The Advantages of a Self-Directed Roth IRA

Estimated reading time: 3 minutes(Last Updated On: April 12, 2021)

Individuals who are actively saving and planning for their own retirements have a number of account choices available to them. Many of us have access to 401(k) plans at work (or possibly traditional pension plans), and every taxpayer with earned income can start their own individual retirement account (“IRA”).

Most people are at least somewhat familiar with the IRA vehicle, but might not know much about the different account structures and options that are available. For example, there are traditional self-directed IRAs and Roth self-directed IRAs. Unfortunately, when it comes to deciding what type of account is most suitable for them, many retirement savers focus only on the contribution differences between the two accounts; namely that contributions to traditional IRAs are sometimes tax deductible, whereas contributions to Roth IRAs are never tax-deductible.

Here is a brief summary of some of the most important advantages that a self-directed Roth IRA as over a traditional account.

No Taxes on Distributions with self-directed Roth IRAs

Interestingly, one of the most significant advantages of a self-directed Roth IRA is the complement of one of the things that lead some investors to initially become more interested in Traditional IRAs. Earnings within a Roth IRA are never taxed, even when they’re withdrawn from your account, and this is the consequence of the fact that Roth contributions are never tax-deductible when they’re made.

Over the twenty or thirty years that many retirement savers have their self-directed IRAs, most of their account balances will be comprised of investment earnings (and earnings on those earnings) rather than contributions. In the long run, the aggregate tax benefit of having tax-free withdrawals is likely to exceed the benefit of having tax-deductible contributions.

No Required Minimum Distributions with a Self-Directed Roth IRA

Traditional IRAs are subject to certain rules regarding required minimum distributions. In essence, these rules provide that once the holder of the IRA reaches age 72, they must begin taking distributions from their account. It’s important to note that these minimum distributions are required, regardless of whether the account holder wants or needs to remove those funds from their account, and failure to do so will cause the account holder to incur financial penalties.

Roth IRAs are not subject to these distribution rules. This means that if the account holder has other adequate sources of retirement income, they can continue to let their Roth IRA grow on a tax-free basis.

Flexible Estate Planning with Self-Directed Roth IRAs

Self-directed Roth IRAs provide you with another way to reach your estate planning goals. In fact, if you name your spouse as the beneficiary of your self-directed Roth IRA, then they’ll be able to easily convert the account into their own self-directed Roth IRA, and take advantage of all the benefits that go along with the account. In some cases this can allow for account assets to grow for additional decades on a tax-free basis.

If you’re interested in learning more about what a self-directed Roth IRA can help you achieve, contact Quest Trust Company today.

Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.

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