What does it take to make someone eligible for a Self-Directed Roth IRA? It might sound like a complicated situation if you’re new to the world of self-directed retirement investing. But the truth is, if you’re eligible for a Roth IRA, you’re also eligible to self-direct that Roth IRA. However, that does require that you meet certain eligibility requirements for a Roth IRA and know what it means when you decide to direct one independently. How does it all work? Let’s zoom in and consider the key eligibility requirements in a Self-Directed Roth IRA.
What You Need to Be Eligible for a Self-Directed Roth IRA
Let’s get the basics out of the way. Here’s what you’ll need to be able to invest in a Roth IRA of your very own:
- Earned income. You can only contribute money toward a Roth IRA if you have earned income that you can put towards it. In this case, earned income means money that you have earned as a salaried employee or as an independent contractor, for example. What wouldn’t fall under earned income? That might include anything that comes from getting money in an investment—for example, earning dividends on a REIT would not constitute “earned income.” You should also note that income such as nontaxable alimony, child support, and social security benefits do not count as earned income for purposes of Roth IRA investing.
- Age. You need to be at least 18 years old to open a Roth IRA of your own. However, it is possible that parents can open a Roth IRA on behalf of their children, acting as the custodian on the account until the child is old enough to reach adulthood (defined as 18 years old) and assume control over the Roth IRA. A parent can’t put their own earned income into the Roth IRA when opening it for a child—in this case, the child needs to have earned income for contributions to take place.
- Contribution limits. Even if you meet the requirements above, there are certain contributions limits you have to be aware of. With a Roth IRA, that contribution is $6,000 in 2021 and 2022 (for each year), for example. You can also see a more detailed table of your contribution limits in a Roth IRA depending on your tax filing status on the IRS website.
- Income limits. It’s certainly possible to open and keep a Roth IRA if you’re well over the income limits for certain contributions. But you do need to know what these limits are if you have a high income as you cannot contribute to a Roth IRA if you make over a certain amount of money. Generally, the Roth IRA limits fit comfortably into most middle-class investment strategies, but as your income goes up, you may find that you can’t put as much money directly into a Roth IRA as you might have thought.
These are the keys to understanding eligibility with a Roth IRA. What about self-directing the Roth IRA? It’s easy to do, provided that you work with a custodian who administers the account. For example, it’s easy to sign up for a Self-Directed Roth IRA when working with American IRA. We can serve as custodian on the account and administer the paperwork, giving you the freedom to make investments as you see fit, provided that you don’t go outside the rules of retirement investing that apply to any account. Doing so with a Roth IRA can be a powerful way to create a more independent-minded portfolio that goes beyond the traditional retirement assets.