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Self-Directed Roth IRA

self-directed Roth IRA Pros

A Self-Directed Roth IRA is a specialized IRA that allows for alternative investments. The Self-Directed Roth IRA can be broken down into two parts: “Self-Directed” and “Roth”. Here, we will break down each part in detail. We’ll also share the pros and cons of the plan so you can decide if it’s right for you.

What is a Self-Directed Roth IRA?

“Self-Directed” means exactly what it implies. YOU are in control of your retirement account. You decide what you want to invest in and when you want to buy and sell your investments. Typically, retirement accounts, such as IRAs and 401(k) plans, invest in a predetermined group of assets. These are generally limited to stocks, bonds and mutual funds. As a result, you have very little freedom in deciding on investments. However, if your IRA custodian offers self-directed retirement plans, a whole world of investment opportunities will open up to you.

A Self-Directed IRA can be either Roth or traditional. With a Self-Directed IRA, you decide what types of investments to make. Additionally, you determine when you want to buy and sell. All decisions are truly yours, hence the name “self-directing.”

With a Self-Directed Roth IRA, if you qualify to make contributions, all distributions are tax-free. This includes the investment returns as long as the distributions meet certain requirements. Unlike a traditional IRA, you can contribute to a Roth IRA as long as you earn income. With a traditional IRA, you can’t make contributions after you reach 72.

Roth IRA vs Self-Directed Roth IRA

A Roth IRA allows IRA holders to enjoy tax-free distributions. This is because the Roth IRA was funded with after-tax dollars, meaning you don’t receive an upfront tax-break, but all income and gains on your investment will be tax-free when you take a qualified distribution (in order for a Roth IRA distribution to qualify, the IRA must be opened for at least five years, and the IRA holder must be age 59 1/2 or older). 

Many retirement investors use their Roth IRA to purchase traditional investments, like stocks, bonds, CDs, mutual funds and the like. The breadth of investments you can make with your IRA is typically determined by the company that holds the account. For example, if your Roth IRA is held by a bank or financial institution, you will most likely only be limited to make tax-free traditional investments. 

Read More: What is a Self-Directed IRA LLC?

Self-Directed Roth IRA for Alternative Asset Investments

You can make almost any type of investment with a Self-Directed Roth IRA. The only investments that you cannot make are those the IRC prohibits, which are very few. Find out the prohibited investments with a Self-Directed Roth IRA.

The primary advantage of using a Self-Directed IRA is the ability to make alternative asset investments. The term “alternative assets” generally includes any non-traditional asset class. It covers investments that do not trade publicly on an organized exchange. This includes investments outside of public stocks, bonds, money markets or cash.

Typically, alternative investments are complex, illiquid, and more difficult to value than traditional assets. They usually offer the opportunity to earn investment returns in excess of those generally available in the traditional financial markets.

So if you dislike the obligatory investments in stocks or mutual funds, or you have an investment that you want to actualize with your Roth IRA funds, then the Self-Directed Roth IRA LLC is your solution.

Read More: What are Alternative Assets?

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Popular Investments in a Self-Directed Roth IRA

The following are some examples of Self-Directed Roth IRA investments:

  • Residential or commercial real estate
  • Domestic or Foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • stocks, bonds, mutual funds
  • Foreign currencies

Benefits of a Self-Directed Roth IRA

Let’s discuss the primary advantage of using a Self-Directed Roth IRA to make investments. First, all income and gains grow tax-free. In other words, they will not be subject to tax upon withdrawal or distribution. Unlike traditional IRAs, you are typically not subject to any tax upon taking Roth IRA distributions once you reach the age of 59 1/2. This presents you with many exciting tax strategies, a few of which are below:

  • You can purchase a vacation home in or outside of the United States with Roth IRA funds and move in tax-free at age 59 1/2
  • Purchase a retirement home in or outside of the United States and move in tax-free
  • Buy an office building with Roth IRA funds and then use the building for your own business after you turn 59 1/2
  • Invest in precious metals and then take possession of the metals.
  • Spend money in tax deeds and then take possession of the property
  • Buy a distressed property – generate large gains and then withdraw the funds tax-free for personal use
  • Invest in an investment fund – generate large gains and then withdraw the funds tax-free for personal use

All of this can be done when you reach age 59 1/2 or just after.

