Why do investors flock to Self-Directed Roth IRAs? There’s a simple reason: they’re great accounts for retirement investors who want to save as much money for retirement as possible. But the Self-Directed Roth IRA is a unique strategy in which investors can use this investment vehicle for a variety of retirement assets, such as real estate, precious metals, and more. That leads to one simple question: why do retirement investors like the Self-Directed Roth IRA so much? Here’s a list of some of the primary benefits to this kind of retirement arrangement:
Benefit #1: Tax-Free Earnings
Like any retirement arrangement, there are tax protections that incentivize people to invest. The key with the Self-Directed Roth IRA is that you can allow your money to grow tax-free while it remains in your account. While you save money for retirement, the money in that account will grow tax-free. That means that you won’t have to worry about taxes eating into your returns over the years. You can invest safely and reliable within a Roth IRA, confident in the fact that your tax-free earnings are providing you with an immediate return, as compared to a taxable brokerage account.
Benefit #2: No Taxation on Withdrawals
Note that you will be using after-tax money with a Self-Directed Roth IRA, which is why you can take distributions from the account after retirement age without paying taxes—the taxes are already paid! And since the retirement account protects the growth from taxation, you’ll have a great, simple, direct way to obtain funds when you’re retired. The more you’ve put aside in a Roth IRA, the happier you’ll be in retirement—at least when it comes to your financial security.
Benefit #3: Variety/Diversification
There’s more to a Self-Directed Roth IRA that investors enjoy. Using a Self-Directed model, investors can use their Roth IRA to hold money in different assets like real estate, precious metals, even tax liens. This is a powerful way to ensure that you don’t have all of your money in the stock market—which helps provide investors with a sense of security. After all, as they say, stock markets take the escalators up, but the elevators down. In times of extreme volatility, using a Self-Directed IRA helps to stabilize one’s portfolio and hedge bets. Of course, a Self-Directed Roth IRA can also be used for a brokerage account, so this isn’t to say that diversification automatically happens. We’re just a Self-Directed IRA administration firm, and we don’t tell you how to make your investments. But we do tell you what a Self-Directed Roth IRA is capable of.
Benefit #4: Liquidity
Because you’re investing after-tax dollars in a Self-Directed Roth IRA, you might be surprised to find out just how liquid the funds within a Roth IRA can be. You can withdraw Roth IRA contributions from the Roth IRA at any time without tax or penalty—this is, after all, your own money, money that you already paid taxes on. However, withdrawing earnings from a Roth IRA will incur a penalty of 10% and would be subject to the income tax.
Even so, the after-tax nature of Roth IRA contributions means there’s more flexibility for this kind of investment.
Should Investors Seek Out Self-Directed Roth IRAs?
Investors who want the benefits listed above often put money in their Self-Directed Roth IRAs first, then moving to other plans (like Self-Directed Solo 401(k) plans) for the remainder of retirement contributions. One of the few limits to the Roth IRA is that it has low contribution limits. But otherwise it can be a powerful tool for retirement investing.