Two Self-Directed Roth IRA Funding Options for High-Income Earners

Retirement savers with high incomes have options for saving but putting them into a Self-Directed Roth IRA is not one of them. One of the critical differences between Traditional IRAs and Self-Directed Roth IRAs is income limits on contributions. It is a shame because a Roth could provide tax-free growth and tax-free withdrawals in retirement.

For the 2018 tax year, here are the income eligibility limits:

  • Single filer – $135,000
  • Married filing a joint return – $199,000
  • Married filing a separate return – $10,000

If you are part of any of these categories, you are probably not eligible to contribute to a Self-Directed Roth IRA. But that does not mean you have to rule it out completely. Your income does not have to be a total obstacle. Here are two suggestions to consider:

Think about a Roth conversion

Converting some or all of the funds in a Traditional IRA into a Self-Directed Roth IRA is a viable option. Of course, the conversion would trigger a tax bill on the converted funds up front, but your money would be growing tax-free from that point on. And since you pay the tax today, your distributions will be tax-free when you retire. This option makes particularly good sense if you think you will be in a higher tax bracket when you withdraw the funds and retirement is down the road a few years.

You can roll it over

While your Self-Directed 401(K) plan might not have a Roth option, you may still roll over to a Self-Directed Roth IRA if a triggering event occurs. Some of the most common events include:

  • Reaching retirement age
  • Termination of employment
  • Disability
  • Death

Talk to your employer to ensure that you meet one of your plan’s triggering events. Then, make sure that the amount you are taking is eligible for a rollover. Most distributions from retirement plans may be rolled over, but there are some that are ineligible. For instance, you may not roll over any required distributions you must take after reaching the age of 70 ½, and you will not be allowed to roll over any excess contributions you made.

Remember that when you roll over pretax funds, they will be subject to income tax for the year in which you did the rollover. You could be paying a significant tax bill if you roll over a large balance all at once. You might want to think about moving the funds over multiple years.

If your qualified plan has a Roth option, the tax consequences change. If there is a triggering event, you can roll these Roth assets into a Self-Directed Roth IRA. And because this transaction involves after-tax contributions, they are no income taxes due.

What about a Backdoor Roth?

In 2010, Congress passed rules that allowed retirement savers to convert funds in a Traditional IRA to a Self-Directed Roth IRA, paying the taxes on the distributions as they made the conversion. Higher-income earners were able to use this approach to gain access to a Self-Directed Roth IRA. Nicknamed a Backdoor Roth, it involves a two-step process:

Open a non-deductible Traditional IRA and make after-tax contributions. For 2018, you may contribute up to $5,500 ($6,500 if you’re age 50 or older).

Then, transfer the assets from the Traditional IRA to a Self-Directed Roth IRA. You can make this transfer and conversion at any time in the future. Some advisors are warning that the Backdoor Roth might not last forever. Restrictions on them might come at some point, requiring converters to pay a penalty, or they could include a grandfather clause. But for now, it’s an option to consider.

Seek professional help before rolling over or converting

If you are a high-income earner, you should consider everything before using retirement plan rollovers and conversions to fund your Self-Directed Roth IRA. Discuss these strategies with your team of professionals. Give us a call when you’re ready to make a move.

At American IRA, we believe that Self-Directed IRAs are the best vehicles for growing your retirement account. And we have the experience to help you with your transactions.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at

Self-Employed Retirement Planning

Self-Employed Retirement PlanningIf you are successfully self-employed, or you are the owner-employee of a successful small business, most of the financial news you see doesn’t speak about self-employed retirement planning.

For example, there’s a lot of information out there about how a straight W-2 employee can make use of his or her employer’s Traditional 401(k) plan. But there’s not much out there about self-employed retirement planning such as how to design a Solo 401(k) plan for yourself, or whether you could be better off with something like a SEP, or Simplified Employee Pension plan.

