Did you notice? The IRS loosened some of its requirements that restrict the amounts individuals can contribute to certain retirement plans. This may mean more people can qualify to participate in Self-Directed IRAs, or perhaps contribute more money on a tax-advantaged basis than they thought.
Traditional Self-Directed IRAs
Last year, in 2013, the tax deduction phase-outs for those who had access to a workplace retirement plan began with modified adjusted gross incomes starting at $59,000, and phased out completely at $69,000. In 2014, though, the phaseouts begin with a MAGI of $60,000 and phase out completely at $70,000.
For those who are married and who have a workplace retirement plan, the phaseouts also clime by $1,000, from $95,000 to $96,000 at the low end and terminate at $116,000, up from$115,000 in 2013.
For those who don’t have a workplace retirement plan but whose spouse has one, the available deduction begins phasing out with a combined income of $181,000 – up from $178,000 in 2013 – and ends with a combined income of $191,000. That is also up from $188,000 in 2013.
Does that help self-directed retirement account owners? It helps everyone with incomes within that range.
Self-Directed Roth IRAs
For those who prefer Roth IRAs, you can enjoy the benefits of Self-Directed Roth IRAs at higher income levels than you could in 2013. Specifically, the AGI threshold for Roth IRAs for single filers begins at $114,000. From that point, the normal $5,500 allowable contribution to a Self-Directed Roth IRA or a conventional Roth IRA declines gradually as income increases, until the AGI reaches $129,000. The same goes for heads of households.
For married couples, the phaseouts begin at an income of $181,000 and go up to $191,000 before the allowable contribution to a Self-Directed Roth IRA or a conventional Roth IRA falls to zero. In each case, the thresholds have increased over 2013 levels by 3,000.
These increases didn’t exactly make headlines this year. That’s because the overall contribution limits for both traditional and Roth IRS remained unchanged, at $5,500, for 2014. Those age 50 and older also qualify for “catch-up contributions of $1,000, for a total of $6,500 to both kinds of accounts.
Will you benefit from the revised income thresholds? In many cases, it could be difficult to tell. If you have deductions or you do not have a set income every month, it could be hard to tell what your eventual adjusted gross income will be until you actually file your tax return.
So what if you overcontribute? In that case, the IRS may assess a 6 percent penalty on the amount overcontributed. But the IRS allows you to correct the overcontribution. You just have to make any corrections from the same IRA you overcontributed to. If you didn’t make any contributions to IRA X this year, you cannot correct the overage by withdrawing from that IRA!
Second, you must correct the overcontribution prior to the tax deadline. Roth IRA excess contributions removed post-deadline get treated like any other distribution. The amount will be tax-free and the 10 percent early distribution penalty generally does not apply. The 6 percent excise tax applies every year for as long as the excess contribution remains in the IRA.
As a third party administrator for Self-Directed IRAs and other retirement accounts, we will help you track and avoid excess contributions. But Self-Directed IRA owners have something else to think of: Liquidity. If you frequently purchase non-liquid assets for your Self-Directed IRA and you overcontribute, you will have a harder time correcting the overcontribution.
For this reason, it may make sense to keep contributions in assets that are easily liquidated until you are certain of your income in 2014.
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