Self-Directed IRAs vs. 401(k)s and Traditional IRAs

*This post originally appeared on Michael Morrow | Financial Planner.

When most people think about retirement savings they think of 401(k)s and IRAs. However, another option to consider are self-directed IRAs. While self-directed IRAs share a lot of similarities with 401(k)s and traditional IRAs, there are some important distinctions to consider. What sets self-directed IRAs apart from other options, though, are the variety of investment options available to you. Keep reading to learn more about the benefits of self-directed IRAs as well as some of the drawbacks of 401(k)s and traditional IRAs.

401(k) Drawbacks

  • There are numerous fees associated with 401(k)s, and most people don’t realize how much they’re even paying. Most of the time the fees aren’t even listed on your account statement. Over time these fees eat into your balance.
  • If you withdraw money from your account before the age of 59 ½, you’ll face penalties. Unfortunately, life doesn’t always go as planned. You might need to withdraw money due to divorce, job loss, or some other unforeseen circumstance. Take a look at this post to learn more about early withdrawal fees. In addition to the penalties, you will also have to deal with taxes. Any money taken out before the age of 59 ½ will be taxed as regular income.

IRA Drawbacks

  • Every IRA plan has contribution limits. If you contribute too much to your account, you will have to deal with IRS penalties. The penalties vary with age. For example, if you are under the age of fifty and you contribute too much, you’ll face a maximum penalty of $5,000. This article has more information on excess contributions.
  • When you reach the age of 70 ½, you have to withdraw funds from a traditional IRA account regardless of whether you need the money or not. Failing to withdraw the funds results in a penalty—typically a fifty percent tax on the minimum amount that was supposed to be withdrawn.

Self-Directed IRAs

A self-directed IRA is often a better option for investors. With a self-directed IRA, you can include assets like real estate rather than the traditional assets that most IRA accounts allow. Self-directed IRAs also offer tax benefits that aren’t available with traditional retirement options. As with every investment self-directed IRAs are not risk-free. However, investors who choose self-directed IRAs select assets that they understand well, so they are aware of the risks associated with the assets held in their self-directed IRAs.

Qualified Plans

This post originally appeared on

Qualified plans are any kind of employer-sponsored retirement plan or individual retirement plan. The most common employer-sponsored retirement plan is a 401(k). Both 401(k)s and IRAs are wrappers for different kinds of assets. Mutual funds tend to be the most common asset held in qualified plans. This post looks at five elements of qualified plans: liquidity, safety, expenses, rate of return, and tax efficiency.


As long as you remain with your employer, 401(k) plans are usually not liquid. However, in many cases, you can borrow up to $50,000 from your plan. Yet borrowing comes with strict repayment terms. On the other hand, IRAs are completely liquid. When you withdraw money, though, you will be taxed immediately, and if you’re under 59 ½ years old you’ll have to pay a 10% penalty.


The safety of qualified plans is not very high. With 401(k) plans, you don’t have unlimited access to any asset you want. The plan administrator decides which assets will be available to employees. IRA plans may be safer than 401(k) plans, but it depends on the type of assets that you choose.


In general, 401(k) plans tend to be expensive. The plan administrator decides which funds will be available, and they’re not always the least expensive funds. You also have to pay administrative fees for 401(k) plans. Most people don’t know what the fees are because they’re typically hidden in the fine print. The expenses for IRAs tend to be lower—there aren’t any administrative fees if the plan is self-directed. However, the expenses of the assets themselves will still be present.

Rate of Return

The rate of return for 401(k) plans depends on the underlying assets that your employer makes available. Yet, since many employers provide employee matching the rate of return can be high. Employers who offer employee matching will usually match 2-6% of your funds. The average tends to be around 3%. There is no employee matching with an IRA plan, so the rate of return depends on the underlying assets in the account. Therefore, the rate can vary wildly from plan to plan.

Tax Efficiency

The tax efficiency depends on whether you have a Roth 401(k) or IRA or you have a regular 401(k) or IRA. When you withdraw money from regular plans, you pay ordinary income taxes. When you withdraw money from a Roth plan, though, you don’t have to pay taxes. With both plans, your money will grow tax-free. Many people find Roth plans attractive since they expect taxes to increase in the future. However, if you earn more than $200,000 you’re ineligible to participate in a Roth IRA. IUL plans are a popular alternative for investors who make more than $200,000.