Effortless Guide to Self-Directed Roth IRA & Real Estate Investor Benefits!

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When the IRA was first created, you only had one option— but since 1997, there’s been another choice, one more and more investors are picking every year. The Roth IRA! A favorite of many investors looking to make their retirement dollars go the extra mile— and you can take advantage too, as long as you qualify.

Wondering why and how you could incorporate Roth IRAs into your self-directed strategy? We’ll go over the main benefits for self-directed investors below.

Tax Advantages

The biggest difference between a self directed Roth IRA and a self directed Traditional IRA is the tax benefits. Most notably, contributions are handled differently.

If you’ve ever contributed to a Traditional IRA or 401(k), you’re probably used to tax-deferred contributions (cash savings or deposit from earned income) being “pre-tax”. This means they’re not taxed when initially deposited into your retirement account, and these contributions may be tax-deductible.

However, with a Roth IRA, these are “post-tax” contributions. This means you pay taxes on these funds before you contribute them to your IRA (like normal income), and there’s no tax write-off.

But wait— that doesn’t sound like a good thing. Why would any investor WANT that?

Investors like this option because of the long-term benefits. Sure, you can write off Traditional IRA and 401 (k) contributions now, but you will have to pay taxes when you take distributions. With a Roth IRA, you pay no taxes on money withdrawn during retirement.

In an account like a Traditional IRA or 401(k), you’ll owe and pay taxes on any withdrawal from the IRA as if it’s regular income, even if you wait ‘til you’re 59 ½ to do so. In fact, at age 72 you’re required to start taking distributions (required minimum distributions) from a Traditional IRA and pay taxes on those funds— or else face major penalties.

With a Roth IRA, you avoid that entirely. Your retirement savings are yours to use as you please, wholly and fully, on your timeline with no more taxes owed. after 59 ½, as long as your Roth IRA has been open for at least five tax years.

That means investment gains are tax-free, with no taxes on sales and no taxes when distributing out of the account, no matter why you want the funds (so no need to apply for an IRS exception). This is why many self-directed investors use Roth IRAs for real estate investing.

How does that work? That can’t be legal.

Yes, it’s legal— it’s how the IRS designed Roth IRAs to work. It works that way because you already paid those taxes on these funds before you contributed to the IRA. That’s why they’re often called post-tax contributions, and a Roth IRA is sometimes called a post-tax account (vs a pre-tax contribution or account with a Traditional IRA). With a Roth IRA, you can enjoy your retirement savings without worrying about managing tax payments for withdrawn savings. 

Distribute Contributions Any Time— Tax-Free

Another advantage investors often appreciate— initial contributions can be distributed penalty-free, no matter your age or reason. So, say you contribute $5,000 to your Roth IRA. In three years, you can withdraw that initial $5,000 penalty-free. You can’t withdraw any of the gains from investments (so if your $5,000 doubled and is now $10,000, you can still only distribute the original $5,000 without penalty).

Though it’s always best to leave retirement funds in their tax-advantaged state (growing bigger for your future), it’s nice to have this option if an emergency should arise. 

No Required Minimum Distributions for Roth IRAs

Since you’ve already paid taxes on your contribution, the IRS doesn’t need you to take Required Minimum Distributions (RMDs) like with Traditional IRAs. If you want, you never have to withdraw funds from your Roth IRA— they can stay in your IRA indefinitely.

Some investors even plan to leave most or all of their funds in their account as a tax-advantaged inheritance to leave for their heirs, some even working to build multi-generational wealth through IRAs.

Small Business Owners Take Advantage

A nice bonus for small business owners with SEP or SIMPLE IRAs— you can maximize your retirement savings by hitting the limit on both your SEP or SIMPLE and a Roth IRA. SEP and SIMPLE IRAs allow small business owners to contribute much larger amounts to retirement accounts for themselves and employees (SEP and SIMPLE IRA limits for 2022 and 2023), and these contributions are not included in the combined Roth/Traditional IRA contribution limit (for 2022 the limits are $6,000 if under 50, $7,000 if 50 or above). If you want to get even more tax-advantaged savings into a retirement account, this is a way to do it. 

