What are the Differences between a Self-Directed Roth IRA and a Roth 401(k)?

A Self-Directed Roth IRA and a Roth 401(k) have some similarities. With both types of accounts, you make your contributions after you have paid the taxes on them. And, when you reach the age of 59 ½, you can take out your earnings without paying additional taxes.

But aside from a few parallels, there are significant differences between the two. While you are allowed to have both a Self-Directed Roth IRA and a Roth 401(k) at the same time, your employer must offer a Roth 401(k) for you to participate.

Take a look at some of the other differences so you can decide which plan works best for you:

Contribution and income limits

Whether it’s a Roth or traditional 401(k), the contribution limits are much higher than the IRA. In 2019, employees will be allowed to save up to $19,000 for the year. Workers over 50 may save up to $25,000. There are no income limits for the 401(k).

Roth and Traditional IRA contributions are limited to $6,000 or the amount of earned income, whichever is less. Those over 50 may set aside $7,000. There are income limitations, however, on Self-Directed Roth IRA contributions for 2019. If your modified adjusted gross income is $203,000 or more for married couples filing jointly or $137,000 or more for single filers, you are not allowed to contribute.

Distributions are handled differently

A Self-Directed Roth IRA account can continue forever, and there are no required minimum distributions as with Traditional IRAs. The Roth can also be passed along through generations, and it continues to accumulate free earnings for each generation.

A Roth 401(k) is treated differently.  Distributions from a Roth 401(k) account must begin by age 70 ½ or when the account holder retires, whichever comes later. If you want to continue getting tax-free savings, rolling over to a Self-Directed Roth IRA is an option to consider.

Withdrawals from both the Self-Directed Roth IRA and the Roth 401(k) are tax-free as long as the accounts were held for at least five years, the distributions were made because of disability or death, or the account holder has reached the age of 59 ½.

Also, with a Self-Directed Roth IRA, you are allowed to withdraw up to $10,000 to buy or build a first home, without paying taxes and the 10 percent early withdrawal penalty, even if you are under age 59½.

Your employer can match your Roth 401(k) contributions

In addition to having higher contribution limits than Self-Directed Roth IRAs, the Roth 401(k) has another distinct advantage: Your employer can match any contributions you make up to a certain percentage. It’s free money from your employer that’s on top of your elective deferrals.

One caveat: Your employer’s match will be deposited into a traditional 401(k). Since you never receive the employer’s match, it cannot be completed on an after-tax basis. For that reason, the company match must be applied to a traditional 401(k).

You will have more investment options in a Roth IRA

Employees generally have little or no control over the investment choices that an employer’s Roth 401(k) plan offers. And those options are minimal most of the time. Those who hold a Self-Directed Roth IRA, on the other hand, will have greater control and more investment opportunities from which to choose.

And when retirement savers open a Self-Directed Roth IRA, they give themselves a virtually unlimited selection that includes alternative assets such as real estate, precious metals, private stock, and private lending.

Remember, even if you have a 401(k) plan through your employer, you may open and contribute to a Roth or traditional Self-Directed IRA.  Interested in learning more about Self-Directed IRAs, download our free e-guide.  Contact American IRA, LLC at 866-7500-IRA (472) or visit us online at

Two Self-Directed Roth IRA Funding Options for High-Income Earners

Retirement savers with high incomes have options for saving but putting them into a Self-Directed Roth IRA is not one of them. One of the critical differences between Traditional IRAs and Self-Directed Roth IRAs is income limits on contributions. It is a shame because a Roth could provide tax-free growth and tax-free withdrawals in retirement.

For the 2018 tax year, here are the income eligibility limits:

  • Single filer – $135,000
  • Married filing a joint return – $199,000
  • Married filing a separate return – $10,000

If you are part of any of these categories, you are probably not eligible to contribute to a Self-Directed Roth IRA. But that does not mean you have to rule it out completely. Your income does not have to be a total obstacle. Here are two suggestions to consider:

Think about a Roth conversion

Converting some or all of the funds in a Traditional IRA into a Self-Directed Roth IRA is a viable option. Of course, the conversion would trigger a tax bill on the converted funds up front, but your money would be growing tax-free from that point on. And since you pay the tax today, your distributions will be tax-free when you retire. This option makes particularly good sense if you think you will be in a higher tax bracket when you withdraw the funds and retirement is down the road a few years.

You can roll it over

While your Self-Directed 401(K) plan might not have a Roth option, you may still roll over to a Self-Directed Roth IRA if a triggering event occurs. Some of the most common events include:

  • Reaching retirement age
  • Termination of employment
  • Disability
  • Death

Talk to your employer to ensure that you meet one of your plan’s triggering events. Then, make sure that the amount you are taking is eligible for a rollover. Most distributions from retirement plans may be rolled over, but there are some that are ineligible. For instance, you may not roll over any required distributions you must take after reaching the age of 70 ½, and you will not be allowed to roll over any excess contributions you made.

Remember that when you roll over pretax funds, they will be subject to income tax for the year in which you did the rollover. You could be paying a significant tax bill if you roll over a large balance all at once. You might want to think about moving the funds over multiple years.

If your qualified plan has a Roth option, the tax consequences change. If there is a triggering event, you can roll these Roth assets into a Self-Directed Roth IRA. And because this transaction involves after-tax contributions, they are no income taxes due.

What about a Backdoor Roth?

In 2010, Congress passed rules that allowed retirement savers to convert funds in a Traditional IRA to a Self-Directed Roth IRA, paying the taxes on the distributions as they made the conversion. Higher-income earners were able to use this approach to gain access to a Self-Directed Roth IRA. Nicknamed a Backdoor Roth, it involves a two-step process:

Open a non-deductible Traditional IRA and make after-tax contributions. For 2018, you may contribute up to $5,500 ($6,500 if you’re age 50 or older).

Then, transfer the assets from the Traditional IRA to a Self-Directed Roth IRA. You can make this transfer and conversion at any time in the future. Some advisors are warning that the Backdoor Roth might not last forever. Restrictions on them might come at some point, requiring converters to pay a penalty, or they could include a grandfather clause. But for now, it’s an option to consider.

Seek professional help before rolling over or converting

If you are a high-income earner, you should consider everything before using retirement plan rollovers and conversions to fund your Self-Directed Roth IRA. Discuss these strategies with your team of professionals. Give us a call when you’re ready to make a move.

At American IRA, we believe that Self-Directed IRAs are the best vehicles for growing your retirement account. And we have the experience to help you with your transactions.

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