Roth IRA

Self-Directed Roth IRA

A Roth IRA is one of the most beneficial retirement plans available. This is especially true if you expect your tax bracket during retirement to be equal to or higher than your current bracket. For example, all contributions are made after tax. The earnings—including interest, dividend income, and capital gains—grow tax free. A self-directed plan offers the same benefits. However, these plan owners choose their own assets and use alternative investments to build retirement wealth.

Funding a self-directed account is easy. You can transfer funds and assets from an existing Roth or traditional IRA and/or make an annual contribution. You can also roll over funds from a 401(k) or pension plan.

Self-Directed Roth IRA Features

  • Tax-deferred earnings, which can be distributed tax free (see requirements below).
  • Contributions can be made at any age as long as you have earned income.
  • Required minimum distributions (RMDs) are not mandatory.
  • Above all, you can invest in real estate, private equity, startups, gold, Bitcoin, and more.
  • Beginning in 2024, you can roll unused 529 plan funds into a Roth IRA.

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Roth Distribution Rules

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Tax-Free Distributions

Perhaps the greatest feature of this plan is that distributions of the contributions are tax free. Additionally, distributions of income generated by this plan are also tax free (and penalty free) as long as you are at least 59 ½ years old and have had the account for at least five years.

However, if you are under the age of 59 ½, there is a 10 percent penalty on most distributions, and the distribution may be included in your income. Some exceptions include if the plan is inherited, you have a disability, if you are a first-time home buyer, or if you pay education expenses for yourself or dependents.

Understanding the Roth 5-Year Rule

You must own your Roth IRA for a period of 5 years (as defined by the IRS) before you can take penalty and tax-free distributions of earnings and converted funds in the account. Even though distributions of your contributions are always tax-free, they are not penalty-free if withdrawn inside this five-year period.

Additionally, although earnings in the account enjoy tax-free growth, if you withdraw them before you have owned the account for five years you will pay tax on the earnings, plus the penalty. You’re also unable to take tax-free distributions on the earnings until you reach 59 ½ years of age, no matter how long you have owned a Roth account.

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Roth IRA Contribution Limits

Roth IRA 2023 2024
Annual Contribution $6,500 $7,000
Catch-Up Contribution (age 50 and older) $1,000 $1,000

Roth IRAs vs. Traditional IRAs at a Glance

Contributions to traditional IRAs are made pre-tax, giving you an immediate tax break. You pay tax when you take distributions of your contributions and account earnings when you retire.

Roth contributions are made after tax. Contributions and earnings grow in the account tax free, and all qualified distributions are tax free in retirement.

There are no income limits to open and fund traditional IRAs. You can’t use a Roth IRA unless your income falls below a certain dollar amount. (See eligibility requirements under Open a New Account in the section above.)

You are not allowed to take withdrawals from a traditional IRA until you are 59 ½ years old. Doing so before then incurs a 10 percent penalty on top of the tax you pay on distributions. You are allowed to withdraw contributions you made to your Roth IRA anytime without incurring a penalty or paying tax. However, if you take a distribution of the earnings from your Roth account before the age of 59 ½ and if you haven’t owned the account for 5+ years, you may be liable for taxes and also incur a penalty. Both plans do waive the 10 percent penalty for IRS-approved early withdrawal exceptions.

Both traditional and Roth IRA rules allow you to make contributions after the age of 72, but only if you have earned income.

Roth IRAs are not restricted by required minimum distributions (RMDs)—you don’t have to take a distribution in retirement unless you want or need to.

Traditional IRA RMDs must begin at age 72 if you turned 70 ½ after December 31, 2019, or at 73 if you turn 73 in 2023 or later.

3 Ways to Open a Self-Directed Roth IRA

1. Open a New Account

Anyone with earned income can open and contribute directly to a Roth IRA. But, your modified adjusted gross income for 2023 must be less than:

  • Married individuals filing jointly: $228,000
  • Single, head of household, or married filing separate returns: $153,000

For 2024, these income limits are:

  • Married individuals filing jointly: $240,000
  • Single, head of household, or married filing separate returns: $161,000

Note: You can move existing Roth IRA funds to a self-directed Roth IRA regardless of your income.

2. Perform a Roth Conversion

If you already have an IRA or an old 401(k), you can convert part or all of those funds into a Roth IRA regardless of your income. A Roth conversion is a strategy many use to alleviate potential high income tax burdens in retirement. While income in all three accounts grows tax free, traditional IRA and many 401(k) contributions are made with pre-tax dollars, so you pay tax on all distributions you take in retirement from these pre-tax accounts. Roth IRA contributions are made with post-tax dollars, which allows for true tax-free growth in the account because your distributions in retirement are not taxed.

If you expect to fall into a higher tax bracket in retirement a Roth account may be a good move. One important consideration is that you will pay tax on the dollars you convert from an IRA or 401(k) into a Roth account. That tax is due the year you make the conversion.

3. Rollover Old 401(k) Funds into a Self-Directed Roth IRA

Many Americans leave one job for a new one that may not offer retirement benefits. These individuals can rollover those funds into Roth IRA to achieve all the benefits Roths have to offer. The bonus with a self-directed plan is the ability to choose your own assets—and to choose them from a large variety of alternative investments to the stock market. Self-directed Roth IRAs are powerful investing tools that allow you to diversify your portfolio and capitalize on your retirement income-earning potential.

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You Can Roll Over 529 Plan Funds into a Roth IRA

The SECURE Act 2.0 provided a new rule. Beginning in January 2024, you will have the ability to rollover up to $35,000 of unused 529 education plan funds into a Roth IRA. These rollovers are tax and penalty free. Although the IRS does need to provide further guidance, below are the conditions that apply to this rollover.

  • The Roth IRA must be established in the name of the beneficiary of the unused 529 funds.
  • The lifetime rollover limit is $35,000, but the annual rollover limit cannot exceed the annual contribution limit of the Roth account, minus any contributions to the IRA.
  • The 529 rollover amount plus annual contribution cannot exceed the beneficiary’s annual earned income.
  • The 529 account must have been open for 15 years, but contributions to that plan within the last five years cannot be rolled over into the Roth IRA.