Your self-directed Roth IRA is likely the foundation of your retirement plan. It’s important to try to accumulate as much as possible in this account, so here are five steps for growing your self-directed Roth IRA.
Make the Maximum Allowable Contribution Each and Every Year. It’s extremely important to make the maximum contribution to your self-directed IRA every year. For 2014, this means up to $5,500 across all IRAs (or $6,500 if you’re age 50 or older). By making the maximum contributions to your account year in and year out, you’ll give your money the longest possible time to grow on a tax-free basis.
Even if you’re eligible to contribute to a traditional IRA and take a tax deduction, it still might be a better long term financial decision to make those contributions to your self-directed Roth IRA instead.
Consider Your Investment Portfolio as a Whole. Chances are that your self-directed Roth IRA is not your only investment vehicle. It might not even be your only IRA. In order to be sure that your overall portfolio is adequately diversified, always evaluate your overall investment position by considering all of your investment and retirement accounts together.
Avoid Penalties and Taxes. The next step in growing your self-directed Roth IRA is to avoid taking any steps that would reduce the balance of your account. For example, you should only take money out of your account as a last resort. Remember that once it’s out, you can’t make up for it or redeposit that borrowed amount later. The only way you can make direct contributions to your account is subject to the IRS annual contributions limits.
Similarly, any early withdrawals you’re forced to make from your self-directed Roth IRA should be made consistent with any IRS rules, so that you aren’t faced with a 10% penalty on those withdrawals.
Consider Converting Your Traditional IRAs. Another way to grow your self-directed Roth IRA is to convert any traditional IRAs you may have into your Roth account. You’ll be responsible for paying taxes on the amount of the conversion, but then you’ll be able to make tax-free withdrawals during retirement. And Roth IRAs have other advantages over traditional IRAs, including provisions that give you extra options when it comes to estate planning. In addition, if you have 401(k)s with prior employers then you can roll these accounts over to your Roth IRA as well.
Embrace the Long Term. Given that you’re not going to be liquidating investments quickly, you should embrace the long-term outlook that a self-directed Roth IRA gives you. This means that you should consider illiquid investments (like real estate and private equity) that you might not feel as comfortable investing in with your taxable accounts.
You can follow one or all of these steps. Keep in mind that having a larger balance in your self-directed Roth IRA will give you additional options when it comes to the types of investments you can participate in.