Taking Charge

For those of you who are in charge of your own financial destiny, and who have not hitched their stars to an outside employer, understanding self-employed retirement planning is critical. You can’t rely on anyone else to take care of your retirement security. Unfortunately, according to a recent industry survey, some 28 percent self-employed individuals aren’t saving for retirement at all.

Nobody is going to do it for you. With that in mind, you will want to take advantage of every quirk the law allows to help you amass your retirement nest egg, and protect it from predators. Here are some principles to keep in mind.

  • Use tax leverage. Accounts grow faster if the tax man leaves them intact, as opposed to levying a current tax on every dividend, every dollar of interest received, and on ever dollar of profit from trading. Retirement accounts like IRAs, Roth IRAs, Solo 401(k)s, Traditional 401(k)s, SEPs and SIMPLES let your money grow tax deferred, or in the case of Roth accounts, tax-free.
  • Protect assets from lawsuits. Trial lawyers go after businesses all the time, for both good reasons and on trumped-up pretenses. They also go after business owners, personally. But money you can keep outside of your business, and in a retirement account, is largely off the table for collections. Specific laws vary by state, but federal law gives a great deal of protection to funds in Traditional 401(k)s and Solo 401(k)s and other pension plans and in IRAs.
  • Leverage your expertise. You’re in business, or you’re self-employed because you’re good at something. You are probably an expert in something you can leverage, even within your IRA or other retirement account. That’s where we have some good news: Retirement accounts aren’t limited to mutual funds, annuities, CDs and money markets. You can invest in nearly anything you can imagine except life insurance, gems, jewelry, art, collectibles and alcoholic beverages – through an increasingly popular option called self-direction.
  • Put lots away. As long as you have sufficient cash on hand to meet your immediate business needs, and accomplish your long term business strategy and lifestyle goals, the more money you can take out of your business and out of your personal name and move into protected retirement accounts, the better.
  • Combine multiple types of accounts. For example, combine Roth and tax-deferred accounts to hedge against changes in tax rates in the future. Take advantage of more liberal hardship withdrawal terms in IRAs but also take as much advantage as you can of the bigger contribution ceilings on Traditional 401(k)s, Solo 401(k)s and SEPs.

Your Options

When it comes to self-employed retirement planning, you have several – the best one for you depends on your circumstances, including the amount you can contribute and what percentage of your income is salary versus Schedule C or dividend income.

The IRA – You get a tax deduction, and you can contribute up to $5,500 per year, or $6,500 if you are age 50 or over. Taxes are deferred until you take the money out. You also have a 10 percent penalty on most non-hardship withdrawals prior to age 59½. Beware: Once you turn 70 ½, you must begin taking money out by the following April 1, or you will face some harsh tax penalties. Your deduction may be limited if your income is high, or if you are covered by another retirement plan at work.

The Roth IRA – Similar rules to the IRA, except there’s no tax deduction. Instead, your investment grows tax-free after that, as long as you leave the money in it at least 5 years. There’s still a 10 percent penalty on the growth if you withdraw money prior to age 59 ½, unless certain hardship conditions apply.

Both versions of the IRA lend themselves easily to self-direction.

The Solo 401(k) – This is a 401(k) plan specially designed for the self-employed or ultra-small business owner. Fees and administration requirements are stripped down, but you can still contribute up to 20 percent of your net self-employment income plus $17,500, up to $52,000 in 2014, when you combine employer and employee contributions. Those age 50 or older can put in up to $5,500 more on an annual basis. This makes the Solo 401(k) an attractive option for those with relatively high incomes who are working on self-employed retirement planning.

Solo 401(k) plans lend themselves well to self-direction, and you can set them up to allow for loans from within the plan if you should so choose. Solo 401(k)s also tend to work well for self-directed investing strategies that involve leverage, such as real estate, because 401(k)s are exempt from unrelated debt-financed income tax rules that apply to IRAs.

You can also select Roth tax treatment for your Solo 401(k) plan, if you choose.

