Menu Close

Blog

The Self-Directed Roth IRA Distribution Rules

Self-Directed Roth IRA Distribution Rules

The distributions rules of the Self-Directed Roth IRA differ from pre-tax retirement plans. In this article, we will explain distribution rules, how to make contributions depending on your age and marital status and how to avoid a penalty when taking a distribution.

Advantages of the Self-Directed Roth IRA

The advantage of contributing to a Self-Directed Roth IRA is that income and gains generated by the Roth IRA 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.

Furthermore, 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 for 2019 cannot exceed the lesser of $6,000 ($7,000 if over the age of 50) or 100% of compensation ($12,000 for married couples – $14,000 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 2019

If your filing status is… And your modified AGI is… Then you can contribute…
married filing jointly or qualifying widow(er) < $193,000 up to the limit
> $193,000 but < $203,000 a reduced amount
> $203,000 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 < $122,000 up to the limit
> $122,000 but < $137,000 a reduced amount
> $137,000 zero

Self-Directed Roth IRA Distribution Rules if Age 59 and Under

Self-Directed Roth IRA distributions can be made any time and distributions are free of tax and penalty. It take a distribution, keep in mind that you may have to pay tax and penalties on the earnings in the Roth IRA.

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.

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:

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.

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.

Share the knowledge

You May Also Like

Free Consultation