Self-Directed Roth IRA

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

What is a Self-Directed Roth IRA?

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 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.

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. 

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:

First-Time Home Purchases

Unreimbursed Medical Expenses

Qualified Education Expenses

Permanent Disabilities