Although you work hard to make sure you put money aside for retirement, you may find that your strategy does not always fit with your tactics. For example, you might have the goal of maximizing your tax deductions, but if you use a Self-Directed Roth IRA, you may not be getting as many deductions as you can.
To make sure that you are optimizing your retirement plan—or even just to familiarize yourself with what you can do before you start a Self-Directed IRA plan—make sure you review the information below:
Know What Your Self-Directed Priorities Are
It starts with strategy. What do you want your Self-Directed IRA to do for you? You may find that your account type is already serving you in the way you are seeking—you just did not know it.
For example, consider the Roth IRA. If your priority is to sacrifice your current income for better returns down the line, holding money within a Roth IRA might be for you. It uses post-tax dollars for its investments, which means that you pay taxes on Roth IRA investments upfront, using your taxable income.
For others, the priority is to decrease the tax burden now while allowing the money within a retirement account to grow tax-free. This can be accomplished with a Traditional IRA or even an arrangement like a Self-Directed Solo 401(k).
If, however, you feel that your current retirement strategy is out of whack with your priorities, it may be time to switch accounts. Fortunately, there are ways you can move money from one type of account to another with a minimal tax hit.
Funding Your Self-Directed IRA
One of the first steps in getting the right account set up is to know how you plan on funding it. There are typically three ways of doing it:
- Rollover: An IRA rollover occurs when you transfer funds from an existing retirement account into a new account type. There are a few different ways of doing this, including a direct IRA-to-IRA transfer. In this kind of transaction, you would keep the tax-protected status of the money intact in terms of not having to pay taxes on it like it were income. An indirect rollover may see the funds ending up in your hands temporarily, but if you do not then put those funds in the new IRA in two months’ time, the IRS will treat this as ordinary income. That’s why it’s important to have a game plan in advance of your Self-Directed IRA.
- Transfer: Similar plans can have a trustee-to-trustee transfer in certain circumstances; however, this is not always typical, so you will want to make sure that you qualify for this type of funding before you get started. Make sure to review a typical trustee-to-trustee transfer form to familiarize yourself with the process.
- Direct funding: In some cases, you may simply open a new retirement account and begin funding it. This is the simplest way to alter your retirement strategy. You do not have to give up a Roth IRA, for example, when you have a 401(k). You can keep both. But you should note that in some cases, the amount you contribute to retirement accounts of the same type will count towards the maximum contribution allowable by the IRS.
With this information, you should be able to correct your course and work towards a retirement strategy that more aligns with your values. It would not hurt to talk to an investment professional about your options, either.