Self Directed Roth IRA

What is a Self Directed Roth IRA?

There are two types of IRAs: Traditional and Roth. A Traditional IRA is a tax-deferred investing account. This means that you do not pay any taxes when you initially fund your account. Rather the taxes come due when the account holder reaches 72 years old and takes out a RMD (Required Minimum Distribution).  

A Roth IRA is when the account holder pays taxes upfront so that when the money is distributed in retirement, it can be taken out tax-free. Basically, you are paying the bill now so you do not owe anything later. The power of the Roth is that all profits that accrue in the account are also tax free. This is great for people who expect to do well in their investments. (Roth IRA Account holders have an additional benefit in that they can maintain a Roth IRA indefinitely. There is no RMD required during their lifetime.) 

Both Traditional and Roth IRAs can be Self Directed. This grants them the greater opportunity to invest in alternatives as opposed to the usual stocks, bonds, and mutual funds.  

Advantages for Self Directed Roth IRA Investors 

Self Directed Roth IRAs create opportunities including:   

  • Diversified Portfolio – A Self Directed Roth IRA allows account owners to invest in a variety of alternatives that are inaccessible in standard IRAs. Possible investment options include real estate, cryptocurrencies, promissory notes, tax liens, and more.
  • Total Control – Self Directed IRA owners can invest in assets that they understand and fit well with their personal financial goals. You have more involvement in the process and have total control over your investment decisions.   
  • Steady Returns – Investing in assets you are more familiar with can result in a more stable revenue stream, thereby avoiding the volatile stock market.   

How to set up a self directed Roth IRA 

Setting up a Self Directed Roth IRA is similar to setting up a Traditional Self Directed IRA. To find out more about setting up a Self Directed account, please read Madison’s set up page here.

Additional Self Directed Roth IRA Rules 

Income Requirements – Only earned income can be contributed to a Self Directed Roth IRA. (Earned income is money paid to you for work performed or money made from running your own business.) You can contribute to a Self Directed Roth IRA at any age, as long as the contribution is earned income and the amount contributed is not more than your earned income that year.  

Your maximum annual contribution depends on your filing status and income level.  

Filing Status2020 MAGIMaximum Annual Contribution 
Single, Head of Household or Married Filing Separately
(if did not live with a spouse during the year) 
Less than $124,000 $6,000 ($7,000 if 50 years old or older)  
$124,000 – $139,000 Reduced Contribution  
$139,000 or more Not Eligible to Make a Contribution
Married Filing Jointly or Qualifying Widow(er)  Less than $196,000 $6,000 ($7,000 if 50 years old or older)  
$196,000 – $206,000 Reduced Contribution
$206,000 or more  Not Eligible to Make a Contribution 
Married Filing Separately
(if lived with a spouse at any time during the year)  
Less than $10,000Reduced Contribution
$10,000 or more Not Eligible to Make a Contribution

Annual Valuation

Withdrawal Rules – Unlike a Traditional IRA, there are no required minimum distributions for a Self Directed Roth IRA. You have the freedom to use the account in retirement or leave it as an inheritance to your heirs.  

If you choose to take out contributions from your Roth IRA, you may do so at any time and for any reasons without taxes or penalties. However, if you are withdrawing earnings from your Roth IRA, it may trigger taxes and penalties depending on your age and how long you have had the account. Those over 59 ½ years old who have owned the Roth IRA for at least 5 years can take out earnings without taxes or penalties. Under 59 ½ there are a limited number of situations that that would similarly avoid a penalty: 

  • first-time home purchases 
  • qualified education expenses 
  • unreimbursed medical expenses 
  • permanent disabilities  

This year (2020) the CARES Act has allowed those affected by the coronavirus pandemic to distribute up to $100,000 without having to pay the 10% penalty. Account owners will have three years to pay the tax owed on withdrawals (instead of in the current year), or they can simply repay the withdrawal.    

Talk to a Specialist  

Here at Madison, we understand your desire for clarity when it comes to making investment decisions. We can help answer any questions you may have and make your investment experience as seamless as possible. 

Have Questions?

Read our FAQs, or feel free to contact our team directly.

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