Why You Should Take Advantage of a Self Directed Roth IRA

Few people know much about a self directed IRA much less a self directed Roth IRA. So why would you want to take advantage of one?

First, let’s come to a basic understanding of what the Roth IRA is. Senator Roth of Delaware created the Roth in 1997. It is a tax-free savings account. When you contribute, you do so with after-tax dollars. None of your funds in your retirement account will be subject to tax ever again. This means that all of your compounded interest is yours to keep.

You will not have to pay any tax on withdrawals if you have had the account open for over five years and you are above the age of 59½. In addition, the account owner is not required to take a distribution at the age of 70½. If you want to continue contributing, you may.

Are You Eligible for a Roth IRA?

As long as you have earned income that is taxable and your MAGI (modified adjusted gross income) is less than:

• $176,000 if married filing jointly in 2009 or $177,000 in 2010• $120,000 for those with single status, including married filing separately if you did not live with your spouse anytime in the past year or head of household• $100,000 if you are married filing separately and have lived with your spouse anytime in the past year

Bear in mind that the IRA contributions change from year to year according to age and other deciding factors in legislation. Also, always check with the IRS for IRS contribution levels.  The current Roth contribution limits are $5000 for 2009 and $6000 for 2010 if you are over the age of 50.

No Income Limit for Roth IRA Conversion

As of January 1, 2010, the previous income limit ($100,000) for converting a Traditional IRA to a Roth IRA was lifted. Income limits have prevented many people from taking advantage of the wealth-creation power of a Roth IRA or a self directed Roth IRA.

How Do Your Investment Options Differ with a Self Directed Roth IRA?

Well, first you have to follow the Roth IRA rules and regulations found in the IRS Publication 590. After that, just keep away from any prohibited transactions and investments.

Prohibited transactions include using your Roth IRA improperly by you, your beneficiary, or any person otherwise disqualified for purposes such as:

• Securing a loan• Selling property to the account• Unreasonable fees for managing the account• Borrowing money from the account• Buying property that is intended for personal use rather than investment• Investments in collectibles such as most coins, alcoholic beverages, most metals, stamps, antiques, gems, artwork, rugs, and other tangible property tax.

Other than that, you will largely be guided by your knowledge in investments, your passive custodian, and investments that don’t break the prohibited transactions list.

The Effects of Reducing Your Tax Liability

Let’s say that you contributed $4000 to a Roth IRA and $4000 to a conventional IRA over the course of 30 years with 8% compound interest. At the end of that time, your IRA would be worth $449,113 with a Roth or $286,752 with a conventional IRA after a 31% tax rate upon withdrawal.

The main benefit that a self directed Roth IRA has is the tax-free profits and withdrawals. This could have a dramatic effect on the bottom line.