Comparing a Self-Directed IRA With Other Retirement Plan Options

Estimated reading time: 3 minutes(Last Updated On: August 13, 2019)

There are a large number of reasons why a self-directed IRA can be the most powerful tool you have in saving for retirement. A self-directed IRA with a custodian such as Quest Trust Company can provide you with an ideal mix of investment flexibility and control, all in an account that can help your investments grow on a tax-deferred or tax-free basis.

However, even if you make your self-directed IRA your primary retirement savings vehicle you still may want to commit additional funds toward your retirement. You can certainly make additional investments with a taxable investment account, but using tax-advantaged retirement account can help your retirement nest egg grow significantly larger.

Let’s compare the self-directed IRA to other retirement plan options you may have available to you.

The 401(k). If your employer offers a 401(k) plan, then you may wish to participate once you’ve maximized your annual contributions to your self-directed IRA. A 401(k) will allow you to contribute pre-tax dollars, and you won’t have to pay tax on your investments until you take a distribution from your account. Furthermore, some employers match some or all of their employee contributions with additional funds.

Unfortunately, your investment options with a 401(k) are generally quite limited. The plan administrator decides what investments are available, and such investment choices don’t always include the types of options you’re looking for.

The Traditional IRA. An IRA with a traditional custodian like a bank or discount broker will provide you with the opportunity to save on a tax-advantaged basis, but again you’ll be limited in the types of investments you can make. You’ll generally be able to invest in publicly traded stocks, bonds and mutual funds. But many retirement savers also want to be able to invest in things like precious metals, real estate, and private debt and equity, and that won’t be possible with an IRA from a traditional custodian.

403(b) Plans. 403(b) plans (also known as Tax-Sheltered Annuities) are offered by certain public schools, churches and tax-exempt charities to their employees. These accounts allow eligible individuals to make contributions to their own individual accounts, and employers may choose to match those employee contributions.

Unfortunately, 403(b) plans often involve high administrative costs. Furthermore, the investment options in 403(b) plans are selected by the employer or plan administrator, and are much more limited as compared to a self-directed IRA.

Taxable Investment Accounts. As far as making this a dedicated retirement plan, only do so if you’re already maximizing the contributions you make to your self-directed IRA and other tax-advantaged accounts. If you do use to use a taxable investment account to help you save for retirement, consider strategically choosing investments for that account which do not generate an ongoing tax liability (i.e., those which do not generate taxable income).

There are also other tools that some retirement savers use to help them plan for their future; including whole life insurance policies and annuities. However, for overall flexibility and tax-advantages, the self-directed IRA is sure to be your most powerful tool.

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