By: Daniel Gleich

Key Points 

• Self-Directed Roth IRAs offer their account holders undeniable benefits such as tax-free gain development and avoiding required minimum distributions (RMDs).
• If you choose to open a Self-Directed Roth IRA, it’s important to understand its associated rules and regulations.
• Some of the most prominent Self-Directed Roth IRA rules are the 5-year rule, contribution limits, and modified adjusted gross income.

Self-Directed IRAs (SDIRAs) are individual retirement accounts offering their users a superfluity of advantages. Many prospective investors determine a Self-Directed Roth IRA aligns with their fiscal ambitions and circumstances. Prior to onboarding, it’s considered best practice for one to acquaint themselves with all the pertinent Self-Directed Roth IRA rules. Let’s divulge: 

Self-Directed Roth IRA Rule #1: The 5-Year Rule

Although Self-Directed Roth IRAs are created to support you during your retirement, situations may arise where you’d like to withdraw from your account to remedy an emergency or financial hardship. The 5-year rule excludes you, as the Self-Directed Roth IRA owner, from withdrawing your earnings before the account reaches the age of five and before you reach 59 ½.  (You can withdraw contributions before you’ve had the Self-Directed Roth IRA for five years and before you reach 59 ½.) 

The date of your Self-Directed Roth IRA’s birthday will depend on the tax year in which you made an initial contribution to your account. For example, if you made your first contribution in September of 2024, the 5-year period starts in January of 2025. This passage of time allows for your retirement savings to transform into qualified distributions of either contributions or earnings, thereby granting your withdrawals not subjectable to taxes or penalties.

Regardless, there are exceptions to this decree. An account holder can avoid the penalty fee if their funds are being withdrawn to cover a qualified higher education expense, certain medical expenses, provide money for a birth or adoption, are first-time homebuyers, and/or carry qualified reservist distributions. If the Self-Directed Roth IRA is inherited, the beneficiary will be eligible to retrieve the funds even if the account is not yet the ripe age of five. This also is implemented if an account holder becomes fully disabled and can no longer control their assets. 

If none of these circumstances apply and you’re in dire need, you can withdraw from your account before it reaches the five-year mark and before you’re age 59 ½ - but you’ll be required to pay a 10% penalty. 

Self-Directed Roth IRA Rule #2: Contribution Limits and MAGI

What stands in effect for this rule is entirely dependent on your personal conditions. In 2024, the maximum annual contribution limit is $7,000, or $8,000 for those aged 50 and older. This limit corresponds with your modified adjusted gross income (MAGI). If you’re single, head of household, or are married and filing separately (while not living with a spouse at any time during the year), you need to make less than $146,000 to contribute up to the maximum amount. If you make between $146,000-$161,000, you can make a reduced contribution, but those earning $161,000 or more are not eligible to contribute. 

Similar Self-Directed Roth IRA rules are implemented for those who are married and filing jointly. As a couple, if you make less than $230,000 you can contribute up to the maximum annual contribution limit. Those $230,000-$240,000 can contribute at a reduced rate, and those above $240,000 cannot participate in contributions. To ensure you’re adhering to the contribution limits and MAGI standards, it’s strongly recommended that you consult with a financial advisor who can best assess your monetary settings. 

Self-Directed Roth IRA Rule #3: Prohibited Transactions

Self-Directed Roth IRA rules are not immune to the same restrictions instilled across the other type of IRA accounts. Performing a prohibited transaction can result in compromising the validity of your account, which has the potential to lead to your retirement savings being dispersed. This means you’d be paying possible taxes, and a penalty based off the entire sum of your IRA. 

Since the objective of a Self-Directed Roth IRA is to create possible security for your retirement, avoiding a relinquish of funds is more than ideal. As things come in threes, here’s a rundown of the most commonly occurring prohibited transactions: 

Per Se Prohibited Transaction – Any transaction that’s performed with a disqualified person. This generally occurs when your Self-Directed Roth IRA lends money, extends credit, sells, leases, or provides any service to an individual or entity that’s disqualified from your IRA. 

Self-Dealing Prohibited Transaction – This might occur if you seemingly appear to be directly benefiting from your Self-Directed Roth IRA in the present day. (Ex: living on your investment property) 

Extension of Credit Prohibited Transaction – If you garner financial assistance incorrectly from a third-party lender, this could signify that you’ve personally guaranteed the loan. This can come across as your IRA reaping benefits. The best loan to acquire is a non-recourse loan in this scenario. 

Disqualified persons are typically your spouse, lineal descendants, closely held corporations, your employer, plan-related service providers, and any entity where either you or a disqualified person holds 50% of influence over. If you’re unsure whether your investment is potentially in cahoots with a disqualified person, speaking with a financial professional can help decipher if you’re on the right path. 

In Spite of Rules, It’s Still Serving Benedictions

Though there’s a few Self-Directed Roth IRA rules to keep in mind, there are ample benefits. As an account holder, you’ll be paying all your taxes upon the establishment of your Self-Directed Roth IRA. This can help you develop a greater amount of savings for your retirement, as all your gains will unfurl in a tax-free residency. Furthermore, once your account has turned five, you can withdraw as need be without the obligation of paying any taxes or fees.  

SDIRAs offer a constellation of alternative assets to its holders, letting you select an investment that possibly sides with a passion or skill. Some of the more prevalent assets are real estate, precious metals, and promissory notes, but your options are copious. Alternative assets generally are uncorrelated to Wall Street products, which means their progress is not dependent on the market’s ever-changing current. This may be rendered as a safeguard against inflation. 

In addition, because required minimum distributions are not mandatory for Self-Directed Roth IRAs, you can continue to keep all your earned revenue accumulating in your account. This factor, congruent with the freedom to self-govern your retirement savings and investment, undoubtedly equates to an extraordinary venture. 

Up, Up, and Away!

Self-directing has virtually ambushed the investment realm, inciting a change in the way saving for our retirement is considered. If you’re feeling motivated to take charge of your future, there’s no better day than today to get started. Our Self-Directed IRA Specialists are rigorously trained and ready to answer any of your questions. Place a free discovery call and start saving today!