Self-Directed Roth IRA

A self-directed Roth IRA is a retirement account that allows for alternative investments while offering the same tax-free growth as a standard Roth IRA under Internal Revenue Code §408A, when applicable requirements are satisfied. This structure may permit investment in certain asset types beyond publicly traded securities, such as certain real estate or privately offered investments, when allowed by the qualified IRA custodian and applicable IRS rules.

You still follow the same contribution limits and income requirements set by the IRS for all Roth accounts. The primary difference is setting up your IRA at a self-directed institution, like IRA Club, to allow you to invest in alternatives. 

Takeaway:

A self-directed Roth IRA follows the same Roth IRA tax rules as a standard Roth IRA, while the self-directed structure refers to the range of permitted investments based on the qualified IRA custodian’s policies and applicable IRS rules.

The main difference between a self-directed Roth IRA and a regular Roth IRA is the variety of available investment options and the role of the custodian. While a regular Roth IRA is usually limited to publicly traded securities, a self-directed Roth IRA allows for certain other permitted asset types, such as certain real estate or privately offered investments.

In a self-directed structure, the account holder directs investment decisions and is responsible for evaluating the investment before instructing the custodian or self-directed administrator to process the transaction. Both accounts share the same tax benefits, but the self-directed Roth IRA requires more direct involvement from the account holder. 

Takeaway:

The self-directed Roth IRA differs by permitting a broader range of investments through the qualified IRA custodian’s administrative structure, while investment decisions remain the responsibility of the account holder.

A self-directed Roth IRA is generally used by account holders who want to direct investments in asset types beyond publicly traded securities, such as certain real estate or privately offered investments. This structure places investment selection and investment evaluation with the account holder rather than with the qualified IRA custodian or IRA Club.

Account holders in a self-directed structure are responsible for directing transactions and evaluating the investment before instructing the custodian to process the transaction. It also requires ongoing attention to applicable IRS rules, including prohibited transaction restrictions under Internal Revenue Code §4975, and to the administrative requirements associated with the account.

Takeaway:

A self-directed Roth IRA is generally used by account holders who want to direct a broader range of permitted investments and who are prepared to manage investment evaluation and account-related administrative requirements under applicable IRS rules

Prohibited transactions are specific actions that involve the misuse of IRA assets by the account owner or other disqualified persons, as described under Internal Revenue Code §4975. These rules exist to prevent direct or indirect personal benefit from IRA assets before a distribution occurs under applicable federal tax rules. For instance, you cannot lend yourself money from the account or use the IRA to buy property that you already own personally.

If a prohibited transaction occurs, the IRA may be treated as distributed under applicable IRS rules, which can result in income tax consequences and other applicable tax treatment. It is important to keep a clear line between your personal finances and your self-directed Roth IRA investments at all times.

Takeaway:

Prohibited transactions are transactions involving IRA assets and disqualified persons that result in direct or indirect personal benefit, as restricted under Internal Revenue Code §4975.

A disqualified person generally includes the account holder, the account holder’s spouse, lineal ascendants, lineal descendants, and certain entities in which these individuals hold a sufficient ownership interest, as described under Internal Revenue Code §4975. In the context of a self-directed Roth IRA, transactions between the IRA and these persons may be restricted because they can involve direct or indirect personal benefit or conflicts of interest.

For example, the IRA generally cannot buy an asset from the account holder’s father or sell IRA-owned property to the account holder’s daughter. Siblings are generally not included in the statutory definition of disqualified persons under Internal Revenue Code §4975, although the specific facts of a transaction still matter under applicable IRS rules.

Takeaway:

In a self-directed Roth IRA, disqualified persons include the account holder, certain family members, and certain related entities under Internal Revenue Code §4975, and transactions involving these persons may be restricted under federal tax rules.