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Combine the tax-free growth of a Roth IRA with the flexibility to invest in a wide range of assets—like real estate, private equity, precious metals, and promissory notes.
How? With a self-directed Roth IRA (Roth SDIRA).
A Roth SDIRA empowers investors to diversify their portfolios, pursue tax-free gains, and build long-term wealth, all while investing in alternative assets. However, it’s important to follow strict IRS rules to avoid potential penalties.
In this article, we’ll walk you through:
Ready to take control of your financial future? Let’s dive in.
A self-directed Roth IRA (Roth SDIRA) is a tax-advantaged retirement account that allows investors to grow their savings tax-free while gaining access to alternative investments beyond traditional stocks and bonds. Like a standard Roth IRA, contributions are made with after-tax dollars, and qualified withdrawals in retirement (after age 59½ and meeting the five-year rule) are tax-free.
What makes it different from a regular Roth IRA is that it allows investments in alternative assets like real estate, private equity, and precious metals. However, Roth SDIRAs require careful IRS compliance to avoid prohibited transactions, and they must be held with a specialized self-directed IRA custodian.
While a Roth SDIRA offers powerful tax advantages and diverse investment opportunities, it also comes with strict IRS rules. Here are three of the top rules to know before opening an account:
The IRS strictly prohibits using your Roth SDIRA to benefit you personally, either directly or indirectly. This means you are not allowed to live in, vacation in, or personally perform work on a property owned by your IRA.
Engaging in prohibited transactions can result in the entire account being disqualified, triggering immediate taxes and penalties on all assets.
The IRS restricts transactions between your Roth SDIRA and certain individuals/entities deemed disqualified persons. These include:
Because a Roth SDIRA is a separate legal entity, any costs related to SDIRA investments must be paid using IRA funds. This includes property taxes, maintenance costs, home insurance, and all other investment-related expenses.
Not everyone qualifies to contribute to a Roth SDIRA. Eligibility is based on income limits set by the IRS. For 2025, you can contribute the full amount if:
If your income exceeds these limits, your ability to contribute phases out. However, if you already have an IRA or 401(k), you may be able to move the funds into a Roth SDIRA through a transfer, rollover, or Roth conversion.
A transfer is a direct movement of funds between retirement accounts of the same type (e.g., Roth IRA to Roth SDIRA).
With a transfer, there are no tax implications because the funds move directly between custodians; the account holder never takes possession of the funds.
On the other hand, a rollover allows you to move funds from one type of retirement account to another, like moving funds from a Roth 401(k) into a Roth SDIRA. There are two types of rollovers:
What if the majority of your funds are in a traditional IRA or traditional 401(k)?
You can still move the funds into a Roth SDIRA through a process known as a Roth conversion. However, you’ll owe income tax on the converted amount in the year of conversion.
For a simplified example, if you roll over $50,000 from a traditional IRA into a Roth SDIRA, that $50,000 is added to your taxable income for the year. If you’re in the 24% tax bracket, you could owe $12,000 in taxes on the conversion.
Before making a move, it’s wise to consult a tax professional to evaluate the best strategy based on your financial situation and tax bracket.
A Roth SDIRA offers tax-free growth and investment flexibility, but it also comes with strict rules and potential risks.
Contributions are made with after-tax dollars, meaning qualified withdrawals in retirement are 100% tax-free. Unlike a traditional SDIRA, you won’t owe taxes on investment gains when you take distributions after age 59½ (as long as the account has been open for at least 5 years).
Unlike standard Roth IRAs, which are limited to stocks, bonds, and mutual funds, Roth SDIRAs allow investments in real estate, private equity, cryptocurrencies, and more.
Traditional IRAs require distributions starting at age 73, but Roth IRAs never require withdrawals during the account holder’s lifetime.This allows assets to grow tax-free for longer and be passed down to heirs efficiently.
Not everyone qualifies for a Roth SDIRA. If your modified adjusted gross income (MAGI) exceeds IRS limits, you cannot contribute directly.
Prohibited transactions (e.g., self-dealing, transacting with disqualified persons) can disqualify the IRA, resulting in immediate taxation and penalties. Investors must conduct due diligence and follow IRS rules carefully.
Compared to traditional brokerage Roth IRAs, SDIRAs typically have:
If you’re interested in investing with a Roth SDIRA, here’s how to get started:
A Roth SDIRA can be a powerful tax-free wealth-building tool, especially for investors seeking non-traditional assets. However, it requires more responsibility, careful planning, and compliance with IRS rules.
If you’re an investor comfortable with alternative assets, risk management, and due diligence, a Roth SDIRA may be an excellent way to grow wealth tax-free. But for those seeking a more hands-off retirement strategy, a standard Roth IRA may be a simpler and safer choice.
If you want to learn more about self-directed investing, download our free SDIRA Basics Guide. Inside, you’ll find:
Note: The content provided here is for informational purposes only and should not be considered financial, tax, or investment advice. Always consult with a trusted tax or financial advisor to determine what is best for your unique situation.