Self-Directed IRA Success Story
Larry (66) and Ethel (62) were both successful real estate investors for years. But did not realize they could leverage their real estate experience and expertise using retirement funds until about 15 years ago, when they discovered investing with Self-Directed IRAs. They had significant assets in a Roth IRA account and were delighted to learn they could roll it over and enjoy tax-free rent income from a portfolio of real estate investments. Over the last 15 years, their real estate profits have exceeded anything they could have expected to earn had they invested in diverse but conventional IRA assets like mutual funds, stocks and funds. They have not needed to tap the income yet, but when they do, a sizeable fraction of their retirement income will be tax free, largely protected from creditors, and have had the benefit of years of tax-free appreciation in the meantime.
Good news: The Internal Revenue Service has increased the amount of allowable contributions to Self-Directed IRAs, Roth’s and other retirement accounts in tax year 2019.
The new contribution limits are as follows:
Traditional IRAs, including Self-Directed IRAs: Increased from $5,500 to $6,000 per year.
Roth IRAs, including Self-Directed Roth IRAs: Increased from $5,500 to $6,000.
The annual catch-up contribution allowance for those ages 50 and older is unchanged, however, remaining at $1,000 for traditional and Roth IRAs, including their self-directed varieties. Unlike the baseline contribution limits for IRAs and Roth IRAs, the catch-up contributions are not subject to an automated cost-of-living adjustment. Any increases in the catch-up limits have to be specifically authorized by Congress.
This news is welcome since the contribution allowances for Self-Directed IRAs have not been increased since 2013.
Likewise, the allowable income limits for deductible IRA contributions and Roth IRA contributions have each increased as well:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $64,000 to $74,000, up from $63,000 to $73,000.
- For married couples filing jointly, where the spouse making the Self-Directed IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
- For a Self-Directed IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000, up from $189,000 and $199,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household for tax year 2019, up from $120,000 to $135,000. For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
In all cases, Self-Directed Roth IRA and Self-Directed IRA thresholds and limits are the same as their conventional IRA counterparts.
Contribution limits for employees who participate in a 401(K), 403(b) and most 457 plans, as well as the federal government’s Thrift Savings Plan, are increased from $18,500 to $19,000.
A full list of the IRS’s contribution limit and income threshold allowances is available here.
Increase your contribution limits.
For now, there is nothing you need to do differently. Most planners would recommend maximizing any 401(K) match, eliminating any high-interest debt, building an emergency fund of three to six months’ worth of expenses, and then maximizing available retirement contributions for the current year.
Remember that for IRAs, self-directed or otherwise, Roths and Self-Directed SEP IRAs, you have until April 15th of 2019 to make your contributions for the year – but any contributions to 401(K)s have to be in by the end of the calendar year.
Beginning in January, though, you are clear to increase your monthly Self-Directed IRA contributions to $500 per month, not including the catch-up allowance for those over age 50.