What Financial Education Podcasts Don’t Tell You About the Self-Directed Roth IRA?
While the Roth IRA, and the Self-Directed Roth IRA, has a reputation as being one of the most beneficial ways to invest in retirement, surprisingly few people know all about these accounts. They might know that a Roth IRA can be a good thing for many investors to have. They might know that investors can invest after-tax money into a Roth IRA, thereby saving them from the liability of paying taxes later in life when they take valid distributions from a Roth IRA. But what are some of the little-known aspects of the Roth IRA that maybe your favorite financial podcast hasn’t told you? Let’s look through some of the key facts.
The Self-Directed Roth IRA Has Eligibility Requirements
Many people look at the Roth IRA and its relatively low contribution limits and assume that they’re for everybody. But they aren’t. The Roth IRA has its own set of eligibility requirements, and they don’t apply to everybody. According to some sources, the MAGI, or modified adjusted gross income, for a single filer or head of household, has to be less than $125,000 for full contributions. Keep in mind, however, that married filers or qualified widowers and windows may have different income limits as well.
What does this mean? It’s not so cut and dry. If you make past a certain amount, you simply won’t be able to save as much for retirement through a Self-Directed Roth IRA. However, you can still keep a Roth IRA that already exists, and transact within a Roth IRA. For this reason, a Self-Directed Roth IRA can be a good option for people who expect to eclipse these numbers in their lifetime. That’s because a Self-Directed Roth IRA includes all sorts of options for investing that go beyond traditional retirement assets.
A Self-Directed Roth IRA Has Unique Rules Because of After-Tax Contributions
When you ask most people about the appeal of the Roth IRA, you’ll typically hear about how the after-tax money means you can front-load the paying of taxes and enjoy tax-free income from your Roth IRA later in life. However, it’s important to remember that there are other benefits to this arrangement as well. Because you’ve already paid taxes on the money you use for contributions, the Roth IRA can provide tax-free distributions before retirement age for the money that you have personally contributed to the Roth account.
This is a big mental relief for people who invest for retirement, because they sometimes believe that storing money away means that it’s money they can’t have until retirement age. With a Roth IRA you do have the ability to take distributions on your personal contributions, provided the account has been established for at least 5 years. With before-tax accounts, there are penalties and taxes associated with taking early withdrawals.
You Never Have to Take a Distribution
While the early withdrawal possibilities can excite Roth IRA investors, there’s another rule on the back end that may be just as interesting. You don’t have to take required minimum distributions—a feature of many other IRAs—when you have a Roth IRA. The reason? The money has already been taxed. This means that the Roth IRA can continue to grow for you in retirement age, which can be especially important if you want to take advantage of compounding gains over the long haul.
It’s important to know what each IRA can do for you, and what their individual quirks are. But just as important? Educating yourself about how to use self-direction. Interested in learning more about Self-Directed IRAs? Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation. Download our free guides or visit us online at www.AmericanIRA.com.