A self-directed Roth IRA is a retirement account that protects you from taxes. You’ll pay taxes on the money you put into the account, but capital gains and dividends don’t get taxed. Many investors flock to Roth IRAs for that significant long-term tax advantage on their gains. Self-directed Roth IRAs come with significant advantages over traditional Roth IRAs.
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How Does a Self-Directed Roth IRA Work?
A self-directed Roth IRA lets investors buy assets and get tax-free gains. You can contribute up to $6,000 per year to a self-directed Roth IRA. Investors who are 50 years or older can invest up to $7,000 per year. The self-directed Roth IRA also has income limits. You cannot contribute to a self-directed Roth IRA if you exceed these income levels:
- Married and filing jointly: $204,000/yr
- Filing as single, head of household, or married but filing separately: $129,000/yr
If you abide by the income requirements, you can contribute to a self-directed Roth IRA. These retirement accounts work best for investors willing to do their homework. You get to explore more assets, but custodians can’t provide financial advice.
Traditional vs. Self-Directed Roth IRA
Traditional and self-directed Roth IRAs have the same income limits and IRS tax advantages. However, self-directed Roth IRAs provide investors with more choices than conventional Roth IRAs. The conventional Roth IRA lets you invest in stocks, bonds, CDs, and mutual funds. Self-directed Roth IRAs let you invest in those assets, but these retirement accounts open the doors to alternative investments. As a result, investors get a larger pool of high-potential assets without worrying about capital gains. Gaining access to additional asset classes helps you diversify your portfolio and potentially higher returns.
Common Investment Options Through a Self-Directed Roth IRA
A self-directed Roth IRA opens up many doors for investors planning for retirement. This retirement account provides more flexibility than a traditional Roth IRA. Investors can add these assets to their self-directed Roth IRA accounts.
Real Estate
Self-directed Roth IRA accounts let you invest in real estate. You can have a rental property in the IRA account, and any rental income from these properties must go into your IRA account. You must also use IRA funds to cover expenses. You can’t receive the money in a personal account and move the funds to an IRA account later. Roth IRA investors can manage their properties directly through an IRA or with a property manager you hire with IRA funds. You can also use the IRA/LLC checking account to obtain rental income and cover expenses.
If you put real estate in an IRA account, you cannot live on the premises, even for a night. You would violate the self-dealing rule and make a penalty payment. Roth IRA holders can’t put their residence into a self-directed Roth IRA. You can only put real estate investments in your Roth IRA.
Precious Metals
Precious metals continue holding their value regardless of the economy. Gold, silver, and other metals will always have demand. These assets provide extra diversification, and some see them as useful inflation hedges.
Private Equity
Investors pool private equity to invest in companies, properties, and other assets. Once you invest in an asset with private equity, the gains accumulate tax-free. Unlike venture capital, private equity targets more mature companies, but private equity still has significant upside potential. Private equity also gives you more choices that extend beyond publicly traded companies.
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Cryptocurrency
Cryptocurrencies have high volatility, but a retirement account forces you to look at crypto’s long-term potential. While other alternative assets can strengthen your portfolio, crypto provides liquidity. You can quickly enter and exit crypto positions while other assets take longer. Liquidity becomes more important for Roth IRAs since you can take out your cost basis at any point without paying any penalties. You would have to pay penalties if you take out your entire cost basis and tap into your capital gains.
Bitcoin is the most established crypto, and it provided a life-changing opportunity for early investors. Bitcoin was worth $0.08 in 2010 and reached a high of over $67,000 per coin. Bitcoin has battled some volatility and hasn’t returned to its all-time high at the moment, but you would still be sitting on a wonderful nest egg if you bought it at $0.08 per coin.
Some altcoins have provided similar returns in shorter timeframes, notably Dogecoin and Shiba Inu. Holding onto crypto for years can provide exponential capital gains. Normally, you would face a substantial tax bill if you sell your holdings.
Benefits of Getting a Self-Directed Roth IRA
A self-directed Roth IRA offers several perks for investors. We have outlined some of them below.
- Increased Potential for Growth: Investing is one of the best ways to grow your net worth. Assets can appreciate over time and help you afford retirement. Roth IRAs encourage retirement planning and reward you for stashing your money. Depending on your age, you can invest $6,000 or $7,000 per year. Many people should invest up to the limit if they can.
- Protection Against Economic Fluctuations: The U.S. economy has continued growing long-term, but several hiccups have rattled investors. Keeping funds in a self-directed Roth IRA helps you keep retirement in perspective. Many investors panic, sell their investments and miss substantial gains. You can also invest in real estate, gold, and other inflation hedges through a self-directed Roth IRA.
- Financial Stability for the Future: People invest their money with their eyes set on living expenses and retirement. Extra money and cash flow make life less stressful. Financial stability gives you more choices in the future, and you can walk out of your job with little to no worries about affording living expenses.
- Greater Flexibility: Self-directed Roth IRAs let investors choose from more assets. You’re not stuck with stocks, bonds, CDs, and mutual funds. You can still buy those assets with a self-directed Roth IRA, but you can also access real estate, crypto, private equity, and other alternative assets.
- Tax Benefits: None of your Roth IRA’s capital gains or dividends get taxed. If you hold onto assets in your Roth IRA for decades, the cash flow and appreciation will compound significantly. Paying taxes on these gains during retirement can make your financial future look less certain. Roth IRAs shield you from these taxes. You’ll only pay taxes on the initial contribution.