The SEP IRA – The SEP IRA also allows you to set aside up to $52,000 in 2014, or 25 percent of self-employment compensation – whichever is less. You have more flexibility if you have no employees – if you do have full-time employees you will likely have to fund their accounts with matching funds on the same basis that you match your own contributions with company money.

The SEP IRA is a great option for self-employed retirement planning because of the large annual contribution limit, and because of the relative ease of setup and low ongoing administration costs.

The SEP IRA also is compatible with self-direction.

Want to learn more? Stay tuned to this blog! Or better yet, visit our library at, or call us at 866-7500-IRA (472). We are one of America’s leading experts on self-directed retirement investing and work with clients all over the country.

We look forward to serving you.






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5 Factors of the Self-Directed Roth IRA Conversion Decision Process

Traditional IRA | Roth IRADeciding whether one should convert assets from a traditional retirement account to a Self-Directed Roth IRA is an important task, and in order to make a reasonable and educated decision, many factors must be taken into consideration. Still it is well worth the consideration since the account will grow tax-free forever after it is converted to a Roth IRA.

The following are only five of the many factors that should be taken into consideration.

1.     Current vs. Future Tax Rates

Many economists and tax professionals who have analyzed factors such as the historical changes in tax rates, the events that either cause or predict increases in tax rates, and the national debt, agree that significant increases in tax rates in future years is inevitable. Individuals who agree with these experts may feel that it is a smart tax move to convert to a Self-Directed Roth IRA now when tax rates are lower, rather than keeping assets in a Traditional IRA where they would be taxed at a higher rate when withdrawn later.

2.     Retirement Horizon

One of the factors to consider when deciding about whether a Self-Directed Roth IRA makes good tax sense is whether you will have sufficient time to accrue enough tax-free earnings that would, at a minimum, offset the tax-related cost of converting amounts to a Roth IRA.

Example: Assume that you convert $100,000 in pre-tax amounts from your Traditional IRA to your Roth IRA, and you owe income tax of $28,000 on the amount. This $28,000 will have to be taken from your retirement account or other sources, which means $28,000 that is no longer available for investing in your retirement nest egg.

A Roth conversion analysis would take the number of years you have until retirement into consideration, so as to determine whether the tax-free earnings that could be accrued during that time is sufficient to make the conversion worthwhile.

3.     Your Beneficiaries and Who You Want to Pay The Income Tax

If you will be leaving your retirement savings to a charity, a Traditional IRA may be a better choice since the charity will not owe income tax on the amount. On the other hand, if your beneficiary is someone like your spouse or child, converting the amount to a Self-Directed Roth IRA could allow him or her to inherit the amount tax-free.

4.     Source of Income Tax Payment

Generally, you are required to pay the income due on a Roth conversion by your tax filing deadline. If you do not have the amount available in non-retirement saving accounts, then the income tax can be paid from the conversion amount. If you choose to pay the income tax from the conversion amount, only the net amount would be converted, which means the income tax amount would not be available for tax-free growth in the Roth IRA.

Example: Assume you convert $100,000 and elect to have $20,000 withheld for federal income tax. Only $80,000 would be converted to your Roth IRA, with $20,000 remitted to the IRS as an income tax payment on your behalf.

A Roth conversion analysis would help to make a reasonable determination of whether a conversion would make sense in such cases.

5.    Investment Vehicles and Rate of Return

A critical component of a Self-Directed Roth IRA conversion analysis is the rate of return on your investments. If your investment portfolio includes stocks, bonds, mutual funds and other investments that do not offer a guaranteed rate of return, then the rate of return is based on assumptions and speculations. On the other hand, if your conversion amount is invested in a product that provides a guaranteed rate of return (such as an annuity), you might get a more realistic determination of the comparison between converting and not converting to a Roth IRA.

These are just a few of the many factors that should be taken into consideration, and what might apply to one person might not apply to another. As such, the Self-Directed Roth IRA conversion decision is often based on a customized Roth profile. Further, whether an outcome is considered favorable can be a matter of personal preference.


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