The rules that govern a Self-Directed IRA are simple, but the Devil, as always, is in the details. Mishaps are few, but we still see people get stung by avoidable mistakes they make with their Self-Directed IRAs, and wind up paying unnecessary legal fees, taxes and penalties as a result. Don’t go it alone with Self-Directed IRAs! Give us a call before making any moves!
Here are some common mistakes even seasoned investors make with their Self-Directed IRA and conventional retirement accounts – problems that working with a qualified advisor would likely have prevented.
1.) Rolling over a 401(k) balance with an outstanding loan. This one is tricky because many people forget about their loan balance when they leave an employer, or they assume that they can repay the loan balance to the new account and avoid taxes and penalties on the loan amount. Not so.
If you roll over a 401(k) to an IRA, and there’s an outstanding loan balance on the 401(k), you will create an immediate distribution, complete with applicable taxes and penalties, both state and federal.
For best results, always pay back the 401(k) loan before liquidating or rolling over the 401(k).
2.) Forgetting to take RMDs. You must begin taking required minimum distributions from your qualified plans and traditional IRAs, including Self-Directed IRAs, not later than April 1st of the year after the year in which you turn age 70½. This is a simple rule, but many people get confused by the awkward formulation of the deadline. Sure, it would be simpler if the year were even, or if the deadline were December 31st. But we don’t make the rules.
People who own Self-Directed IRAs are particularly vulnerable to forgetting to take RMDs simply because they aren’t having their hands held and their noses wiped by a Wall Street investment company. But the deadline and the requirement is the same for both self-directed and conventional IRAs and other retirement accounts. And the penalty for failing to take a required distribution is severe: 50 percent of the amount you were supposed to take.
3.) Contributing too much. If you contribute more than the allowable contribution limit for the year to your IRA, you have until the deadline – usually April 15th after the contribution is made – to correct the problem. Otherwise the IRS will assess a penalty of 6 percent per year on any overages. Be sure to be very cognizant of your earnings for the year, and how they will affect your ability to contribute to your Self-Directed IRA.
4.) Contributing too little. Most people will not go far wrong by maximizing their eligible contributions to tax-advantaged retirement accounts. But many fail to take advantage of ‘catch-up’ contributions they become eligible for when they turn 50, in the case of Self-Directed IRAs. 401(k) plans, SEPs and SIMPLE IRAs also allow for catch-up contributions.
Additionally, many people stop short with an IRA, forgetting that if they have their own business or self-employment income, it’s very easy to set up their own 401(k) or SEP IRA account and contribute significant sums of money to those accounts, generally on top of their IRA contributions.
5.) Making prohibited transactions. While it’s not very common, occasionally Self-Directed IRA owners jeopardize their entire retirement account by engaging in prohibited transactions. Remember that you cannot use your Self-Directed IRA to do business directly with yourself, your spouse, ascendants, descendants or any entities under their control. You also cannot invest your account in life insurance, collectibles, jewelry, gems, certain kinds of gold and silver coins and bullion of insufficient purity and consistency, or alcoholic beverages.
If you have more questions, or to set up an account with American IRA, LLC, call us today at 866-7500-IRA(472), or visit us online at www.americanira.com.
We look forward to serving you.