow Self-Direction?
Most of the time, you can add funds to your traditional IRA by simply making a contribution to the account. If your current traditional retirement account doesn't allow self-direction, you can transfer the funds to a self directed traditional IRA with a passive custodian.
With the higher than usual layoffs and unemployment, the word "roll over" has become more than financial jargon. It has permeated the vocabulary of anyone that had a retirement account that experienced a loss in his or her plan.
Many traditional IRA holders want to roll over or transfer from an old employer, existing employer, pension, or a 401(k) to a self-directed account; however, you don't have to move all of your contribution funds into assets such as real estate, tax liens, mortgages, and partnerships that are typical for a self directed IRA.
It is perfectly fine to keep your IRA traditional, but a roll over to a self directed ensures that you make the final decisions on where you make your contributions. This is particularly appealing to people who would like to be in charge of their future in order to create lasting wealth for their family in the years to come.
Factors to Consider with a Self Directed Traditional IRA
If you want to receive a tax deferment on earned income, you may be eligible for a traditional IRA until you are 70 years-old.
If you think that your tax rate at retirement will be lower than the tax rate you are at now, you might want to consider a traditional IRA over a Roth.
If you need a deduction on your current taxes, this may be a good option. (It's still possible to contribute to an IRA even if you don't take the tax deduction.)
If your income is too high, you are not eligible to make a contribution to a Roth IRA. Check the AGI (adjusted gross income) with the IRS to make sure what they are since they do change year by year and with certain terms of legislation.
Find Someone Who Will Help You Make Informed Decisions
Any of these reasons will be good reasons to at least research your options in the self directed IRA. Make sure that you have a good administrator to help answer any of your questions and make sure that the paperwork is filed correctly.
All IRAs require a custodian. The big difference between a traditional IRA and a self directed traditional IRA is that the self directed account provides the accountholder with a greater amount of investment choices as well as a greater sense of control over retirement savings.
