IRAs and SDIRAS – What are They and How Do They Work?

Summary

An IRA (Individual Retirement Account) is a tax-advantaged retirement account that allows investments to grow tax-deferred or tax-free, depending on the account type. A Self-Directed IRA (SDIRA) is a specialized IRA that expands investment options beyond traditional stocks and bonds to include alternative assets such as cryptocurrency, precious metals, real estate, and private equity. While both account types follow the same IRS contribution limits and tax rules, SDIRAs provide greater investment flexibility for investors seeking broader diversification. Platforms like iTrustCapital allow eligible investors to access cryptocurrency and precious metals within a SDIRA while maintaining the tax advantages associated with retirement investing.

What Is an Individual Retirement Account (IRA)?

An Individual Retirement Account (IRA) is a tax-advantaged retirement account. It is an account that must be established at a financial institution, like a bank, a brokerage, or a mutual fund company.

An IRA custodian is an IRS-approved financial institution that holds and administers IRA assets on behalf of the account holder. A custodian must hold an IRA on behalf of an individual where these retirement investments grow on a tax-free or on a tax-deferred basis, depending on the type of IRA (Traditional or Roth). .

There are two types of conventional IRAs. There is the Traditional IRA where contributions to the account are made with pre-tax dollars and there is the Roth IRA where contributions to the account are made with after-tax dollars. Both the traditional IRA and the Roth IRA have their own rules and restrictions regarding fund accessibility, tax consequences, and eligibility.

What is a Traditional IRA?

Contributions to a Traditional IRA are tax-deductible but there are strict eligibility requirements. These requirements are mandated by the IRS and are based on an investor's income, filing status, and availability of other retirement plans.

Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while the funds remain in the account. However, when funds are withdrawn from the account in retirement, withdrawals are subject to federal income tax.

What is a Roth IRA?

Unlike Traditional IRAs, contributions to a Roth IRA are not tax-deductible since they are made with after-tax dollars. With a Roth IRA, contributions grow tax-free* and are not subject to taxes at withdrawal in retirement.

Traditional IRA vs. Roth IRA Comparison

Feature	Traditional IRA	Roth IRA
Contribution Tax Treatment	Pre-tax (may be tax-deductible)	After-tax (not deductible)
Growth	Tax-deferred	Tax-free
Withdrawal Tax Treatment	Taxed as ordinary income	Tax-free (if qualified)
RMD Requirements	Required starting at age 73 (or 75 for those born in 1960 or later)	None during owner's lifetime
Income Limits for Contributions	No income limits	Subject to income limits

Conventional IRAs

Assets Held

The U.S. Tax Code identifies what type of assets are permitted to be held in conventional IRAs. Typical assets that can be held in conventional IRAs (either Traditional or Roth IRA) include stocks, cash, bonds, equities, mutual funds, U.S. government securities, certificates of deposit, money market accounts, and ETFs.

However, the IRS does not allow alternative assets such as real estate or cryptocurrencies in a conventional IRA.

Tax Treatments

Withdrawals from an IRA are treated differently, depending on the type of IRA. For example, taxes are paid upon the withdrawal from a Traditional IRA.

In contrast, there are no taxes due upon withdrawals from a Roth IRA, on either contributions or earnings, provided the account holder meets certain requirements.

Contribution Limits

For 2026, the total contributions that an investor can make each year to all Traditional IRAs and Roth IRAs is limited to $7,500 for individuals under age 50. However, if the investor is age 50 or older, the total contribution limit is $8,600 (including the catch-up contribution).

Distribution Rules/Required Minimum Distributions

Required Minimum Distributions (RMDs) are the mandatory minimum amount that must be withdrawn from an IRA each year after an account holder reaches a certain age.

Investors can withdraw more than the RMD each year.
RMDs from Traditional IRAs will be included as taxable income in the year withdrawn. Withdrawals are tax-free* if withdrawn from designated Roth accounts.
The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period which can be obtained from the IRS's "Uniform Lifetime Table."
For a Traditional IRA, an account holder must begin taking RMDs by April 1 of the year following the year you turn 73 (or age 75 for those born in 1960 or later), per the SECURE 2.0 Act.
RMDs do not apply to Roth IRAs during the account holder's lifetime. However, heirs may need to take RMDs to avoid penalties.

