When people consider their retirement investment strategy, many of the go-getters who choose a more independent route to investing get excited about the prospect of investing a lot of money in a hurry. After all, someone who is opening a Self-Directed IRA, for example, is interested in retirement. And that excitement could translate to an aggressive approach to putting aside money in that retirement account.
But then they run into the problem all retirement investors run into. Contribution limits. Simply put, a Self-Directed IRA—or any IRA, for that matter—is going to have an upper ceiling for how much money you can put away for retirement. Let us delve deeper into this topic to figure out exactly what that means for Self-Directed IRA investors.
Why Contribution Limits?
Let us look at it from a broad perspective first. Self-Directed IRA investors have to know that accounts such as retirement investing accounts were created to incentivize retirement investing. By creating a tax-favored vehicle under which an investor could place money, the U.S. government wanted to incentivize more investing without making it possible to put aside all investments into a retirement account.
Enter contribution limits. As Forbes recently noted, the contribution limits for contributing to IRAs (such as a Traditional IRA and a Roth IRA) is $6,000 in 2021. But this is not the only type of investment vehicle available for Self-Directed IRA investors. An investor could theoretically open a Self-Directed Solo 401(k), for example, which includes much higher contribution limits. The same is true for a Self-Directed SEP-IRA.
However, it is worth noting that these specific investments do have their individual quirks. For example, a SEP-IRA is available for certain types of investors with self-employment income. This is an account that lets investors put aside a larger portion of their money, if need be. However, it is up to everyone to understand their specific limits, particularly in regard to the accounts they may already have, such as through an existing employer.
Are Contribution Limits a Problem?
If you have plans on investing the most amount of money possible into retirement, there is certainly a chance you could hit your upper limit for these accounts, at which point you will have to use taxable accounts for investing. However, it is worth noting that with Self-Directed IRAs—and with any retirement accounts—there may be ways to expand your capacity to invest:
- Catch-up contributions. One of the popular features of a Self-Directed IRA (and many retirement accounts) is the ability to put aside catch-up contributions if you are 50 and older. For example, if you have a Traditional IRA, you can currently contribute $7,000 into the IRA in 2021 if you have reached the age of 50 or older. This often favors people who tend to expand their income as they progress in their careers.
- Using different types of accounts. Remember: investors are not locked into any one type of account if they do not want to be. There are options such as conversions and rollovers, through which investors can switch their strategies. You can find more information about the available sources of funding by visiting our Getting Started page.
Contribution limits are indeed a reality of retirement investing. However, contribution limits have nothing to do with what you do inside the retirement account. With a Self-Directed IRA, you will have more freedom to explore the potential for aggressive returns. The caveat? You are the one calling the shots, so you are the one responsible for the decisions.