Self-Directed Roth IRA

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

For investors looking to expand beyond Wall Street products, the Self-Directed Roth IRA could be the best Roth IRA to consider establishing. With a Self-Directed Roth IRA, account holders can invest in alternative assets with their retirement funds.

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 a straightforward endeavor. Simply follow our formulated three-step process: open, fund, and invest.
You’re fully capable of upgrading your Self-Directed Roth IRA to a Self-Directed Roth IRA LLC and obtaining checkbook control. This supercharged tool is best suited for investors who want to perform everyday transactions without the involvement of their custodian. In addition, you’ll receive the freedom and flexibility of real time investing.

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 IRA funds can be passed down to your heirs and taken out tax-free. 

Are You Ready to Experience Tax-Free Growth of Your Retirement Funds?

We’re here to assist you at any point of the process, from setting up your Self-Directed Roth IRA all the way to placing your investment. Start the conversation today.
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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 streamline your investments, as you no longer have the middle step of having every transaction processed by your 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.

A happy couple nestles with their piggy bank, excited that their retirement savings will be developing tax-free in their Self-Directed Roth IRA.

How To Open a Self-Directed Roth 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. When completing our application, you will select that you'd like to establish a Self-Directed IRA.
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 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

An investing couple enjoys their time, knowing that their Self-Directed Roth IRA doesn’t have any required minimum distributions and they can let their money flourish.

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

Blue circle with a white check mark inside

Unreimbursed Medical Expenses

Blue circle with a white check mark inside

Qualified Education Expenses

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Permanent Disabilities 

Ready to Embark on Your Journey to a Richer Retirement?

Start a conversation and speak to a Self-Directed Roth IRA Specialist.
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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 & 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 IRA Specialist at Madison Trust to show our incredible customer service.

Self-Directed Roth IRA – FAQs

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

A Self-Directed Roth IRA is primarily designed to aid in an individual’s retirement. As you pay for all the taxes upfront upon contributing to your account, the money that grows in your account develops tax-free.

Self-Directed Roth IRAs 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 account types you’re also investing with a tax advantaged account. The big difference between these account types 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, visit our blog comparing Self-Directed Traditional IRAs and Self-Directed Roth IRAs.

Who Can Contribute to a Roth IRA?

To be eligible for Self-Directed Roth IRA contributing, 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 2024, single tax filers must make under $161,000 and those filing jointly must make under $240,000.

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

The annual IRA contribution limit will increase from $6,500 to $7,000 as of 2024. 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 per say, but there is a bounty of tax advantages present through this vehicle. 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. You can also relinquish concern about your current existing funds – all the money within a Self-Directed Roth IRA is yours.

Can I Contribute to Both a Self-Directed Roth IRA & 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 where you will behave as the manager of the account. Self-directed investing gives account holders the ability to get into the driver’s seat and steer the wheel towards their ideal retirement.

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