What You Need to Know About Self-Directed Roth IRA

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on August 10, 2023

Are You Retirement Ready?

When it comes to retirement planning, most people think of 401(k) plans and Individual Retirement Accounts, or IRAs.

However, there is another type of retirement account that is often overlooked: the self-directed Roth IRA.

A self-directed Roth IRA is an individual retirement account in which the holder can direct how their investments are made.

This allows for greater flexibility and control over one's retirement savings.

There are many different ways to invest in a self-directed Roth IRA. Some common options include stocks, mutual funds, and real estate.

However, there are many other investment options available, including precious metals, private equity, and venture capital.

Have questions about Self-Directed Roth IRAs? Click here.

Who Is Eligible to Have a Self-Directed Roth IRA?

Anyone who meets the qualifications for a Roth IRA can have a self-directed account.

To qualify for a Roth IRA, you must be earning income and you cannot be age 70½ or older.

You must also have a taxable income of less than $124,000 if you are single or $196,000 if you are married filing jointly.

Investing With a Self-Directed Roth IRA

Once you have established a self-directed Roth IRA, you can start investing in a variety of different assets such as stocks, mutual funds, and real estate.

However, it is important to remember that there are some restrictions on what you can invest in.

For example, you cannot invest in collectibles, such as art or antiques.

Tax Guidelines for Self-Directed Roth IRA

When it comes to taxes, there are some guidelines that you should be aware of when investing with a self-directed Roth IRA.

In order to avoid abusing the benefits of self-directed IRAs, the following two rules should be observed:

Disqualified Persons

This refers to people who are not allowed to make investments in a self-directed Roth IRA. The list of disqualified persons includes the following:

  • The Roth IRA owner (the account holder)
  • His or her spouse
  • His or her lineal descendants and ascendants (parents, grandparents, etc.)
  • Investors in the Roth IRA owner's business
  • Plan service providers

Prohibited Transactions

This is a broader category that includes any transaction that would disqualify the Roth IRA from being tax-deductible.

This includes transactions with disqualified persons, as well as investing in prohibited assets. Prohibited transactions include the following:

  • Borrowing money from the account
  • Selling property to the account
  • Using the assets of the account as security for a loan

Advantages of a Self-Directed Roth IRA

The main advantages of using a self-directed Roth IRA are:


1. You can invest in almost any type of investment.

This allows for increased diversification and the ability to make the most out of your retirement savings.

Traditional or regular IRAs do not allow you to use alternative investments such as real estate. With a self-directed Roth IRA, however, you can invest in these sorts of assets.

2. Withdrawals from a self-directed Roth IRA are tax-free.

There is no 10% penalty fee or taxes on withdrawals as long as one meets certain requirements.

Also, if your account is holding a Roth IRA conversion, you are allowed to make penalty-free withdrawals of your converted funds at any time.

3. There is more flexibility with a self-directed Roth IRA.

This includes being able to contribute more money each year and taking out money without penalty.

Disadvantages of a Self-Directed Roth IRA

The main disadvantages of using a self-directed Roth IRA are:


1. There is more responsibility and liability with a self-directed account.

Since the account holder is responsible for making investment decisions, it is important to do your homework before investing in any asset.

2. The fees associated with a self-directed Roth IRA can be higher than those of other retirement accounts.

This is because you are typically charged an annual administrative fee as well as a fee for each transaction.

3. It can be more difficult to find investments for a self-directed Roth IRA.

This is mainly because not all investment firms offer this type of account. You may need to do some extra research to find the right investments for your needs.

Final Thoughts

A self-directed Roth IRA can be a great way to have more control over your retirement savings.

A self-directed Roth IRA may not be for everyone, but it certainly has its benefits and advantages over traditional retirement accounts.

If you are interested in using a self-directed Roth IRA or have any questions about the rules and regulations regarding these types of accounts, consult with your financial advisor or tax advisor before making any decisions on how to invest your retirement savings.

Self-Directed Roth IRA FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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