What is a Self-Directed Roth IRA?

A self directed Roth Ira can be a tremendous way to save for retirement.  Tax laws have just recently been changed to help allow individuals to contribute higher amounts to their Roth Ira accounts.  Theses contributions can be as high as $4,000 per year.  These contributions are strictly non-deductible.  These self directed Roth Ira's are available to any single person with an annual income of $95,000 or less.  Married individuals must have an income not to exceed $150,000 per year.

If a person has traditional IRA's and chooses to do so, they may choose to have them rollover to a Roth Ira.  The 10% premature withdrawal penalty will not apply if it is being converted to a Roth IRA.  However, there may be a conversion tax that will be due at the end of the year.  One detail to think about if you are considering a rollover is if you have to hold out any money to pay the conversion taxes, then you may want to reconsider this as an option.

There are many benefits to a Roth IRA.  The biggest selling point is that after you make your first contribution, there are no taxes.  Also, there is never a minimum distribution amount because it is pre taxed.  This means for the beneficiary as well as the IRA owner.  The early withdrawal penalty is also void if the individual is 59 1/2 years of age or has been vested for 5 years. 

Like everything else though, Roth IRA's do have their downside, as well.  The biggest downfall to a Roth IRA is that there are no tax deductions for this type of individual retirement account.  Also, not everyone is eligible for the Roth Ira.  The income guidelines mentioned above are set in stone. 

In most cases the Roth IRA would be the way to invest, however, there are cases where the traditional IRA is the way to go.   One case where this does not hold true is if a persons tax bracket is expected to be lower at the time of withdrawal than at the time of contribution.  In this case, the Roth IRA would not be to this persons benefit.

The best advice to give an individual on whether to choose a Roth IRA or a traditional IRA is to do research on both investment plans.  After researching both plans, consider your personal situation and talk to a financial advisor. 

Recommended: Use your Self-Directed IRA, Roth or 401(k) Plan + Loans to buy investment property