Self-Directed Roth IRA

What is a Self-Directed Roth IRA and How Does It Work?

What is a Self-Directed Roth IRA?

You can choose to open a Self-Directed IRA as either a Self-Directed Traditional IRA or as a Self-Directed Roth IRA. A Self-Directed Traditional IRA is a tax-deferred investment account. This means that you do not pay any taxes when you initially fund your account. Instead, the taxes are due when the account holder reaches 73 years old and takes out a required minimum distribution (RMD). However, with a Self-Directed Roth IRA, the account holder pays taxes upfront. Then, when the money is distributed in retirement, it can be taken out tax-free. Basically, the account holder is paying the tax bill now so that they do not pay taxes on their distributions later.

This makes the Self-Directed Roth IRA a powerful investment tool, as all profits that accrue in the account are tax-free. This is a great advantage if an asset is expected to have higher income potential. Self-Directed Roth IRA account holders also have an additional benefit in that they can maintain their Roth account indefinitely. RMDs are not required with a Self-Directed Roth IRA.

The best Self-Directed Roth IRA will allow investors to expand beyond Wall Street products. With a Self-Directed Roth IRA, account holders can invest in alternative assets with their retirement funds.

What are the Advantages of a Self-Directed Roth IRA?

Setting up a Self-Directed Roth IRA can create numerous advantages: 

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, private business, promissory notes, tax liens, and more.

Tax-Free Earnings

With a Self-Directed Roth IRA, the account holder pays the taxes upfront and enjoys tax-free distributions in retirement.

No RMDs 

Roth IRA account holders have already paid taxes upon contribution, so RMDs, or required minimum distributions, are not required. The IRA funds can be passed down to your heirs and taken out tax-free. 

How To Open a Self-Directed IRA

Opening a Self-Directed Roth IRA is similar to setting up a Self-Directed Traditional IRA. In the classic Self-Directed IRA model, the process is simple and inexpensive.


Open a Self-Directed Roth IRA Account

Open a Self-Directed IRA with Madison Trust by completing our easy online application.
Investor Standing Looking At Screen Icon to show funding a Self-Directed IRA

Transfer Funds into the Self-Directed Roth IRA

Fund your Self-Directed IRA by transferring or rolling over all - or a portion of - your funds from an existing retirement account, such as an IRA or 401(k), or by making an initial contribution. 

Invest in the Asset of Your Choice

Instruct Madison Trust to send your IRA funds by writing a check or sending a wire to your investment. 

In a Self-Directed Roth IRA with checkbook control, the setup process has a few extra steps. In addition to opening a new account, you will also establish a financial vehicle for the purpose of opening a checking account. This vehicle can be in the form of an LLC or a trust. Once your LLC/trust is established, you will go to the bank of your choice and open a new checking account in the name of your LLC/trust. This effectively gives your Self-Directed Roth IRA the power to make investments in real-time without the need for a custodian for your everyday transactions. Simply write a check or send a wire from your dedicated checking account.

Do you have any questions about a Self-Directed Roth IRA?


What is a Self-Directed Roth IRA LLC?

Adding an LLC to your Self-Directed Roth IRA gives you more control over the investment process and also allows you to save on transaction fees. The idea behind it is similar to investing on Wall Street. Just like you can place your retirement funds in a company like Coca-Cola or Apple, you can also place them in an LLC. In other words, your new Roth IRA LLC will be using your retirement funds invest in the alternative asset of your choosing. This can really streamline your investments, as you no longer have the middle step of having every transaction processed by a custodian. (The custodian will still hold the IRA, just without everyday transactional involvement). This is great for time-sensitive investments that have to be acted on quickly. It's also favorable for assets that require a lot of transactions, such as a rental property. A Self-Directed Roth IRA saves both time and money in their management.

Additional Rules for a Self-Directed Roth IRA

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. 

Contribution Limits

For a Self-Directed Roth IRA, your maximum annual contribution depends on your filing status and income level. 

Filing Status
2024 MAGI
Maximum Annual Contribution

Single, Head of Household or Married Filing Separately (and did not live with a spouse at any time during the year)

Less than $146,000

$7,000 ($8,000 if 50 years old or older) 

$146,000 – $161,000

Reduced Contribution 

$161,000 or more

Not Eligible to Make a Contribution

Married Filing Jointly or Qualifying Widow(er) 

Less than $230,000

$7,000 ($8,000 if 50 years old or older) 

$230,000 – $240,000 

Reduced Contribution

$240,000 or more 

Not Eligible to Make a Contribution

Married Filing Separately (and lived with a spouse at any time during the year)

Less than $10,000

Reduced Contribution

$10,000 or more

Not Eligible to Make a Contribution

Required Minimum Distributions

Unlike a Self-Directed 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 Self-Directed Roth IRA, you may do so at any time and for any reason 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 Self-Directed Roth IRA for at least 5 years can take out earnings without taxes or penalties. Under age 59 ½, there are a limited number of situations that may avoid a penalty:

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First-Time Home Purchases

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Unreimbursed Medical Expenses

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Qualified Education Expenses

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Permanent Disabilities 

Talk to a Specialist About Setting Up a Self-Directed Roth IRA

At Madison Trust, we understand your desire for clarity when it comes to investing in your financial future. Our 
Self-Directed IRA Specialists can help answer any questions you may have and make your investment experience as seamless as possible. 

Contact us to learn more today.

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Fill out our form, and one of our IRA Specialists will answer any questions that you may have.
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