How does a self-directed Roth IRA work?


A self-directed Roth IRA combines the tax advantages of a Roth IRA with the freedom to self-direct investments. The "self-direct" aspect allows individual holders of retirement accounts to invest their Roth IRA funds in a whole range of diverse assets that would typically not be available under a traditional IRA. It also provides individuals with a greater investment potential and more direct control over the IRA funds.

Things to Consider with Self-Directed Roth IRA

  • To open a self-directed Roth IRA, you should select a qualified trustee or custodian who will provide information about the regulations governing an IRA, issue statements, file tax reports and keep record of your contributions. As a rule of thumb, make sure you find a custodian with rich expertise in handling the type of investment you have chosen.
  • Under a self-directed Roth IRA, you will be able to choose and direct what to put your Roth IRA funds in yourself, instead of having a financial organization decide upon the investments for you.
  • A self-directed Roth IRA might give you the right to make purchases and write checks on behalf of the individual retirement account. If you choose the checkbook control option, transactions will be through a limited liability company (LLC) which reduces the administrative fees and gives Roth IRA owners a direct access to and a greater control of their Roth IRA assets.
  • Unlike traditional IRAs wherein investment options are restricted to mutual funds and CDs, with self-directed Roth IRAs, you have a very diversified portfolio of investment options which include the following: bonds, stocks and mutual funds, LLCs, partnerships and joint ventures, private limited partnerships; tax sale certificates; equipment leasing, structured settlements; secured and unsecured notes (mortgages and deeds of trust); personal and commercial property and other investments. It is strongly advisable that you check with your trustee what the available investment options are, as not all of them provide all the assets that are IRS-permissible.
  • You cannot use life insurance and collectibles to fund your self-directed Roth IRA, under current tax regulations.
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