Say goodbye to the days of only being able to invest in stocks, bonds, or mutual funds with your retirement accounts. Self-Directed IRAs are here to transform the way you think about your financial future. When utilized correctly, a Self-Directed Roth IRA (a self-managed Roth IRA) allows you to diversify your portfolio while taking control of how you grow your wealth.
In this FAQ, we’ll cover some of the top questions that come to mind when you think of a Self-Directed Roth IRA. Whether you’re a seasoned investor or just starting, you’ll understand how a Self-Directed Roth IRA can be a crucial tool in your retirement planning.
A Self-Directed Roth IRA is an individual retirement account that allows you to invest in assets outside of the standard investments of stocks, bonds, or mutual funds, while also allowing the benefit of tax-free growth within a Roth IRA. By including different types of assets or investments across your retirement accounts, you can diversify your portfolio to strengthen your financial growth.
Self-Directed Roth IRAs allow you to direct where you invest your retirement funds, allowing you the ability to invest in what you understand the most. It’s important when exploring investments for your Self-Directed Roth IRA to do your research and due diligence on both the investment opportunity and the company or people involved to ensure you’re investing with a credible source.
While these are both individual retirement accounts that allow for tax-free growth, their difference lies in what you’re able to invest in. A Roth IRA allows you to contribute after-tax dollars to invest in options such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Any growth inside the Roth IRA or withdrawals in retirement are tax-free. Your options for investing, however, are more limited.
A Self-Directed Roth IRA allows the same contribution of after-tax dollars and benefits from the same tax-free growth and withdrawals as a standard Roth IRA but allows for a wider variety of investment opportunities. Instead of stocks, bonds, ETFs, or mutual funds, a Self-Directed Roth IRA will enable you to invest in assets such as real estate, precious metals, or even digital currencies. Including investments like these in your portfolio can diversify your investments even further, transforming how you plan for your financial future.
While there are many different alternative investments to invest in with your Self-Directed Roth IRA, some of the more common ones are:
Whether you choose to invest in one of the options above or a different alternative investment, be sure to do your due diligence on the investment opportunity to help protect your retirement funds.
Although Self-Directed Roth IRAs open the door to new opportunities for investment, there are a few limitations. These include
It’s important to work with your Self-Directed Roth IRA custodian to make sure your investments are compliant with the IRS to avoid any penalties.
If you have a prohibited transaction with your investments in your Self-Directed Roth IRA, there can be severe consequences. Your IRA will be considered distributed as of January 1st of the year the transaction occurred, and the amount is based on the fair market value. When your IRA is distributed, you will be responsible for any applicable taxes on the distributed amount. If you are under the age of 59 ½, you will also incur a 10% early withdrawal penalty. If the transaction was caused by an individual other than the IRA owner, a 15% excise tax will apply to the amount of the transaction. If the IRA owner fails to correct the transaction, a 100% penalty may apply.
It’s important to work with your custodian and do your due diligence to ensure no prohibited transactions occur on your investments.
To be eligible to contribute to a Self-Directed Roth IRA, you must:
If your MAGI is above the IRS-defined limits, you can utilize what’s called a backdoor Roth IRA to still gain the benefits of tax-free growth in your self-managed Roth IRA. You can contribute funds to a Traditional IRA or a Self-Directed Traditional IRA regardless of your income. Depending on your circumstances, this contribution may or may not be tax-deductible. After you’ve contributed to a Traditional IRA, you can convert the funds to a Self-Directed Roth IRA. IRA conversions are not limited by the MAGI income requirements, so this is seen as a powerful strategy for those who want the tax-free growth of a Self-Directed Roth IRA.
When you convert your funds from a Traditional IRA to a Self-Directed Roth IRA, you’ll owe taxes on any pre-tax contributions or earnings. It’s important to consult with a tax professional when considering an IRA conversion to make sure it’s the right move for you.
A Self-Directed Roth IRA needs to be managed by a qualified custodian who is approved by the IRS to hold Self-Directed IRAs. These custodians specialize in alternative assets and ensuring your Self-Directed Roth IRA follows IRS rules. It’s important to note that your custodian will not offer investment advice. There are many different Self-Directed Roth IRA custodians, and each one has different fee schedules and minimum balances. The best place to start is contacting a Self-Directed IRA custodian to learn what their process and fee structure looks like but be sure to do your due diligence when choosing a Self-Directed Roth IRA custodian to make sure you find the right fit for you. Once you’ve chosen your custodian, you can set up your Self-Directed Roth IRA and fund it with either a contribution or by transferring funds from an existing IRA or old 401(k) to start investing.
IRA accounts have contribution limits, which apply to the total contributions made to all of your traditional and Roth IRAs for the year. This includes any made to a standard IRA or a Self-Directed IRA. For 2025, the IRA contribution limits are:
If you have multiple IRAs, it’s important to make sure you don’t exceed the contribution limits, or you might be subject to a 6% penalty tax on the excess amount for every year it remains in the account. If you’ve exceeded the contribution limit, contact your IRA custodian.
You can also transfer funds from an existing IRA or an old 401(k) from a previous employer to your Self-Directed Roth IRA. There is no limit on the amount you can transfer, or roll over, from an existing IRA or old 401(k); however, there may be tax implications if you are transferring from a Traditional IRA to a Roth IRA.
The rules for withdrawing funds from your Self-Directed Roth IRA depend on your age and whether you are withdrawing contributions or earnings. Contributions can be withdrawn at any time; however, withdrawals of earnings in the IRA before the age of 59 ½ are subject to a 10% early withdrawal penalty. If the account has been opened for at least 5 years and you are 59 ½ or older, withdrawals of both contributions and earnings are tax and penalty-free.
Some exceptions allow you to withdraw both contributions and earnings if the withdrawal is for:
The world of investments outside of stocks, bonds, and mutual funds offers new diversification for your portfolio. With more diversification in a tax-free environment, Self-directed Roth IRAs can be a powerful tool when planning your financial future. When setting up your Self-Directed Roth IRA and choosing an investment, be sure to conduct thorough due diligence on both your custodian and your investment to ensure you are protecting your retirement funds effectively. If you feel a Self-Directed Roth IRA might be something that can transform the growth in your retirement accounts, contact a Self-Directed IRA custodian to start learning more. What’s stopping you from transforming your retirement?