Self-Directed Roth IRA FAQs
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, the Roth IRA could be the right choice to help you build your account. Here is what Roth IRAs are all about and five benefits to having one.
What Is A Self-Directed Roth IRA?
A self-directed Roth IRA works in the same way as a traditional Roth IRA. Any contributions made to the IRA are taxed up front, and the funds accumulate over time. When you’ve reached retirement, these funds are available for you to take, tax-free.
Additionally, to open a Roth IRA your modified adjusted gross income, or AGI, cannot exceed the limits. 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.
If you are within the income limits or you want to transfer your funds, Roth IRAs carry several benefits. If you are considering going with a Roth IRA, here are the top five benefits.
1. Tax-advantaged Savings
The top benefit to 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 retirement at 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, there are many options open to you. The key to a well-formed SDIRA is diversity in your portfolio. With a few carefully considered selections, a Roth IRA can grow tax-free long-term.
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. There are no rules in place to stop you from allocating funds well past age 70 ½. 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 the opportunity to take early withdrawals. 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 do early withdrawals after owning your account for five years. Also, you cannot take any of the interested 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 are required to take RMD at age 70 ½. There’s no penalty for Roth IRA owners. You can continue to save for years to come without being forced to take any required amounts.
Selecting The Right IRA For You
Roth IRAs can be an excellent choice, especially those who have 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 find out if a self-directed Roth IRA is right for you.