How to Setup a Roth IRA Self-Directed

How to Setup a Roth IRA Self-Directed

Some investors prefer to follow a more self-directed style of managing their retirement portfolios. A Roth IRA self-directed account is one option for the more adventurous and seasoned investors. A self-directed IRA can contain a variety of asset classes beyond the usual stocks or bonds.

What's Unique About Self-Directed IRAs?

A self-directed IRA (known as an SDIRA) can be a traditional IRA or a Roth IRA – they both must abide by the IRA requirements outlined by the IRS; this includes the annual ​$6,000​ contribution limit (​$7,000​ for the over-​50​ catch up) which must come from earned income. Self-directed accounts are unique because of the assets contained in those accounts.

Unlike most retirement accounts, which usually contain conventional assets such as mutual funds, stocks or bonds, self-directed accounts contain alternative assets or "alts." These alternative assets may include cryptocurrencies, real estate, foreign currencies, precious metals and even start-up businesses. Many investors view SDIRAs as an opportunity to maximize returns on their retirement investment.

The Roth IRA specifically has some additional rules that make it less accessible for some people. There are income thresholds to open and contribute to a Roth IRA. A single filing taxpayer would be entirely phased out at a modified adjusted gross income of ​$140,000​ or ​$208,000​ for married filers. Although some people opt to work around the limits through a Roth conversion, there are many limitations on the Roth IRA. These can lead investors to diversify by seeking out novel investments with the possibility of higher earnings. This is where the Roth SDIRA and alternative investments come into play.

Why a Self-Directed Roth IRA?

A self-directed Roth IRA is funded through after-tax money and earnings can grow within the Roth SDIRA tax-free just like a regular Roth IRA. These retirement accounts are a popular option, because unlike traditional IRAs, there are no required minimum distributions and there is no age requirement for contributions. Anyone with a Roth IRA can contribute to the account at any age, without having to take withdrawals even if they are over ​72​. An inherited Roth IRA can also be withdrawn by a beneficiary with no income tax due.

A typical Roth IRA with a traditional custodian will limit the options for assets only to approved securities. A self-directed Roth IRA is also held by a custodian, but there are fewer limitations on the types of assets because the account owner is independently responsible for them. The custodian of a Roth SDIRA will hold alternative assets in the retirement account but they do not manage it; the account is "self-directed" by the account owner. This can provide some investors with an alluring array of investing options, but it also adds layers of complexity and expense.

Since the account owner is responsible for managing the Roth SDIRA, extra care must be taken to ensure that any alternative assets are legitimate and the account does not run afoul of regulatory guidelines. Certain alternative assets are disallowed by the IRS, such as collectibles or life insurance.

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Self-Directed Roth IRA Setup

First, it will be necessary to find a trustee or custodian willing to hold the account and who is approved by the IRS. You can find a list of self-directed IRA custodians online or by calling around. Given the nature of the Roth SDIRA, fees will likely be higher for this account than a regular IRA but this will also depend on the nature of the assets. For example, some alternative assets such as precious metals require physical storage which will increase costs.

Some custodians specialize in specific alternative assets, such as cryptocurrencies, which can be helpful. If the custodian does not have existing relationships with alternative asset brokers, it will be entirely up to the account owner to source them. The custodian must purchase the alternative assets for the Roth SDIRA, then it is up to the account owner to manage the account. Many alternative assets are illiquid and additional planning for withdrawals may be necessary for a Roth SDIRA.

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