You might know all about Traditional and Roth IRAs. You may even know all about self-directed Traditional and Roth IRAs. This means that you know how they function, and that self-directing your own accounts means you can have access to a wide variety of alternative retirement asset classes. But when it comes to understanding contribution limits, do you really have a handle on things? To explore that, we’ll take a deeper look today at the contribution limits if you have both Self-Directed Traditional and Roth IRAs.
Contribution Limits in Self-Directed IRAs: What You Need to Know
There are two important factors here. You not only do you need to understand what the contribution limits are, and you can find out more about them at the IRS website, but you need to understand what happens if you own both a Traditional and a Roth IRA.
To explain, let’s take an example. Say you already have a Self-Directed Traditional IRA and a Self-Directed Roth IRA. You know that the contribution limit for each of these accounts is currently $6,000 if you’re also beneath a certain age. But what happens if you want to contribute both to a Self-Directed Traditional IRA and a Self-Directed Roth IRA? In that case, you should pay attention to what the IRS says: you have to combine the contributions that you make to these IRAs to come up with the number of your total IRA contributions. In other words, you can’t make more than $6,000 in combined contributions to your Roth IRA and Traditional IRA. For that reason, many people ultimately choose one or the other.
When you understand that it’s the combined contributions that will ultimately determine how much money you can put in each, you’ll be much closer to understanding how these two account types work. And keep in mind that only contributions toward a Traditional IRA will be tax-deductible, as contributions toward a Roth IRA are considered after-tax contributions.
Do Contribution Limits Change Over Time?
If you’ve been studying retirement contribution limits for any amount of time, you know one consistent thing about them: they change. A lot. In fact, we’re sometimes hesitant to publish Self-Directed IRA contribution limits without a link to the IRS website because they do change so much.
According to the IRS website, the current contribution limit rules for Traditional and Roth IRAs will apply through 2022 and have been in place since 2019. There are also additional catch-up provisions possible if you’re over a certain age. That means that in 2023, there may be contribution limit changes to watch out for; the government often changes these to help offset inflation. And anyone watching the economic headlines in 2021 knows that inflation is on the forefront of many investors’ minds. To that end, you should probably expect the contribution limits to increase after the year 2022.
Understanding Self-Directed Traditional and Roth IRAs
Once you understand that these contribution limits are combined across both accounts, you’ll better be able to discern your specific strategy. It’s better to know your limits and work within them, after all, rather than improvise as you go on. And with a Self-Directed IRA, it’s important that you better understand to rely on the expertise around you, such as a tax professional, because so much of what you do will be at your own behest.