More information about RMDs is available from the IRS here: Retirement Plans FAQs regarding Required Minimum Distributions | Internal Revenue Service.

Income Limits

Traditional IRA contributions can be tax-deductible or partially tax-deductible based on an investor's modified adjusted gross income (MAGI) even if you contribute to an employer-sponsored plan, such as a 401(k).

For 2026, the IRS has adjusted the income phase-out ranges for Traditional IRA deductibility:

Single taxpayers covered by a workplace plan: Phase-out roughly $81,000–$91,000
Married filing jointly, contributor covered by workplace plan: Phase-out roughly $129,000–$149,000
Married filing jointly, contributor not covered but spouse is: Phase-out roughly $242,000–$252,000

There are no income limits on who can contribute to a Traditional IRA.

However, there are income limits on who is eligible to contribute to a Roth IRA. For 2026, the Roth IRA income thresholds are:

Single filers: Full contribution under $153,000 MAGI; phase-out begins at $153,000 and ends at $168,000
Married filing jointly: Full contribution under $242,000 MAGI; phase-out begins at $242,000 and ends at $252,000

Early Withdrawals

Early withdrawals (which occur before age 59½) from traditional IRAs are subject to a 10% penalty along with the payment of any income taxes due.

There are some exceptions to this rule. IRA holders may be able to avoid the 10% penalty for making an early withdrawal from a traditional IRA based on the following scenarios:

For qualified higher education expenses for yourself, your spouse, your or your spous’s children or grandchildren..
For using the withdrawn funds to buy, build, or rebuild a first home.
For paying unreimbursed medical expenses that exceed a certain percentage of adjusted gross income.
You are in the military and are called to active duty for more than a certain number of days.
You have become totally and permanently disabled.
You are the beneficiary of a deceased IRA owner.

In a Roth IRA, withdrawals of contributions are penalty-free and tax-free* at any time. Earnings may be withdrawn without penalties or taxes as long as you are age 59½ or older and you have held the Roth IRA account for at least five years.

When can IRA Contributions be Made?

Tax day is the deadline for all US taxpayers to file and pay their taxes.

Tax day is also the last day on which investors can contribute to an IRA for the prior tax year.

To open an IRA, there is no minimum deposit required and there are no rules about how much money you must deposit. Note that brokers may set their own account minimums.

Contributions can be made to both a traditional IRA and a Roth IRA in a given year. The combined contribution amount to any type of IRA must not exceed the applicable annual limit as referenced above.

What is a Self-Directed Individual Retirement Account (SDIRA)?

A Self-Directed Individual Retirement Account (SDIRA) is an IRA that must be set up as a conventional IRA, that is, either a Traditional IRA or a Roth IRA. Whether you select a Traditional or Roth IRA for your SDIRA, the same limitations and eligibility guidelines apply to SDIRAs as conventional IRAs.

An SDIRA is different from a conventional IRA in that it allows the account holder to invest in alternative assets within the retirement account. Importantly, SDIRAs have the same contribution and income limits as conventional IRAs.

Alternative Assets Allowed in an SDIRA

Alternative assets allowed in an SDIRA include:

Real estate
Precious metals (gold and silver)
Private equity
Commodities
Cryptocurrencies (such as Bitcoin and Ethereum)

All individual retirement accounts including SDIRAs are covered under Internal Revenue Code 408.

What Type of Custodian is Required for an SDIRA?

One important distinction between conventional IRAs and an SDIRA is the type of account custodian required.

The custodian for conventional IRAs typically plays the role of being an active custodian. This custodian is oftentimes a financial institution that is responsible for maintaining and administering the IRA. The custodian holds an account's investments for safekeeping and is responsible for complying with all IRS and government regulations. For example, an IRA custodian has the responsibility of filing IRS Forms 5498 and 1099-R.

IRA custodians must abide by the IRS requirements to have the authority to hold title to the assets, investments, or properties of their clients.

