While many people are familiar with traditional IRAs, not so many understand a Roth IRA. We explain a self-directed Roth IRA and its top 5 benefits.


Self-directed investing grants you not only the ability to invest in many alternative assets , but it also gives you the freedom to personally develop your strategy for retirement. You can select your IRA, choose your custodian, build your portfolio, and allocate your funds as you see fit.

Before you dive into your investments, the first thing new account holders need to settle on is whether they want a traditional, tax-deferred IRA or a tax-free Roth IRA.

While many people are familiar with traditional IRAs, self-directed Roth IRAs offer additional tax benefits that are helpful for investors. 

What is a Self-Directed Roth IRA?

A self-directed Roth IRA is a self-directed IRA with a Roth structure. This is very similar to a traditional Roth IRA, but the primary difference is any contributions made to the IRA are taxed upfront, and the funds accumulate over time. When you’ve reached retirement, these funds are available for you to take tax-free.

Roth IRAs are recommended if you believe you’ll be in a higher tax bracket at retirement. Otherwise, traditional IRAs are more advantageous.

If you’re unsure if you’ll be in a higher tax bracket, most people prefer the certainty of a Roth IRA, knowing that any funds they withdraw in the future will be received tax-free. 

Here are five benefits of a self-directed Roth IRA based on our experience and personal knowledge. 

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5 Benefits of a Self-Directed Roth IRA

While we’ve talked briefly about the benefits of a self-directed Roth IRA, there are five reasons why we think investors will prefer a Roth structure over a traditional structure for their SDIRA.

1. Tax-Advantaged Savings

The top benefit of having a Roth IRA is the tax-advantaged perks. Since your funds are taxed before you apply them to your account, your earnings will grow tax-free. After you reach 59 ½, your withdrawals will be tax-free.

This is a huge benefit, especially if you might remain in a similar tax bracket. Any money accumulated over the long-term life of your account is also tax-free. There’s no need to worry about heavy fees or taxes during your golden years.

2. Alternative Assets 

If you open a Roth IRA through a traditional institute, your investment pool is limited to stocks, bonds, and mutual funds. With a self-directed Roth IRA, you have many more alternative assets at your disposal. 

You form your own investment portfolio, and you have many different opportunities. Account holders can try their hand at real estate investment, precious metals, or tax liens.

The IRS has limited restrictions imposed on alternative assets, including life insurance, S Corporation, and collections. Aside from those small limitations, many options are available that extend beyond traditional retirement plans.

3. You Can Contribute For As Long As You’d Like.

Unlike traditional IRAs, Roth IRA account holders can continue to their retirement funds well into their golden years. No rules are in place to stop you from allocating funds well past age 72. Your account can continue to grow as you age past retirement, and it can even pass down to your beneficiaries.

Say you have a successful real estate investment. You can let that continue to bring revenue to your SDIRA, and it can pass to your beneficiary as well. Additionally, it can pass to their beneficiary, too!

4. Early Withdrawals 

Another benefit to owning a Roth IRA is the opportunity to withdraw early. All withdrawals are tax-free as long as the account has been open for at least five years. 

You have immediate access to your savings, and because you’ve already paid the taxes, you do not have to pay a penalty on your withdrawals. 

Note that you can only make early withdrawals after owning your account for five years. Also, you cannot take any of the interest accumulated–only what you’ve personally put in. Any interest accrued cannot be taken until after retirement.

5. No RMD

Perhaps one of the top benefits of owning a Roth IRA is that account holders are not forced to take any required mandatory distributions. With traditional IRAs, investors must take required minimum distributions (RMD) each year starting April 1 of the year they turn 73 and by December 31 each year after. The SECURE 2.0 Act, which was passed in 2022, extends the RMD age to 75 in 2033.  These mandated withdrawals prevent traditional IRA holders from accruing more money in their accounts as they age. 

How to Open a Self-Directed Roth IRA

To open a self-directed Roth IRA, you must choose a custodian to handle the account. Even though you’re in charge of the account, regulations mandate using a licensed custodian. 

Conduct your due diligence and look out for custodial fees, which vary between clients. 

We should note that to open a Roth IRA, your modified adjusted gross income, or AGI, cannot exceed the limits set forth by the IRS. Your contribution amount is also based on your AGI.

If you and your spouse have received compensation during the year, you can both contribute to your own IRA. If you are filing jointly, only one is required to have compensation, and you can contribute on behalf of your spouse. Should you want to convert your traditional IRA to a Roth IRA, there is no income limit–income limits only apply to your annual contributions.

Once you’ve selected your custodian, you must fund the account. At that point, you can begin choosing the investments that you want to make. The custodian will technically handle the transactions, but you’re the one who makes the decisions.

Self-Directed Roth IRA Rules

The most important rules of self-directed Roth IRAs involve contribution limits. For 2023, the annual contribution limit is $6,500 or $7,500 if you’re 50 years old or older. 

While contributions into your self-directed Roth IRA are not tax deductible, qualified withdrawals are not taxed. Therefore, legal contributions can be withdrawn at any time without penalty. 

When you begin making withdrawals from your account, you will pay regular income taxes based on your personal income level if you are younger than 59.5 years old. Additionally, any withdrawals made before you reach this age are subject to a 10% penalty. 

Self-Directed Roth IRA Prohibited Transactions

There are some transactions that you cannot perform with your self-directed Roth IRA. According to the IRS, self-directed Roth IRA prohibited transactions include: 

  • Borrowing money from the account
  • Using the money in the account as security for a loan
  • Selling property to the account
  • Buying property for personal use with funds from the account 

Who Can Contribute to a Self-Directed Roth IRA?

Most people who earn income can contribute to a self-directed Roth IRA. However, there are some limits in place. If you’re a single tax filer, your modified adjusted gross income (MAGI) must be $138,000 or less. If you’re a married filer or a qualifying widow, your MAGI must be less than $218,000.

Risks of a Self-Directed Roth IRA

One downside of self-directed IRAs is that they face additional scrutiny and regulation from the IRS. For example, there are several rules governing real estate investments that limit your ability to live or work on any properties you own directly. 

For this reason, custodians must help guide you through these regulations and ensure you are tax-compliant each year. In addition, your custodian will help you prepare Form 5498 each year and assist you in calculating your FMV of account for tax-reporting purposes. 

Is a self-directed Roth IRA right for you?

Roth IRAs can be an excellent choice, especially for those with income limits. This investment can help those with lower income save for retirement with tax benefits and plenty of alternative options. Of course, there are some pitfalls to avoid when opening a self-directed account.

Be wary of any prohibited transactions and be careful not to invest in any forbidden assets. With any financial decision, it’s important to perform your due diligence and seek out legitimate financial advice. Contact a trusted Horizon Trust custodian today and determine if a self-directed Roth IRA is right for you.