The Self-Directed Roth IRA may be one of the most powerful wealth-building tools in existence—and yet many people do not quite understand how it works, what limitations it contains, or how it might best be utilized. One particular area of confusion: income thresholds. These income thresholds can play a major part in how you use a Self-Directed Roth IRA—or whether you even use them at all—which is why it is so important for investors to understand what they are. That is why we have put together this brief but comprehensive guide to income thresholds of which you need to be aware:
Self-Directed Roth IRA Limitations Based on Income
What is an “income threshold” in this context? The simplest explanation is that the IRS sets limits in the types of individuals that are qualified to invest in a Roth IRA—which includes the Self-Directed Roth IRA. Those limitations are clear when it comes to the income you can receive while also investing in a Self-Directed Roth IRA.
Want to make sense of these Self-Directed Roth IRA income thresholds? Here is what you will need to know about these limitations and qualifications:
- To invest in a Self-Directed Roth IRA, you will have to earn an income in the year in which you make a contribution. Disability retirement benefits may also count as income. That establishes, essentially, a minimum income threshold: if you earn zero dollars, you cannot contribute to a Self-Directed Roth IRA.
- There are also upward limits on income for Self-Directed Roth IRA For 2018, those limits are $135,000 for single filers and $199,000 for married couples filing jointly. (It is worth noting that both of those figures increased over the limits in 2017, which suggests a little more flexibility for higher-income earners).
- Contribution limits change based on age. For anyone 50 or older, it is possible to make $6,500 in contributions to a Self-Directed Roth IRA—a so-called “catch-up” period that allows aspiring retirees to make up for lost time with higher limits. For those younger than this, the contribution limit remains at $5,500 for 2018.
These limits are critical to understanding whether or not an individual can make a valid contribution to a Self-Directed Roth IRA. They should not only assist in the planning of retirement contributions but can also highlight any additional retirement account needs if you are able to go over these contribution limits.
Making Use of the Self-Directed Roth IRA Limits
How does an investor make “use” of a limit to something like a Self-Directed Roth IRA? By understanding them. For example—a single person earning less than $135,000 per year can make up to $5,500 in Self-Directed Roth IRA contributions. But if this same individual has more retirement money to set aside after that, knowing this in advance can lead them to opening an additional account, such as a Self-Directed Solo 401(K). These accounts come with high contribution limits and would give the investor plenty of flexibility to continue to put money aside for retirement with tax protections.
To properly strategize, it helps to know what you should expect in the calendar year. Your tax filing status and your current year’s income will both play heavily into whether or not you are capable of investing using a Self-Directed Roth IRA.
The Benefits of the Self-Directed Roth IRA
Why bother with a guide like this? Because a Self-Directed Roth IRA, in addition to allowing you to invest in a diverse list of assets from real estate to precious metals, allows you to use taxed earnings to create tax-free investments. By paying your taxes up front, you can create a truly tremendous amount of wealth as you utilize the power of compounding interest over time. For that reason, many people first make the maximum contributions to their Self-Directed Roth IRA when going about their yearly retirement strategies.
For more information on Self-Directed IRAs or Self-Directed Roth IRAs, call us today at 866-7500-IRA (472) or visit us at www.AmericanIRA.com.