(800) 721-4900

Self-Directed Roth IRA Basics

How Does a Self-Directed Roth IRA Work?

What Is a Self-Directed Roth IRA?

When opening a Self-Directed IRA, you can choose to establish your IRA as 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, also sometimes called a Self-Managed Roth IRA, the account holder pays taxes up front. Then, when the money is distributed in retirement, it can be taken out tax-free. Self-Directed Roth IRAs allow the account holder to pay the tax now, hopefully at a better rate, so they do not pay taxes on their distributions later.

Self-Directed Roth IRAs are powerful investment tools, 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 account indefinitely. Required minimum distributions (RMDs) are not required with a Self-Directed Roth IRA.

For investors looking to expand beyond Wall Street investment products, a Self-Directed Roth IRA could be the best investment option. With a Self-Directed Roth IRA, account holders can invest in alternative assets with their retirement funds, opening up a wider variety of opportunities to diversity and accrue value.

Self-Directed Roth IRAs at a Glance

Through its exceptional structure, a Self-Directed Roth IRA allows your revenue to accumulate tax-free without required minimum distributions.
Similar to a Self-Directed Traditional IRA, you’ll have access to a variety of alternative investment opportunities, curating a diversified retirement portfolio beyond Wall Street.
Opening a Self-Directed Roth IRA at Madison Trust is straightforward. Simply follow our formulated three-step process: open, fund, and invest.
You can also upgrade your Self-Directed Roth IRA to a Self-Directed Roth IRA LLC to obtain checkbook control. This supercharged tool gives you the freedom and flexibility of real-time investing and is best suited for investors who want to perform everyday transactions without the involvement of their Self-Directed Roth IRA custodian.

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 businesses, 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 

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

Benefit From Tax-Free Growth of Your Retirement Funds

The financial professionals at Madison Trust are here to assist you at any point in the process, from setting up your Self-Directed Roth IRA to placing your investment where you feel it is most aligned with your needs and values. Start the conversation today.
Start a Conversation

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 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 Roth IRA LLC will be using your retirement funds to invest in the alternative asset of your choosing. This can streamline your investments, as you no longer have the middle step of having every transaction processed by your Self-Directed IRA custodian. The custodian will still hold the IRA, but 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.

How To Open a Self-Directed Roth IRA

Opening a Self-Directed Roth IRA is similar to setting up a Self-Directed Traditional IRA. The process is simple and inexpensive.

1

Open a Self-Directed Roth IRA

Open a Self-Directed IRA with Madison Trust by completing our easy online application. When completing our application, you will select that you'd like to establish a Roth IRA.
2
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. 
3

Invest in the Asset of Your Choice

Instruct Madison Trust, as the Self-Directed Roth IRA custodian, to allocate your funds by writing a check or sending a wire directly 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.

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
2025 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 $150,000

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

$150,000 – $165,000

Reduced Contribution 

$165,000 or more

Not Eligible to Make a Contribution

Married Filing Jointly or Qualifying Widow(er) 

Less than $236,000

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

$236,000 – $246,000 

Reduced Contribution

$246,000 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, a Self-Directed Roth IRA has no required minimum distributions. You have the freedom to use the account in retirement or to leave it as an inheritance for 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:

Blue circle with a white check mark inside

First-Time Home Purchases

Blue circle with a white check mark inside

Unreimbursed Medical Expenses

Blue circle with a white check mark inside

Qualified Education Expenses

Blue circle with a white check mark inside

Permanent Disabilities 

Ready to Embark on Your Journey to a Richer Retirement?

Start a conversation and speak to a Self-Directed Roth IRA Specialist.
Start a Conversation

Our Story

Madison Trust is an industry-leading Self-Directed IRA custodian with a passion for empowering individuals to gain control of their retirement investing. Learn more about our story from our President and CEO, Daniel Gleich.

Ready to Get Started? We're Here for You! 

Madison Trust offers Self-Directed IRA services that are easy to get started with! Thanks to our dedicated Self-Directed IRA Specialists, you will be provided with step-by-step guidance from account setup all the way to placing your investment. 

It's time to start investing in what you know and believe in with a Madison Trust Self-Directed IRA!

Self-Directed Roth IRA FAQs

What are the main benefits of a Self-Directed Roth IRA?

As you pay all of the taxes up front upon contributing to your account, the money that grows in a Self-Directed Roth IRA develops tax-free. Self-Directed Roth IRAs also do not require account holders to participate in required minimum distributions (RMDs).

Are Self-Directed Roth IRAs and Self-Directed Traditional IRAs Alike?

