It can get confusing for the average retirement saver to know what is allowed and what is against the rules when it comes to contributing to a Self-Directed IRA. Of course, there are two types of IRAs—Roth and Traditional—and there are contribution limits and age limits to which you must adhere when using them. The rules are not universal, so here is a rundown of what you need to know before putting your retirement savings in either of them.
Are there minimum age limits for contributing to a Self-Directed IRA?
The good news is that neither Self-Directed Roth IRA nor Traditional IRAs have a minimum age requirement for contributions. However, to be eligible to make a Self-Directed IRA contribution, there has to be earned income—taxable compensation from a job—that equals or exceeds the amount of your contribution.
Typically, minors cannot use money earned from household chores as earned income. They will need to show proof that they are on a company’s payroll for it to count as earned income.
Many parents have their teenagers open a Self-Directed Roth IRA after they get their first part-time job. It is a smart thing to do for many reasons, not the least of which is the tax-free growth of their money for what could be fifty years or more. The small amounts they put away today could turn into hundreds of thousands for retirement.
One caveat that goes with this idea is that the children will have access to the account funds once they turn 18 years of age. Once again, it might be wise to enlist the help of a financial professional to find out if there are options for you to retain some control, so the money cannot be frittered away.
There are also contribution limits to consider. Keep in mind that no matter how much they earn, your kids can only contribute the maximum amount each year, which is $5,500 for 2018, or up to the amount they earned if it was less than $5,500. In other words, if they earned $2,000 at their summer job, they cannot contribute more than that to their Self-Directed IRA.
What about maximum age limits?
While there are no maximum age limits for contributions to a Self-Directed Roth IRA, once you have reached the year in which you turn age 70 ½, you may no longer make a Traditional IRA contribution. As long as you have earned income, however, you can keep adding money to your Self-Directed Roth IRA. Of course, you must stay within the contribution limits and have taxable income equal to or greater than the amount you contributed. And once you are over 50, your contribution limit increases from $5,500 to $6,500.
Also, keep in mind that there are no maximum age limits on rollovers or transfers with your Traditional IRA. Even if you are over 70 ½, you can consolidate your accounts by bringing in money from another trustee.
For example, you have $50,000 in your Self-Directed IRA at Investment Company A and want to move that money to Investment Company B, where you have another $50,000. You can do a direct transfer from A to B by simply filling out the necessary paperwork, or you can do a rollover, in which you would withdraw the money from A and re-deposit into your Self-Directed IRA account at B within 60 days. A word of caution on the rollover: If you do not make that deposit within the 60-day limit, the entire $50,000 could become taxable!
American IRA, LLC does not provide individualized tax advice. The information in this article is for general informational purposes only and should not be construed to be tax advice in your case. Engage the services of a qualified tax professional, such as a CPA or enrolled agent, before taking action.