Adam Bergman

Founder, Tax Lawyer, Author

When clients ask me which retirement account does the most for their kids and grandchildren, my answer is almost always a Roth IRA. Money in a Roth grows tax free, comes out tax free once you meet the rules, and can pass to your heirs tax free too. A Self-Directed Roth IRA adds investment choice. You can hold real estate, private businesses, notes, precious metals, and digital assets, the kinds of investments many families have used to build wealth outside the stock market. Here’s how the account works, what you can do with it, and how to set it up so the wealth reaches the next generation.

What Is a Self-Directed Roth IRA?

A Self-Directed Roth IRA follows the same tax rules as any Roth IRA. The difference is what you can hold. A Roth IRA at a typical brokerage limits you to its menu of stocks, bonds, ETFs, and mutual funds. A Self-Directed Roth IRA, held with a custodian that allows alternative assets, lets you invest in almost anything the tax code permits.

You make the investment decisions, so you’re also responsible for due diligence. Self-Directed IRA custodians, including IRA Financial, don’t give investment advice. Before you buy anything, you need to understand the asset, its risks, and how it’s valued.

The Tax Benefits of a Roth IRA

You fund a Roth IRA with after-tax dollars, so contributions aren’t deductible. In exchange, the money grows without tax. When you take a qualified distribution, both contributions and earnings come out tax free.

A distribution is qualified when the Roth has been open at least five years and you’re 59½ or older, disabled, or using up to $10,000 for a first home purchase. Distributions after death are also qualified once the five-year period is met. You can withdraw your contributions at any time without tax or penalty. Earnings taken out before a distribution is qualified may be taxed and hit with a 10% penalty.

The Roth also has no required minimum distributions during the original owner’s lifetime. A Traditional IRA forces withdrawals starting in your 70s. A Roth can stay invested as long as you live, which is a big reason it works well for building wealth for heirs.

What You Can Invest In

A Self-Directed Roth IRA can hold a wide range of assets, including:

• Residential and commercial real estate
• Private equity and private companies
• Real estate funds and partnerships
• Private loans and notes
• Tax liens
• Precious metals that meet IRS fineness standards
• Cryptocurrency and other digital assets

The tax code bars only a few investments in an IRA: life insurance and most collectibles, such as art, antiques, gems, and most coins. Certain gold, silver, platinum, and palladium bullion and coins are allowed. Every investment also has to follow the prohibited transaction rules. You can’t buy from, sell to, lend to, or provide services to yourself or other disqualified persons, such as your spouse, parents, and children.

Real Estate in a Self-Directed Roth IRA

Real estate is one of the most popular investments among IRA Financial clients. In a Roth, rental income and gains on sale build up tax free. Outside an IRA, the same property would generate taxable rental income each year and capital gains tax when you sell.

There are tradeoffs. You can’t use depreciation to offset other income, and all expenses have to be paid from the IRA. The IRA can use leverage, but only through a non-recourse loan, and the share of income tied to the debt is subject to unrelated debt-financed income (UDFI) tax. You and your family also can’t use the property or work on it yourself.

Other Alternative Assets

Private equity, private credit, precious metals, and digital assets can all go in a Self-Directed Roth IRA. A Roth can be an especially good home for higher-growth assets, because all of the upside can come out tax free. These assets also bring their own risks. Private investments are illiquid and hard to value. Crypto is volatile. Metals don’t produce income. Match each asset to your time horizon and how much risk you can tolerate.

2026 Contribution Limits and Rules

• Contribution limit: $7,500, or $8,600 if you’re 50 or older. This limit is shared across all of your Traditional and Roth IRAs.
• Income limits for single filers: You can make a full contribution with modified adjusted gross income below $153,000. The amount you can contribute phases out between $153,000 and $168,000.
• Income limits for married couples filing jointly: You can make a full contribution below $242,000, with a phase-out between $242,000 and $252,000.
• Deadline: You have until the tax filing deadline to contribute for a given year. 2026 contributions are due by April 15, 2027.
• Excess contributions: Contributing more than you’re allowed triggers a 6% excise tax for each year the excess stays in the account. You can avoid it by withdrawing the excess and any earnings on it by your tax filing deadline, including extensions.

If your income is above the limits, a Backdoor Roth IRA may still get you there. See the FAQ below.

