This piece is for those who are interested in starting a new Self-Directed IRA account but who aren’t yet sure how to fund it. It’s important to know a few things about how Self-Directed IRA and other related retirement accounts work.
Funding Self-Directed IRA accounts is not complicated, but it’s important to execute them right in order to avoid future headaches and possible unwanted tax consequences.
There are three ways to fund a Self-Directed IRA:
We’ll deal with each one in turn.
A contribution is a direct movement of fund from a non-taxed advantaged account to a retirement account. In the case of IRAs and Roth IRAs, these are transfers of personal assets. Contributions to traditional IRAs allow you to take an income tax deduction in the current year as long as you make the contribution by April 15th (normally) of the following year, and you meet certain income requirements.
If you make over a certain amount, your allowable deduction may be reduced or eliminated. But you can still make contributions on a non-deductible basis, no matter how high your income is.
Roth IRAs do not allow for current tax year reductions, but growth is tax-free, provided you keep the money in your Roth IRA for at least five years.
Again, You must meet certain income requirements for the Roth IRA.
Under current law, total contributions to all traditional or Roth IRAs are limited to $5,500 per year, with an additional $1,000 ‘catch-up’ contribution allowed for those age 50 and older.
A transfer is simply a movement of funds from one custodian to another, within like accounts. For example, if you have a traditional IRA at a conventional investment company, such as Fidelity, and you decide you want to open a self-directed retirement account with American IRA, you would simply transfer the funds from your Fidelity account to American IRA, using our transfer form.
In most cases, we recommend doing a trustee-to-trustee transfer of the funds. This simply means you authorize us to forward your request to the existing custodian and have us receive the funds directly from them. This ensures that there will be no negative tax consequences and prevents botched transfers.
The other alternative is to have your existing custodian transfer money to you – either via wire or a paper check – and then have you wire or mail the funds in to us. If you go this route, you must complete the transfer to us within 60 days, or the IRS will deem you to have taken a withdrawal. Taxes and early withdrawal benefits may apply, though in some cases your tax professional can write a letter to the IRS explaining why you were unable to complete the transfer in 60 days.
Otherwise, properly executed transfers are not taxable events. As long as the money moves from one account to another like account, there is no taxable distribution, no capital gains and no income tax due.
Unlike contributions, there are normally no limits on the amount of funds you can transfer during a single year, and there are no income requirements you have to meet to qualify.
A rollover is a movement from one type of account to another. It can happen between to accounts with the same trustee, or it can involve a movement of funds between two trustees. The receiving account is normally an IRA.
Examples of rollovers include:
- 401(k) to IRA
- SIMPLE IRA to IRA
- 403(b) to IRA
Getting started with a Self-Directed IRA is very easy, and the contribution, transfer or rollover process is very simple. Simply download the appropriate form from American IRA, LLC, fill it out, sign it and mail it back, or FAX it to 828-257-4948.
As always, representatives from American IRA, LLC are happy to answer your questions about the process and about self-directed retirement accounts in general. We are one of the leading experts nationwide on self-directed retirement accounts, and work in tandem with your existing team of financial advisors to ensure your transactions are executed accurately and on time.
For more information, visit us at www.americanira.com, or call us today at 866-7500-IRA(472).
We look forward to working with you.