Self-Directed IRA vs Traditional IRA: Know the Difference
In general, Individual Retirement Accounts (IRA) are more or less saving accounts for saving funds to provide a source of income for the post-retirement years. The individual account holder makes the contributions to the IRA. And depending on the type of IRA, the employer, too, contributes to the account.
The IRA funds are held by financial institutions that invest the funds in assets, like stocks, bonds, mutual funds, and others.
In practice, a broker or an investment advisor oversees a traditional IRA. The broker or investment advisor invests in traditional assets, like stocks, bonds, and mutual funds.
However, things with a Self-Directed IRA (SDIRA) are a little different. With an SDIRA, you will see investment opportunities spreading beyond the traditional assets to areas, such as precious metals, real estate, and even startups.
To set-up an SDIRA, you need to deploy an IRA custodian, which is a financial institution that holds the investments in the account and ensures the adherence to all IRS as well as government regulation.
At the same time, the IRA custodian helps the account holder to invest retirement savings into a broad range of assets, including the areas beyond what the traditional IRAs allow.
In the context of an SDIRA, the prefix–” Self-Directed”– is worth introspecting. Interestingly, the custodians do not offer any investment, tax, or legal advice. Instead, it is the account holder who instructs the custodian on matters such as the assets to invest upon. And that is where the prefix comes into play. It means the account holder himself/herself makes the decisions on the investments. And the custodian functions as a passive entity, acting upon the instruction of the account holders.
An SDIRA is a good instrument to invest in startups. Investing in startups is an excellent way to enable your funds to grow. As startups are not initially listed, traditional IRAs do not invest in them. If you want to know the way, refer to the infographic in this post.