With an SDIRA, the custodian plays a more passive role. Custodians of SDIRAs are referred to as directed custodians as they have only limited duties to investigate the assets or the background of the account assets.

In its role as a passive custodian, a directed custodian solicits no investments and provides no advice or recommendations to account owners with regard to investments acquired by or held in the SDIRAs.

It is important to choose a qualified custodian and consult with a qualified investment professional in this regard.

What are SDIRA Account Holder Responsibilities?

Unlike with conventional IRAs, SDIRA account owners are "self-directed." These owners must be mindful that this means that the owner - and not the directed custodian - must directly manage the alternative assets held within the account.

What Asset Types Can and Cannot be Held in an SDIRA?

SDIRAs are designed to hold alternative assets that cannot be held in conventional IRAs. Alternative assets include things like precious metals, tech startups, private equity, investment property, wind farms, promissory notes, and cryptocurrencies.

There are, however, limits and restrictions on the types of assets that can be held in an SDIRA and these assets are outlined by the IRS. For example, you cannot hold life insurance, collectibles, or S-corporations in an SDIRA.

Collectibles include works of art, rugs or antiques, certain metals, gems, stamps, and certain coins, alcoholic beverages, and any other tangible personal property that is a "collectible" under IRC Section 408.

How Does an SDIRA Work?

The IRS requires custodians or trustees to hold all SDIRA accounts. Therefore, it is always best to fully investigate your options and your requirements before opening an SDIRA.

A self-directed IRA includes complex rules and presents potential risks for the SDIRA owner. Such rules include prohibiting certain types of transactions along with how the assets can be used while they are held in the SDIRA.

A violation of the rules can result in costly tax consequences for the SDIRA owner. It is best practice to consult with a tax advisor if you are unsure of the potential tax ramifications of any transaction that you may initiate as the self-directed owner of an IRA.

A few of these prohibited transactions are summarized below.

First, the SDIRA owner (or account beneficiaries) cannot engage in a transaction with a disqualified person. Disqualified persons are individuals or entities that cannot perform any direct or indirect deals, investments, or transactions with the IRA. That would include the SDIRA owner, IRA beneficiaries, or SDIRA owner family members.

Second, the SDIRA owner cannot use the SDIRA for personal benefit. For example, revenue that is generated from real estate held in an SDIRA must be deposited back into the SDIRA account. Such funds cannot be deposited into a personal account. All income generated by SDIRA assets must be invested back into the SDIRA.

Key Takeaways

IRAs offer tax advantages: Traditional IRAs provide tax-deferred growth with pre-tax contributions, while Roth IRAs offer tax-free growth and withdrawals with after-tax contributions.
SDIRAs expand investment options: Self-Directed IRAs allow you to invest in alternative assets like cryptocurrency, real estate, and precious metals that aren't permitted in conventional IRAs.
Contribution limits for 2026: Individuals under 50 can contribute up to $7,500; those 50 and older can contribute up to $8,600.
RMD rules have changed: Under the SECURE 2.0 Act, RMDs for Traditional IRAs begin at age 73 (or 75 for those born in 1960 or later). Roth IRAs have no RMDs during the owner's lifetime.
Custodian requirements differ: Conventional IRAs use active custodians, while SDIRAs use directed (passive) custodians who don't provide investment advice.

How Do You Open an SDIRA?

Use the following steps to open your own self-directed IRA:

Find a custodian or trustee for the account. Remember, not all IRA administrators are authorized to custody an SDIRA.
Determine what type of alternative asset you would like your account to hold.
As you will be directing the investment activity for this self-directed account, you must perform your own due diligence on the investment, including consulting with a qualified investment professional.
Find a party to purchase the investment. If you are purchasing a cryptocurrency, you might select an exchange or platform that offers the type of currency that you are looking to add to your retirement account.
Request that your account be initiated to hold your desired investment.

Open an SDIRA at iTrustCapital

If you're interested in opening a Self-Directed IRA, iTrustCapital offers a fully digital platform that makes it easy to invest in alternative assets within a tax-advantaged* retirement account. Investors can choose between a Traditional IRA, which offers potential tax-deferred growth, or a Roth IRA, which offers potential tax-free growth and qualified withdrawals in retirement.

