Self-directed Roth IRA’s provide investors with a great deal of flexibility. While some investment accounts limit what you can invest in, a self-directed Roth IRA allows you to use the funds in your account to investment in a wider variety of instruments than a traditional IRA. In addition to investing in stocks, bonds, CD’s and the like, self-directed Roth IRA’s allow the owner to invest in some commodities and real estate. That, coupled with the amount of time an investor has to make contributions, after age 70 ½ as long as you have earned income, makes this a particularly attractive option for the right investor.
While the primary attraction of opening a self-directed Roth IRA is the ability to diversify what you invest in, there are some other differences that may influence whether or not this is the retirement account for you.
One of the distinctions to consider is the technicality of transferring accounts. If you wish to convert you traditional IRA into a self-directed Roth IRA, you may run into transfer difficulties. Most advisors recommend what is called a trustee-to-trustee transfer, the safest method when converting your account. Approaching the transfer in this way constitutes a rollover.
However, some IRA custodians do not support a trustee-to-trustee transfer. In this case you need to ask for a check equal to the amount of your account. In most cases you then have 60 days to invest the funds into another qualifying retirement account, such as a self-direct Roth IRA. But if you have to take this approach, be careful. If you miss the 60 day deadline, you may be subject to taxes or penalties on that money.
Additionally you can expect to have higher fees to open and maintain a self-directed Roth IRA. The rules for running a self-directed Roth IRA vary significantly from maintaining a traditional IRA. In exchange for the freedom of being able to invest in a variety of more exotic investment options, you also agree to different regulations, increased tax implications and other concerns that a traditional Roth IRA does not have.
Self-directed Roth IRA’s can be a powerful and flexible alternative to traditional IRA’s. But, as always, it is important to check with your investment advisor or accountant prior to making any changes to your retirement.