Just like a Self-Directed Traditional IRA, with a Self-Directed Roth IRA, you can access the same alternative assets. With both types of retirement accounts, you're also investing with a tax-advantaged account. The big difference between an SDIRA and a Self-Directed Roth IRA is when you receive tax advantages. If you choose to open a Self-Directed Traditional IRA, your funds will grow tax-deferred, and if you open a Self-Directed Roth IRA, your funds will grow tax-free. For more information, read our blog post comparing Self-Directed Traditional IRAs and Self-Directed Roth IRAs. Self-Directed Traditional IRAs and Self-Directed Roth IRAs.

Who Can Invest in a Roth IRA?

To be eligible to invest using a Self-Directed Roth IRA, you must have earned an income. If you're married and your spouse has not earned income, you're permitted to make a spousal Roth contribution. Consequently, if your earned income exceeds the limit, you won't be able to contribute to a Roth IRA. As of 2025, single tax filers must make less than $165,000 and those filing jointly must make less than $246,000.

Are There Limits to What Can Be Contributed to a Self-Directed Roth IRA?

The annual contribution limit for a Roth Self-Directed IRA is set annually, and is $7,000 as of 2025. For those aged 50 and older, you remain eligible for the amended SECURE ACT 2.0 catch-up contribution. This allows you to give an additional $1,000, granting a contribution of up to $8,000 per year.

Will I Get a Tax Break for Contributing?

There's no instant tax break for contributing to a Self-Directed Roth IRA, but there are tax advantages of investing through a Self-Directed Roth IRA. Since the future cannot be predicted, this type of IRA can help mitigate the risk involved with falling into a higher tax bracket than expected.

Can I Contribute to Both a Self-Directed Roth IRA and a Self-Directed Traditional IRA?

Yes! Feel free to divide your contributions up between a Self-Directed Traditional IRA and Self-Directed Roth IRA. Do keep in mind that the combined number should still not exceed the current year’s contribution limits.

Are Self-Directed Roth IRA Withdrawals Tax-Free?

In most circumstances, withdrawing funds from your Self-Directed Roth IRA won't result in an incursion of taxes. The notable exception is that income earned on investments held within the Self-Directed Roth IRA may be taxable if you decide to take a non-qualified withdrawal. Additionally, if you've recently converted funds from a traditional retirement plan to a Roth IRA, you could be subject to taxes if the funds are withdrawn too close to the time of conversion. If unsure, it's best to speak with a financial advisor prior to withdrawal.

What’s the Difference Between Roth 401(k)s and Roth IRAs?

A Roth 401(k) is an employer-sponsored retirement plan. A Self-Directed Roth IRA is an individual retirement account, funded and managed by the individual. Self-directed investing gives account holders the ability to get into the driver's seat and steer the wheel toward their ideal retirement.

Ready to Start Investing in Your Future?

Fill out our form, and one of our IRA Specialists will answer any questions that you may have.
All Pages Bottom Contact Form

By providing a telephone number and submitting the form you are consenting to be contacted by SMS text message. Message & data rates may apply. Reply STOP to opt out of further messaging.

Your information is secure.

Trending IRA Insights

An employee looks over the documentation of her current employer-sponsored plan to see if she’s eligible to rollover her 401(k) into an SDIRA.

Can I Rollover My 401(k) to a Self-Directed IRA While Still Employed?

In some instances, it’s possible to roll over your 401(k) to a Self-Directed IRA while still employed. In these circumstances, it’s important to be mindful of limitations. Get a greater understanding in our newest blog entry.
Read More
Notebook with “New Rules” highlighted in green to show that the Inherited IRA 10-Year Rule will begin in 2025.

2025: New Inherited IRA Rules Every Beneficiary Should Know

The IRS has implemented finalized regulations in 2025 regarding Inherited IRAs and required minimum distributions from an Inherited IRA. Prepare for the upcoming year by understanding these changes and how they may affect your estate planning and Self-Directed IRA inheritance.
Read More
A group of investors corral as they determine if the investor who’s interested in their offering qualifies as a Self-Directed IRA disqualified person.

   Who Classifies as a Self-Directed IRA Disqualified Person?

Self-Directed IRA disqualified persons are a lot easier to distinguish than you may perceive. As a common prohibited transaction, understanding what makes a disqualified person is crucial. Here’s a rundown of what individuals and organizations fit the bill.
Read More
1 2 3 23
Corporate Headquarters:
Madison Trust Company
401 East 8th Street • Suite 200
Sioux Falls, SD 57103
Mailing Address:
Madison Administration Company
One Paragon Drive • Suite 275
Montvale, NJ 07645
Hours:
Monday - Thursday: 9:00AM - 6:00PM EST
Friday: 10:00AM - 4:00PM EST
Saturday/Sunday: Closed
Contact:
(800) 721-4900
[email protected]
F: 845-947-1212
magnifiermenuchevron-down