For some investors, the Roth IRA is the Rolls-Royce of retirement accounts. It creates plenty of benefits that go beyond the structure that makes it different than the Traditional IRA. But what are those benefits, and how might they benefit someone with a Self-Directed Roth IRA? Here are some of the reasons to consider using a Self-Directed Roth IRA:
Reason #1 to Use Self-Directed Roth IRAs: Tax Benefits
Let’s be honest—the tax benefits are substantial, and it’s the primary reason that many personal finance experts recommend first putting money aside in a Roth IRA before other types of retirement contributions. In Self-Directed Roth IRAs, you will be able to put after-tax money in the account, which then grows tax-free. You can then make tax-free withdrawals on this money at retirement age, which means that all of the taxes have been front-loaded.
For many people, that means that a lifetime of saving can eventually yield considerable tax benefits, particularly for those who have an advanced income later in life. Due to the tax bracket you may find yourself in later in life, that can mean tremendous tax benefits. You will keep more of your own money during retirement, which in turn means more wiggle room for spending and saving.
Reason #2 to Use Self-Directed Roth IRAs: Access to Contributions
A Roth IRA withdrawal of only your contributions without taxes or penalties means that your Roth IRA has a tremendous amount of flexibility. This feature is not available with a 401(k) or Traditional IRA, as these withdrawals would then be taxable because they have not already been taxed. In that way, a Roth IRA can serve as a partial emergency fund, especially if you have already contributed a lot of money to it over the years. That’s not to say that it should, but the flexibility of a Self-Directed IRA can be a tremendous way to ensure that you have money when you need it.
Reason #3 to Use Self-Directed Roth IRAs: No Required Minimum Distributions (RMDs)
One of the problems with investing in a retirement account is that you do not get to keep that money growing as long as you would like—at least, not if you’re using something other than a Self-Directed Roth IRA. That’s due to the presence of Required Minimum Distributions, in which you have to start taking money out of the account after a certain age.
With the Roth IRA, this is not an issue. Since you have already taken the taxes out of the money by preloading those taxes at the beginning, the IRS does not require that you take money out of the account after a certain age to ensure the taxes get paid. That means that you will have a lot of flexibility with your Roth IRA and can allow the money inside the Roth IRA to build even after you have officially hit retirement age.
Reason #4 to Use Self-Directed Roth IRAs: Freedom of Investment
When you use a Self-Directed Roth IRA, you open a lot of possibilities for the future. You can use the money inside the account to make a wide range of investments in different asset classes, from real estate to precious metals. And because you will have the other benefits of the Roth IRA listed here, it will give you plenty of options when you hit retirement age—at which point you may not even decide to take out your distributions just yet.