Through iTrustCapital's desktop and mobile platform, investors have access to 100+ cryptocurrencies, physical gold and silver, crypto staking opportunities, low transaction fees, no monthly account fees, and 24/7 account access. Funding an account is straightforward, setup is quick, and once your account is established, you can directly access digital assets and precious metals within your retirement portfolio. Whether you're looking to diversify beyond traditional investments or gain exposure to emerging asset classes, iTrustCapital provides a streamlined way to invest through a tax-advantaged IRA.

Click here to open an account today.

*Some taxes may apply.

Frequently Asked Questions

What is the difference between an IRA and an SDIRA?

An IRA is a tax-advantaged retirement account that typically holds traditional investments such as stocks, bonds, mutual funds, and ETFs. A Self-Directed IRA (SDIRA) follows the same IRS rules and tax treatment but allows investors to access a broader range of alternative assets, including cryptocurrency, real estate, precious metals, and private equity. The primary difference is the expanded investment flexibility available within an SDIRA. Investors who want exposure to digital assets or physical precious metals often use SDIRA platforms such as iTrustCapital to access these investments within a retirement account.

Can you hold cryptocurrency in an IRA?

Yes, cryptocurrency can be held within a SDIRA. While conventional IRAs generally limit investors to traditional securities, SDIRAs can hold alternative assets such as Bitcoin, Ethereum, and other cryptocurrencies. This allows investors to potentially benefit from tax-deferred or tax-free growth while maintaining long-term exposure to digital assets. Platforms like iTrustCapital provide a streamlined way to buy, sell, and hold cryptocurrency within eligible Traditional and Roth IRAs.

What assets are prohibited in an SDIRA?

Although SDIRAs offer expanded investment options, the IRS still prohibits certain assets and transactions. Examples of prohibited assets include life insurance contracts, most collectibles, artwork, antiques, gems, stamps, alcoholic beverages, and S-corporation stock. Additionally, SDIRA owners cannot engage in transactions with disqualified persons, including themselves, certain family members, and entities they control. Violating these rules can result in taxes, penalties, and possible disqualification of the IRA.

What are the contribution limits for IRAs in 2026?

For 2026, individuals under age 50 can contribute up to $7,500 annually across all Traditional and Roth IRAs combined. Individuals age 50 and older may contribute up to $8,600, which includes the IRS catch-up contribution allowance. These limits apply regardless of whether the account is a conventional IRA or a Self-Directed IRA. Investors using platforms such as iTrustCapital must follow the same annual contribution limits established by the IRS.

Can I transfer an existing IRA into a Self-Directed IRA?

Yes, many investors fund an SDIRA through a direct transfer or rollover from an existing IRA, 401(k), 403(b), TSP, or other eligible retirement account. A properly completed transfer generally does not trigger taxes or penalties because the assets move directly between custodians. Once the transfer is complete, investors can allocate funds into eligible alternative assets permitted within the SDIRA. Companies such as iTrustCapital help facilitate these transfers while preserving the tax-advantaged status of the retirement account.

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DISCLAIMER

This article is for informational purposes only and is not intended to constitute investment advice in any way or constitute an offer to buy or sell any cryptocurrency, digital asset or security or to participate in any investment strategy.

iTrustCapital is a fintech software platform for alternative assets. iTrustCapital is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrustCapital is not affiliated with and does not endorse any particular digital asset, precious metal or investment strategy.

Investing in any digital asset or cryptocurrency (including meme coins) carries significant risks due to their speculative and highly volatile nature. No investment is completely risk-free, and every investment carries the potential for losing some or all of the principal amount invested. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Digital asset (Cryptocurrency) deposits held with institutional storage providers are never FDIC insured and may lose value. Clients do not receive a choice of custody partner.

Investors assume the risk of all purchase and sale decisions. iTrustCapital makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrustCapital does not provide legal, investment or tax advice. Conduct your own research and consult with a qualified legal, investment, or tax professional to assess your own risk tolerance prior to investing.

iTrustCapital makes no representation or warranty as to the accuracy or completeness of this information and does not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrustCapital disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.