You are in the majority by researching self-directed Roth IRA accounts, due to the fact that in a self-directed account the owner of the Roth IRA decides where the funds are invested, making this a popular option for retirement investors.
There are benefits and drawbacks to investing in a self-directed Roth IRA. It is also important to remember that you should research Roth IRA brokerages to ensure that you are paying the lowest administration fees, and therefore, retaining the most profits.
Self-directed Roth IRAs can be opened at online brokerages such as ETrade, which offer excellent investment options and low fees. Banks and credit unions also offer these types of individual retirement accounts, but your choices of investments may be more limited.
You may also chose to invest with a full-service brokerage firm, but be cautious of high fees eating into your capital. Some of these firms can charge over 1% in administrative fees, and while this may not seem like much, consider that as your investments grow you could be paying hundreds if not thousands of dollars in fees alone.
Advantages Of A Self-Directed Roth IRA
In a self-directed Roth IRA accounts, the money invested can be withdrawn upon retirement tax and penalty-free. This feature provides you with tremendous savings if you expect to be in a higher tax bracket when you retire.
The drawback is that, unlike a traditional IRA, contributions to a self-directed Roth IRA are made with after-tax dollars. This means that you can not claim your contributions as deductions on your federal income tax return, and therefore, do not realize an immediate tax benefit.
In a traditional IRA, those who qualify can deduct their contributions on their tax returns, resulting in an immediate tax benefit. Upon withdrawal, the money is taxed at your normal federal income tax rate. With a Roth IRA, qualified distributions are tax-free, with original contributions available for withdrawal tax-free at any time.
There is also no restriction on age to contribute to self-directed Roth IRA accounts. As long as your investment funds are from employment, or from a taxable alternative you can make contributions to this type of individual retirement fund.
Getting Started With A Self-Directed Roth IRA
It is fairly easy to open a self-directed Roth IRA, and the first step is to contact a brokerage about opening a self-directed Roth IRA. You will be asked to complete two forms, and in the case of online broker ETrade, you will even be able to download them directly to your computer.
It is important to remember that there are income limits placed on who can invest in Roth IRAs, and significant contribution phase outs after exceeding these limits. For single and head-of-household income-tax filers, the adjusted gross income limit is $122,000 as of 2011, and $179,000 in 2011 for married couples filing jointly.
There are also contribution limits set on self-directed Roth IRA accounts, and as of 2011 you could contribute up to $5,000 if you are under the age of 50, and $6,000 if you are over the age of 50.
A self-directed Roth IRA account is not right for every circumstance. Carefully consider your unique investment objective, available capital, as well as time frame for investment.