Recently, the IRS allowed an extra month for tax filers to get their taxes done in 2021, extending the typical deadline from April to May in 2021. What kinds of influence does this have on the Self-Directed IRA world? According to a recent post at Forbes, it may indeed have an impact on your bottom line. With the IRS extending the tax filing deadline to May 17 of 2021, there is the potential for Americans to have an extra month of putting money toward IRA contribution. And this, in turn, could mean potentially saving money on taxes in the short-term.
How does it all work? Let us take a closer look.
Reducing Taxable Income with a Self-Directed IRA
When you contribute to a qualifying account, such as a Traditional IRA, it is possible to money aside for retirement with before-tax dollars. That means that the contributions you make to a Traditional IRA are deducted from your taxable income for the year. In turn, the money grows in the account tax-free, until you take it out, at which point it will be taxed as income. This means that if you contribute more during the year—up to the contribution limit—you can save money on your taxes because you have reduced your taxable income.
This is not a get-rich-quick scheme. It is a real tax policy that lets you reduce your tax burden through tax-advantaged accounts like Self-Directed Traditional IRAs. However, it is important to know that there are specific rules about how much money you can put away—and how you can do it.
For example, the post at Forbes notes that “Anyone not covered by a workplace defined contribution plan, like a 401(k), can deduct all of their traditional IRA contributions from their taxes.” But the post also notes that the situation is more complicated if you or a spouse are covered by a 401(k) plan through your place of employment.
That is why it can be difficult for individual investors to look up a specific type of account and make decisions based on universal rules. For many investors, it is a matter of finding a good accountant and making appropriate decisions.
What Does a Self-Directed IRA Bring to the Table?
A Self-Directed IRA refers to the act of directing your own account. In essence, you are in charge of the investments you can make. And with a Self-Directed IRA, that opens up all sorts of possibilities, from investing in precious metals to investing in real estate. For example, an investor can hold raw land within a Self-Directed IRA. Or they might hold a rental property, such as a single-family rental home.
This does not change the baseline rules of the retirement account, however. The Self-Directed IRA is not a unique type of account, but rather an approach for managing the account. With a Self-Directed IRA, you would have the responsibility of making your own financial decisions from a wide number of potential possibilities.
It will still be up to the investor to choose which type of account to use. For example, it is possible to keep a Self-Directed Roth IRA, just as it is to keep a Self-Directed Traditional IRA. Some investors even use Self-Directed Solo 401(k) plans, especially the self-employed.
It is important for investors to understand the rules so that they can make the best decisions for themselves. And with another unique tax situation in 2021 when filing for 2020, it shows how important it is for investors to understand how these accounts work and what it means for the individual investor to take on a Self-Directed IRA.