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What To Know About the Self-Directed Roth IRA



Self-Directed Roth IRA

Are you familiar with the political compass? In 2021, who isn’t? In this familiar graphic, we see political views split into four quadrants by two axes: economic liberalism vs. conservatism on one axis, and its social counterpart on the other. Someone can be socially liberal but economically conservative, economically liberal yet socially conservative, or both of each.

Now, let’s keep the graph but put away the politics. It turns out that you can do a quadratic breakdown of individual retirement accounts, too. Let’s devote one axis to taxation: do you pay taxes on contributions or distributions? The other axis is about who calls the shots: is a custodian handling all the IRA’s transactions or is the investor involved? This yields the four most common IRAs:

  • A traditional IRA, in which tax-deferred contributions fund stocks, bonds, and similar instruments,
  • A Roth IRA, in which after-tax contributions fund those instruments with tax-free distributions,
  • A self-directed IRA, where tax-deferred contributions can also go into unconventional investments,
  • A self-directed Roth IRA, with after-tax contributions under the same looser restrictions on investments.

For some investors, this is the best of both worlds: the freedom to invest with the pleasures of tax-free income in retirement. Here’s what to know about the self-directed Roth IRA if this interests you.

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No Self-Dealing

No matter which quadrant of our “IRA compass” you’re in, the IRS has strict prohibitions against conducting business with your own IRA’s holdings. This is a peril of self-directed IRAs both traditional and Roth, particularly when the account holds real estate. For example, you can’t rent out your IRA’s summer cottage to family members at under market value. You may not even be able to do your own maintenance on it. While a self-directed Roth IRA is great for hands-on investors, you can’t get too hands-on.

Income and Contribution Limits

Diverse investments in a self-directed Roth IRA can grow impressively through the years, but even after taxes, contributions can’t be too large. The government designed the Roth IRA as an investment tool for the middle class, and this presumes a limit on what an investor can reasonably contribute. A self-directed Roth IRA can take up to $6,000 a year, or $7,000 over age 50. This also applies to annual income. Single filers can earn up to $140,000 a year and married people filing jointly are limited to $208,000 of total income.

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Your Future Is in Your Hands

What is most important to know about the self-directed Roth IRA is that you have a dizzying array of investment opportunities for a tax-free retirement. By investing in diverse avenues like cryptocurrency, debt instruments, real estate, precious metals, private businesses, and more, middle-class investors can pay Uncle Sam now and enjoy life later—when it matters most. Just be sure not to concentrate too much on one aspect. The key to any self-directed IRA is a diversified portfolio that smooths out the bumps and glitches for an account that provides exciting opportunities with reliable returns.

Till next time,


PS – If you enjoyed found value in this post, then you’ll love this article on How to Not Work for The Rest of Your Life.