Why bother with a Self Directed ROTH?

Question

I'm trying to wrap my mind around this option. Here is the scenario: I have a Roth (and it's an absolute DOG by the way) and I want to move it into REI. I've been reading other post asking about moving 401k funds to self-directed IRAs and moving roths to s-d roths. All that makes sense. But here is what I'm wondering- Compared to not having roth, what is the benefit of a roth IF I want to take income every year? My understanding is, I would be taxed on the (withdrawn) earnings whether in a roth or out of a roth just the same. And I'm familiar with 1035 exchanges so that could be used in a similar fashion/objective of delaying earnings. Thanks in advance BP experts (and experienced).

Brian Eastman · Answer

@Jesse Turner

I Roth IRA is not "today money", but can be a terrific wealth building tool.

Because all growth in a Roth IRA is tax free, you can use such a tax-sheltered vehicle to create a whole lot of tomorrow money for your retirement.

If you do not have a Roth IRA, there can be some reasons to stick with keeping your investment capital in non-qualified funds so you can generate today income.  If you already have a Roth IRA, and have success in a particular asset class such as real estate, then moving the Roth to a self-directed Roth IRA capable of being invested in real estate can make a lot of sense.  You can turn that DOG account into a real performer.

George Blower · Answer

@Jesse Turner

Essentially, if you don't need income now, the Roth IRA is a good way to grow your retirement funds tax free but you still have the option of distributing the basis anytime even if you have not yet reached age 59 /12 and have not had the Roth IRA for 5 years.

Jesse Turner · Answer

@Brian Eastman, @Carl Fischer and @George Blower, thank you for the sound advice. There are some fine details here.

I just updated my question above.

Roth's are no doubt a nice way to grow money tax free, among the other beneficial nuances of this investment vehicle. No question. But for me and my scenario, what I'm mining from these responses is that it isn't the best use for a small fry like me; to actively receive income from properties.

Scratching my head, they only thing that I could figure as a benefit to a ROTH (for my situation), is that over the years as my portfolio grows and income stream grows, I would be able to choose how much to receive in income. Without a ROTH, all income is taxed. With a ROTH, only the money/gains are considered taxable.

Thanks again gentleman. This BP community is impressive (and that is due to the quality of its members).

George Blower · Answer

@Jesse Turner

The benefit of the Roth IRA is that all the gains grow tax free.

The tax treatment of Roth IRA distributions depends on whether the distribution is considered qualified or nonqualified. If a Roth IRA distribution is qualified, all distributed assets are tax-free.

If a distribution is nonqualified, some of the assets (generally the earnings) may be subject to regular income tax and a 10 percent early distribution penalty tax unless the Roth IRA owner qualifies for a penalty tax exception.

Tax laws require Roth IRA assets to be distributed in the following order: regular contributions, conversionsand retirement plan rollovers, and earnings (IRC Sec. 408A(d)(4) and Treas. Reg. 1.408A-6). Newcontributions (regular contributions, conversions, and retirement plan rollovers) go into Roth IRAs on anafter-tax basis—the Roth IRA owner does not take income tax deductions for these contributions.

See the following for more.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

Carl Fischer · Answer

@Jesse Turner

TA Roth IRA is tax free income for life is the simple answer to your question. @Brian Eastman made some great points that most people follow.

There are several strategies to take money out of a Roth with out penalties and /or taxes for today’s use -dependent on your age and other personal factors. Checkout 72t  distributions especially SEPP ( substantially equal periodic payments) and see if that is an option for you. If you need other strategies PM me and we can discuss some potential strategies other clients use.

Why bother with a Self Directed ROTH?

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