Roth IRA Eligibility

To contribute to a self-directed Roth IRA, you (or your spouse, if filing jointly) need to have earned income equal to your contributions for that year. If your earned income was $2,000, you can’t contribute $6,000 to your IRA (unless, as stated previously, your spouse has earned income and you are filing jointly).

Self-directed Roth IRAs also have a maximum income to be able to contribute, Modified Adjusted Gross Income. If you (or you and your spouse) make more than the stated income limits you can still invest those Roth funds, but you won’t be allowed to contribute new savings to a Roth account. That is because these accounts (and their specific sort of tax benefits) are meant to target lower-income and beginner investments, and this promotes Traditional IRA for high earners once they hit the threshold. They’re tax-advantaged accounts with specific eligibility requirements.

If you don’t have earned income or make more than the income limits, unfortunately, you aren’t eligible for a Roth IRA. However, there is another way to get funds into a Roth account— through a Roth Conversion.

Roth Conversions

There are income restrictions on contributions to a Roth IRA— but if you exceed these limits, you may have the option to convert your funds from a Traditional IRA.

Often referred to as a “backdoor Roth IRA”, a Roth Conversion lets you move your existing retirement savings to a Roth IRA. There’s no income limit and no early withdrawal penalty, but you‘ll have to pay regular taxes on the funds you are converting (as if you initially contributed to the Roth IRA). Afterward, the funds can be treated like any other Roth IRA funds, with the same rules.

How to open a Self-Directed Roth IRA

If you have retirement savings in a Traditional IRA or old 401 (k) you can convert these accounts to a self-directed Roth IRA. Roth conversions are explained above. If you do not have any savings, you can start with a contribution, verify if you qualify.

The process of establishing the Roth IRA is simple. A financial institution like IRAR can help you. From our website, you can complete a new account application online and then fund the account. Here are your options to fund the self-directed Roth IRA:

  • Transfer a Traditional IRA then do a conversion
  • Make a contribution (verify if you qualify)
  • Move an old 401 (k) to a Traditional IRA then do a conversion

Self-Directed Roth IRA - Real Estate Rules

All the same self-directed IRA rules apply— you can’t engage in prohibited transactions (like investing in life insurance), you can invest in almost all types of investments, but you need a self-directed IRA custodian, just as with any other self-directed IRA.

Make sure to compare trust companies before picking a provider, and ensure you’re getting the best price and service for your retirement account.

In a Nutshell

Though most with individual retirement accounts end up with a Traditional IRA by default, that’s not your only option for alternative investments. The Roth IRA is a strong contender with a lot of benefits, but there are restrictions investors should take into consideration.

If you think this account may be the right choice for your retirement strategy, get investment advice from a financial advisor familiar with self-directed IRAs. As with any other truly self-directed retirement account, the investment decisions are always yours to make. Explore the possibilities!

Whether you are interested in rental properties, private stock, or any other type of alternative asset, IRAR Trust Company can help. IRAR is here to answer any questions you or your advisor may have about incorporating a Roth IRA into your investment and retirement strategy. 


Self-Directed Roth IRA FAQs

What is a Roth IRA?

A Roth IRA is an individual retirement account that allows you to make after-tax contributions, while still letting your money grow tax-free. This means that your contributions are not tax-deductible, but when you make withdrawals in retirement, you may not have to pay taxes.

How do you open a self-directed Roth IRA?

To open a self-directed Roth IRA you need to complete a new account application online and provide a form of government-issued identification; ID, driver's license, or passport. Almost anyone with earned income can open a Roth. However, there are income restrictions for contributions to a Roth IRA—find out if you can contribute if that is your goal.

When can you withdraw from a Roth IRA?

Your annual cash contributions can be distributed penalty-free, no matter your age or reason at any time. However, you can’t withdraw any of the gains from investments or contributions until you are of retirement age, 59 1/2, or meet special conditions.

What is the Roth IRA contribution deadline?

The Roth IRA contribution deadline is April 15, 2023. All IRA contribution deadlines are usually on the tax filing deadline.

How do I start a self-directed Roth IRA?

To contribute to a self-directed Roth IRA you must meet the income requirements. If you have an account that you want to convert to a Roth but are over the income limit, you may still be able to do that and invest those Roth funds—but won’t be allowed to contribute to the Roth.



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