How Compounding Builds Wealth in a Roth

Compounding is what makes tax-free growth so valuable. Say you contribute $7,500 a year for 30 years and earn 7% a year. You’d end up with roughly $708,000, of which only $225,000 came from contributions. In a Roth, all of that growth can come out tax free. This is a hypothetical example, not a projection, but the math shows why starting early matters so much. Every year of growth you add happens at the end, where the balance is largest.

Over generations the effect is bigger. Because there are no lifetime RMDs, the account can compound for your whole life and then for up to 10 more years in your heirs’ hands.

How a Roth IRA Passes to Your Heirs

These are the rules that make the Roth a generational wealth tool:

• Spouses can treat an inherited Roth IRA as their own. They also take no RMDs and can keep the account growing.
• Most other beneficiaries, such as adult children and grandchildren, must empty the account by the end of the 10th year after your death. For an inherited Roth, they don’t have to take annual distributions along the way, so they can let the account grow for nearly the full decade and withdraw at the end.
• Certain eligible beneficiaries, including minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than you, can stretch distributions over a longer period. Minor children switch to the 10-year rule when they turn 21.
• Tax treatment: Inherited Roth distributions are generally income tax free as long as the account met the five-year rule. Leaving your heirs a Traditional IRA instead could push them into higher tax brackets during their peak earning years.
• Estate tax: A Roth IRA still counts toward your taxable estate. Most families fall below the federal exemption, but large estates should plan for it.

Strategies to Get the Most From a Self-Directed Roth IRA

1. Name your beneficiaries and keep them current. The beneficiary form controls who inherits the IRA, not your will. Name contingent beneficiaries and review the form after marriages, divorces, births, and deaths.
2. Consider Roth conversions. Converting Traditional IRA funds to a Roth means paying tax now so the money and its future growth come out tax free later. If you pay the tax with non-IRA funds, you also shrink your taxable estate. Converting an alternative asset requires a fair market value, often from a qualified appraisal, and the value has to be supportable.
3. Put your highest-growth assets in the Roth. Since Roth growth is never taxed, it often makes sense to hold the assets you expect to grow most in a Roth rather than a Traditional IRA.
4. Watch the rules that can sink the account. A prohibited transaction can disqualify the whole IRA. Handle rollovers and transfers carefully, and use a direct trustee-to-trustee transfer when you can.
5. Prepare your heirs. An inherited Self-Directed IRA can hold real estate or private investments your heirs have never managed. Make sure they know what the account owns, who your custodian is, and the 10-year deadline they’ll face.

Final Thoughts

The Roth IRA is one of the few places in the tax code where money can grow for decades and pass to the next generation without income tax. Self-direction lets you put that account to work in the assets you know best, whether that’s real estate, private businesses, or something else. The families who get the most out of it start early, follow the prohibited transaction rules, and plan for the handoff to their heirs.

Frequently Asked Questions

What is a Self-Directed Roth IRA?
A Self-Directed Roth IRA is a Roth IRA held with a custodian that allows alternative investments such as real estate, private equity, private loans, precious metals, and digital assets. It follows the same tax rules as any Roth IRA.

What are the tax benefits of a Roth IRA?
Investments grow tax free, and qualified distributions, including earnings, are tax free. The original owner also isn’t required to take minimum distributions, and heirs generally receive distributions tax free.

What types of investments can I hold in a Self-Directed Roth IRA?
You can hold real estate, private equity, private loans, tax liens, approved precious metals, and digital assets. You can’t hold life insurance or most collectibles, and you can’t transact with disqualified persons.

What are the Roth IRA contribution limits for 2026?
The limit is $7,500 for people under 50 and $8,600 for people 50 and older. The amount you can contribute phases out between $153,000 and $168,000 of modified AGI for single filers and between $242,000 and $252,000 for married couples filing jointly.

What is a Backdoor Roth IRA?
If your income is too high to contribute to a Roth IRA directly, you can make a nondeductible contribution to a Traditional IRA and then convert it to a Roth. If you have other pre-tax IRA balances, including SEP or SIMPLE IRAs, the pro-rata rule makes part of the conversion taxable. Talk to a tax advisor before you start.

What happens to my Self-Directed Roth IRA when I die?
It passes to the beneficiaries on your beneficiary form. A spouse can treat it as their own. Most other beneficiaries must empty the account within 10 years, and the distributions are generally tax free.

This content is for educational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified professional before making any investment decisions.