*It is important to note that precious metal investments should be held in a safety deposit box or by a licensed fiduciary to ensure you comply with IRS rules.

Pros and Cons of the Self-Directed Roth IRA

Regarding the “self-directed” part of the plan, generally there are two cons to consider. Depending on what investments you plan to make, there may be fees that don’t come with a regular IRA. Secondly, there’s always the risk of fraud when self-directing your retirement plan. However, if you do your homework, you’ll find the perfect custodian, such as IRA Financial Trust.

Therefore, there is really no downside to self-directing your retirement account. Of course, there are risks pertaining to alternative investments, such as real estate and cryptocurrencies. But aren’t the stock markets filled with risk, too?

Let’s focus on the pros and cons of the Roth IRA:


  • Tax-Free Growth – Your investments grow tax-free. Never pay taxes on any qualified Roth IRA withdrawals!
  • No Penalty for Contribution Withdrawals – You can withdraw your Roth IRA contributions at anytime, without penalty. Since fund the plan with after-tax money, you can withdraw it at any time and for any reason.
  • No RMDs – All traditional plans are subject to required minimum distributions (RMDs). Once you reach age 72, you must begin withdrawing funds from a traditional IRA or 401(k). Because you have already paid your taxes, there is no requirement to withdraw from a Roth.
  • No Age Limit – Once you hit that magical age of 72, you can no longer contribute to a traditional IRA. However, there are no age limits for Roth IRA contributions. You may continue to fund a Roth as long as you have earned income for any given year.
  • Estate Planning – Because there are no RMDs, a Roth makes for a great estate planning tool. Your plan will continue to grow unencumbered. This allows you to pass the entire account to your beneficiaries.
  • Diversification – It’s important that your retirement portfolio is properly diversified. Diversification with the types of assets within the account, and the tax treatment. A Roth IRA may be best in conjunction with a traditional workplace 401(k). No one knows what will happen with our tax system. Therefore, it’s wise to have a tax-free account in addition to a tax-deferred account.


  • Low Contribution Limits – IRA limits are the same no matter if it’s a Roth or traditional plan. You may contribute up to $6,000 ($7,000 if you are age 50+) for 2022. On the other hand, 401(k) plans offer more than triple the IRA contribution limit.
  • No Immediate Tax Break – The caveat to receiving tax-free withdrawals is not getting an upfront tax break on your contributions. The tax break you receive right away might steer you towards a traditional plan.
  • Income Restrictions – Not everyone can contribute to a Roth IRA. If you make too much money ($144,000 for single filers in 2022), you may not contribute directly to a Roth. You may, however, rollover traditional funds to a Roth. You can do this no matter what your income.

Roth IRA Distribution Penalties

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:

1. The distribution is made within the five-year tax period starting with the year that the conversion was distributed from a regular IRA

2. Only to the extent that the distribution is attributable to amounts that were includable in gross income as a result of the conversion.

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.


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.

Converting a Traditional IRA to a Self-Directed Roth IRA

Beginning in 2010, the modified Adjusted Gross Income (“AGI”) and filing status requirements for a Roth conversion from a traditional IRA were eliminated.

Below are some important points to consider when deciding whether to convert your Traditional IRA to a Self-Directed Roth IRA LLC.

  • Do you have the ability to pay income taxes on the money you convert from your Traditional IRA?
  • Based on your income tax bracket, does it make sense to pay the entire tax due in 2022? If you expect your rate to go up, converting may be for you. If you think it will go down, then the opposite holds true.
  • Do you anticipate withdrawing Roth IRA funds for personal use within five years of conversion? If so, you may face taxes and penalties if you withdraw within five years of a conversion.

