Self Directed Roth IRA

If you're looking for information on a self-directed Roth IRA, consider yourself in the majority when it comes to establishing a Roth IRA account.  That's because a self-directed account is simply defined as one where the owner of the account determines where the money is invested.  That's a pretty common arrangement when it comes to Roth IRAs.

Benefits of Self-Directed Roth IRAs

The nice thing about Roth IRA plans is that the money placed into the account can be withdrawn at retirement tax-free.  On the down side, contributions to a Roth are made on an after-tax basis - meaning you cannot deduct your contribution from your federal income taxes.  That's different than the way a traditional IRA might work.

For those that qualify, you can deduct your contribution to a traditional IRA, but when the money is removed from the account, you need to pay federal income taxes on all amounts withdrawn.  With a Roth, you are using after-tax money (you can't take a tax deduction for the contribution) but you don't have to pay any federal income tax on the amounts withdrawn when you're retired.

Another benefit of a Roth is that there is no age restriction for contributions.  If you want to take a more in-depth look at the differences between Roth IRAs and traditional IRAs, take a look at our article on IRA Rules.

Setting-Up a Self-Directed Roth IRA

Setting up a self-directed Roth IRA is a pretty straightforward process.  The first step you need to take is to contact a stockbroker and explain to them that you want to set up a self-directed Roth.  That broker will then send you two forms or you might even be able to download the forms right from that company's website.

The first form is an application for a Roth IRA and this is the same form you may have used when setting up an IRA with a bank, investment house, or mutual fund.  That form needs to be completed and mailed back to your broker.

The second form goes to your existing Roth IRA custodian - if you have an account you're converting. This form is the basis for an exchange, or renaming, of your Roth IRA custodians.

Trustee to Trustee Transfers

You may have to wait a bit for this trustee-to-trustee or custodian-to-custodian transfer to take place - and it can take up to 45 days for the transfer to occur.  But by allowing the money to exchange hands between these financial institutions, you're avoiding all of the potential IRA withholding policies such as the 60 day rule and withholding tax.  That helps you steer clear of tax penalties too.  You'll find a more detailed explanation of this topic in our article on IRA Rollovers.

Roth IRA Account Guidelines

The IRS has established guidelines that all IRAs - including Roth IRAs - must abide by to be considered "legitimate" IRA accounts.  This includes self-directed Roth IRAs.  Summarizing those requirements:

• The trustee or custodian of a Roth IRA must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.  This list also includes a stockbroker's account.
• The trustee or custodian agrees not to accept more than the allowable annual contribution limits for a Roth IRA.
• All contributions - except for Roth IRA rollovers or conversions - must be in cash.
• The account must offer you a non-forfeitable right to your money at all times.
• The money in the account cannot be used to purchase life insurance.
• The assets in this IRA account cannot be combined with your other investment assets.
• Finally, you need to abide by all of the minimum required distribution rules that apply to IRAs.  Roth IRAs do not have minimum required distributions.

Setting up a self-directed Roth IRA is nothing new, so an established stockbroker should be able to ensure that the new account you set up passes all of these rules.

Contributions to a Roth

If your thinking about starting up a self directed Roth IRA, you need to be aware of some of the contribution rules and limits that apply to these accounts.  If your filing status is Married Filing Joint returns, and your adjusted gross income or AGI is less than $166,000 in 2007 or $169,000 in 2008, then you can make a contribution to a Roth.  The AGI limit is $114,000 in 2007, and $116,000 in 2008, for single filers and those filing as head of household.  Phase-out limits do apply, staring about $10,000 lower than the limits just discussed.

If you're eligible to make a contribution to a Roth, and you reach the age of 50 before the end of the calendar year, then you can also make a catch up contribution to a Roth.  The contribution limits for the years 2005 - 2009 appear in the table below:

Roth Contribution Limits (2005 to 2009)

Rollovers, Conversions and Distributions

We've already published quite a bit of information concerning Roth IRAs and it's not our policy to repeat information when we can avoid it.  If you're thinking about starting a self-directed Roth, then you might want to take a look at some of our other publications including:

Roth IRA Rules

This publication on Roth IRA rules gives you more detail on eligibility requirements, contributions, and distributions.  This article also talks about conversions and distributions - also known as transfers.

Roth IRA Contribution Limits

This article's sole focus is on Roth IRA contribution limits.  It gives you a brief explanation of the phase-outs for contributions, and its relationship to your tax filing status.  Catch-up contributions are also discussed in this article.

Retirement Planning Tools

Finally, if you thinking about setting-up a self-directed Roth IRA, we've got some retirement planning tools that can help you figure out if your retirement plan is working.  Our retirement planning guide helps walk you through all of your investment options, while our retirement calculators can help you figure out if you've got enough retirement funds to meet your future income needs.

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