Self-Directed IRA fans, rejoice – there’s a lot more to self-directed investing than just the Self-Directed IRA. And that’s great news for some people with higher incomes who don’t qualify for deductible or Roth IRA contributions. The tax code actually allows investors to leverage the flexibility and diversification potential of self-directed investing with the tax and asset protection benefits of tax-deferred or tax-free accounts.
Here is an overview of the major types of accounts that qualify for Self-Directed IRA treatment.
Traditional IRAs. If you meet the income requirements, you can contribute up to $5,500 per year to a traditional IRA and self-direct some or all of the assets in it. If you’re age 50 or older, you can contribute up to $6,500. You can roll over an unlimited amount from a qualified employer sponsored retirement plan, such as a 401(k) or 403(b) into a traditional IRA tax-free and penalty free, if the transfer is properly structured and executed. Contributions are tax-deductible, although the deduction is reduced for individuals with higher incomes. Income and capital gains tax is generally deferred until you take distributions, at which time it is taxed as ordinary income. Traditional IRAs are subject to required minimum distributions after age 70.
If you earn too much money to qualify for a deduction on contributions, you can still contribute up to $5,500 per year to any combination of IRAs on a non-deductible basis. You still get the benefit of tax deferral until you take the income, so the taxation of a non-deductible IRA would be similar to a deferred annuity.
Roth IRAs. Maximum Roth IRA total contribution limits are the same as those for traditional IRAs, provided you meet the income requirements. That is, you can contribute up to $5,500 to a Roth IRA in a given year, if you qualify. Those age 50 and older can contribute up to $6,500, again subject to income requirements.
Growth in a Roth IRA is tax free, and income attributed to assets that have been in the account for five years or longer is tax-free. Roth IRAs are not subject to required minimum distributions.
SEP IRAs A SEP, or Simplified Employee Pension, is a great solution for some individuals with their own businesses or substantial self-employed income. With a maximum allowable annual contribution of $53,000, or 25 percent of compensation, whichever is less. For man of our clients, this amounts to a substantial sum – much more than the contributions allowable for IRAs or Roth IRAs.
These plans are suitable for those looking for a self-employment retirement benefit, a retirement benefit for an owner-employee of a corporation, or anyone who wants a plan that is easy and inexpensive to create and operate, and where cash flow is uneven or the employer has other reasons for not wanting to lock into a minimum annual funding requirement.
If you have employees, understand that you must contribute equally for all eligible employees. You cannot start a SEP for yourself alone and leave other full-time employees out of the plan.
Contributions to these accounts are tax deductible and assets within them grow tax deferred. SEPs are subject to required minimum distributions. Contributions to a SEP do not count against you for the purposes of your maximum annual contribution to an IRA or Roth IRA.
Solo 401(k) Plans. The solo 401(k) plan is also an excellent option for those who are owner-operators of their own one-person companies, or who have no employees other than a spouse, or who have significant income from self-employment.
- Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit: $18,000 in 2016, or $24,000 in 2016 if age 50 or over; plus
- Employer nonelective contributions up to:
25% of compensation as defined by the plan. Special rules apply for self-employed individuals because of the effect of self-employment taxes on income.
Coverdell ESAs. If you have a Coverdell Education Savings Account (ESA) you can self-direct it. Contributions are not tax deductible, but contributions grow tax deferred and distributions are tax-free provided they are used to pay for a qualified educational purpose. Income limits apply.
Health Savings Account. If you have assets in an HSA, or health savings account, you can also self-direct them. You can only contribute if you are eligible for a high-deductible health plan. But if you have assets sitting unused in an HSA, you can pull them out of underperforming mutual funds and other conventional assets and self-direct them.
Current contribution limits are $3,350 per year, or, for those over age 50, $4,450 per year.
Benefits of Self-Directed IRA
A Self-Directed IRA is an excellent way to gain access to a much wider variety of asset types and classes than would be available under a conventionally managed retirement account. American IRA is a leading national administrator for Self-Directed IRA investors who use all of these types of accounts. So don’t limit your thinking to IRAs or the other kinds of accounts you read most often about in the papers.
For more information, or to schedule a no-obligation consultation and review, call us today at 866-7500-IRA (472).
We look forward to hearing from you.