*While a Roth conversion may be a good idea for some, you should know that you can have both a traditional IRA and a Roth IRA.

Roth Conversion Cost (Valuation) Discount Tax Strategies

The amount of taxable income on a Roth conversion is based on the fair market value of the IRA assets subject to the conversion. Therefore, the lower the fair market value of the IRA assets, the lower the taxes due on the Roth conversion. Typically, the standard of “fair market value” is an objective test. It uses hypothetical buyers and sellers.

The Roth Conversion Valuation Discount Strategy is based on tested case law. The valuation discounts applicable to an LLC with IRA assets typically fall into two categories: (1) a discount for lack of control, and (2) a discount for lack of marketability.

Your retirement tax professional at IRA Financial Group, along with a valuation expert, will develop a customized Roth conversion tax strategy. This will allow you to take a discount of anywhere from 15% to 35% on the value of the IRA assets subject to the Roth conversion. Notably, the Roth Conversion Valuation Discount Strategy can save you thousands of dollars in taxes.

For example, if you have a Traditional IRA and want to convert to a Self-Directed Roth IRA LLC to purchase any alternative investments, using the Roth Conversion Valuation Discount Strategy can save you thousands of dollars on the conversion.

Learn More: Backdoor Roth vs Mega Backdoor Roth

Self-Directed Roth IRA Distribution Rules if Under 59 1/2

Self-Directed Roth IRA distributions of contributions can be made at any time without tax or penalty. Keep in mind that you will owe tax and pay a penalty if you withdraw earnings from the Roth before age 59 1/2. This would be an unqualified distribution.

If You Had the Account Open Less than 5 Years…

When you take a distribution of Self-Directed Roth IRA earnings prior to age 59 1/2 and before the account has been open five years, the earnings may be subject to tax and penalties. If the following situations apply, you may be able to avoid the penalty, but not the tax when you make a withdrawal:

  • The withdrawal is used to purchase your first home.
  • The withdrawal pays for qualified educational expenses.
  • The Roth IRA withdrawal pays for unreimbursed medical expenses or health insurance if unemployed.
  • The distribution is made in periodic payments that are substantially equal.
  • You are 50 1/2 or older.
  • You become disabled or pass away.

If the Self-Directed Roth IRA is Open More Than 5 years…

You can avoid taxation on the earnings even if you are 59 1/2 but have had the self-directed Roth IRA open more than five years. You will have to meet the following conditions:

  • The withdrawal is used to purchase your first home.
  • The withdrawal pays for qualified educational expenses.
  • The Roth IRA withdrawal pays for unreimbursed medical expenses or health insurance if unemployed.
  • The distribution is made in periodic payments that are substantially equal.
  • You are 50 1/2 or older.
  • You become disabled or pass away.

Self-Directed Roth IRA Distribution Rules if You’re 59 1/2 or Older

If you are 59 1/2 or older, you can perform a Roth IRA distribution anytime, tax and penalty-free.

Withdrawals if account is open 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 is the account is open more than five years.

Once you have met the five-year holding requirement, you make a withdrawal from the Self-Directed Roth IRA tax- and penalty-free.

Is a Self-Directed Roth IRA Right for You?

Now that you have the basics down, you can decide if a Self-Directed Roth IRA is for you. If you want to invest in alternative assets, you must self-direct your retirement plan. The next step is considering whether you want to pay taxes now or wait until retirement.

Here are two other things to consider:

  1. Your age. The younger you are, the more time you have for your investments to grow tax-free.
  2. Your tax situation. If you are in a high tax bracket, the potential tax-break of a traditional plan may be more appealing. If not, paying taxes now may be your best bet.

In the end, it doesn’t matter which retirement plan you choose. The most important thing is choosing to save for your future. A Self-Directed Roth IRA is an excellent choice to both diversify your savings and have the ability to invest in anything you like.

Related: How to Choose the Right Self-Directed Retirement Plan


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