Can You Have an IRA Without a Custodian?

Custodians for Individual Retirement Accounts (IRA) typically include banks, brokerage firms and mutual fund companies. Their investment options typically consist of relatively safe assets like exchange-traded funds, bonds or publicly traded stocks.

After age 59 1/2, withdrawals can be made penalty-free from an IRA; however, only for qualified reasons; otherwise a 10% penalty and taxes will apply.

Self-Directed IRAs

Switching to a self-directed IRA (SDIRA) offers numerous advantages. From accessing alternative assets and having greater control, to understanding its risks and staying disciplined to avoid potential tax pitfalls, this option may offer great returns. However, it is essential that investors remain mindful of any possible tax pitfalls when switching over.

Traditional brokerage houses and IRA custodians typically limit your investment choices to stocks, bonds and mutual funds; SDIRAs provide more flexible options that enable investors to invest in private placements, real estate purchases and tax liens among others.

These investments offer more options, but also pose greater risk. Non-traditional assets, like rental property, may be difficult to convert back into cash quickly or may involve disqualified person restrictions which could incur IRS penalties. Therefore, before making non-traditional investments within an SDIRA it is essential that thorough research be performed so as to fully comprehend any associated risks and understand which are more suited.

Tax-Advantaged IRAs

Tax-advantaged investments and accounts offer special tax benefits to help you take advantage of them, including deferring or skipping taxes on future earnings. People from varying financial situations and goals use this type of account – from high-income investors looking for municipal bonds, to employees saving for retirement with IRAs and employer sponsored plans such as 401(k), and those looking to save for education expenses with 529 accounts or health care costs using HSAs.

Traditional and Roth IRA earnings aren’t taxed until you withdraw them during retirement; if funds are withdrawn before age 59 1/2, however, they will incur an early-withdrawal penalty of 10%.

Traditional IRAs

Traditional IRAs provide an efficient tax-cutting way of building up your nest egg. Your contributions qualify as tax deductions, while withdrawals are taxed at ordinary income rates. Furthermore, traditional IRAs allow investors to invest in various asset classes, though riskier options cannot be included within them.

Individual taxpayers may fund traditional IRAs with their earned income; self-employed people and their employees can create SEP IRAs; while small business owners can offer SIMPLE IRAs to their workers.

At age 70.5, tax deferral for Traditional IRA accounts expires and you must begin taking required minimum distributions (RMDs). If you withdraw money before then, however, an early-withdrawal penalty of 10% could apply in addition to regular taxes; although exceptions to the penalty rule exist such as for qualified first-time homebuyer expenses, unreimbursed medical costs, disability or death. SEPPs offer another means to avoid penalties altogether.

Roth IRAs

No matter how close or distant retirement may seem, starting saving early is critical to taking full advantage of compounding – where your initial investment and its earnings continue to compound over time – while tax-free withdrawals in retirement.

Roth IRA contributions can be made regardless of income; however, you may not be eligible to claim them as tax deductions. Contributions made to traditional IRAs or employer-sponsored retirement plans are deductible up to certain limits on income.

Consider fees when selecting an IRA custodian. Fees can eat away at your account balance over time, so it’s essential that you understand exactly what you’re paying for. Online tools such as Empower Personal DashboardTM allow you to track how much each of your accounts cost on a regular basis and can help avoid unpleasant surprises later on. Furthermore, an ideal custodian should offer an array of investments suitable to both your budget and risk profile.

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