The Self-Directed Roth IRA Distribution Rules

The advantage of contributing to a self-directed Roth IRA is that income and gains generated by the Roth IEA investment can be tax-free and penalty-free so long as certain requirements are satisfied. Unlike with a traditional self-directed IRA, contributions to a self-directed Roth IRA are not tax deductible.

Unlike the self-directed Traditional IRA, there is no 70 1/2 age limit on making contributions. Individuals of any age with compensation are eligible to contribute to a self-directed Roth IRA. The total amount you may contribute to a self-directed Roth IRA for 2016 cannot exceed the lesser of $5,500 ($6500 if over the age of 50) or 100% of compensation ($11,000 for married couples - $13,000 if over the age of 50).

If you maintain a Traditional self-directed IRA, the maximum contribution to your self-directed Roth IRA is reduced by any contributions made to your Traditional self-directed IRAs.

Amount of Roth IRA Contributions That You Can Make for 2016



If your filing status is... And your modified AGI is... Then you can contribute...
married filing jointly or qualifying widow(er) < $181,000 up to the limit
  > $181,000 but < $191,000 a reduced amount
  > $191,000 zero
married filing separately and you lived with your spouse at any time during the year < $10,000 a reduced amount
  > $10,000 zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year < $114,000 up to the limit
  > $114,000 but < $129,000 a reduced amount
  > $129,000 zero


Self-Directed Roth IRA Distributions Rules if Age 59 and under.

You can withdraw contributions you made to your self-directed Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

Withdrawals from a Roth IRA you've had less than five years and under the age of 59½

If you take a distribution of self-directed Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

Withdrawals from a self-directed Roth IRA you've had more than five years

If you’re under age 59½ and your self-directed Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:

Self-Directed Roth IRA Distributions Rules if Over Age 59½

Withdrawals from a Roth IRA you've had less than five years

If you have a self-directed Roth IRA LLC and you have not met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you've had more than five years.

If you’ve met the five-year holding requirement for the self-directed Roth IRA, you can withdraw money from a Roth IRA with no taxes or penalties.

Penalties on Conversions From a Traditional IRA to a Roth IRA

The penalty rules regarding conversions are a bit different than those for annual contributions, which may be taken at any time for any purpose free of income taxes and penalty. An early withdrawal of a conversion contribution has a different twist. The early withdrawal penalty applies to a distribution of conversion money from a Roth IRA when:

In general, when doing a Roth conversion, one can take a distribution of the funds that were converted at any time without tax, however, an early distribution penalty of 10% would apply if the five-year holding period from date of conversion was not satisfied.

For example, Joe made a $20,000 conversion from his regular IRA to a Roth IRA in 2008. The entire amount converted was includable in Joe's income for 2008. Joe made no additional contributions or conversions to a Roth IRA in 2008 or in later years. In 2011, before he is age 59 1/2, Joe withdraws $10,000 from the Roth IRA. Joe will have no tax to pay on this withdrawal because he paid income taxes on the full $20,000 he converted in 2008; however, he will have to pay a 10% penalty (or $1,000) unless one of the IRA early withdrawal exceptions apply. Why? Because Joe didn't keep the conversion amount in his Roth IRA for the required five-tax-year period since his original conversion.

So, if you are going to take funds "early" from your Roth IRA, weigh your conversion decision very carefully.

Deciding between a Traditional Self-Directed IRA and a Self-Directed Roth IRA?

Unfortunately there is no right or wrong answer when it comes to deciding whether one should make contributions to a self-directed IRA or self-directed Roth IRA. The decision generally depends on a variety of factors, which are generally facts and circumstance based, such as:

To learn more about the self-directed Roth IRA and the rules surrounding contributions and distributions, please contact an IRA Financial Group tax professional at 800-472-0646.


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