Self directed Roth IRA Archives

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Why You Need Rental Income in a Self-Directed Roth IRA

March 18, 2019/in Blog, Roth IRA /by Jim Hitt

What is a Roth IRA, and why do investment professionals recommend it so vigorously? If you are new to retirement advice, you’ve probably heard this phrase “Roth IRA” and rolled your eyes. It sounds complicated. It sounds like another worry in your life. Yet when you realize the potential in a Self-Directed Roth IRA, you might just begin to feel excited about your potential for building a strong retirement nest egg.

Why? Because the Self-Directed IRA comes with a number of benefits that you might not have considered:

Money in a Self-Directed Roth IRA Grows Tax-Free

When you put money in a Self-Directed Roth IRA, you are putting in your own after-tax dollars. That means these dollars have already been taxed. The tax protections in a Roth IRA then allow these dollars to grow tax-free with the full protections of an IRA. This is a reversal of the typical situation in which you withdraw retirement money and pay taxes on it then.

When you withdraw your money from your Roth IRA past the appropriate age, that money will be tax-free. It’s not difficult to see why this might help you save thousands—and maybe more—in the future.

Money within a Self-Directed Roth IRA Includes Tax Protections

A Roth IRA is a type of account the government approves for certain tax protections, encouraging people to save for retirement.

Usually, people take advantage of this account by investing in stocks and mutual funds. But with a Self-Directed IRA, you can do much more. You can even invest in real estate. And the real estate you invest in through a Self-Directed IRA allows your rental income to go to that Roth IRA, where it will receive protections.

That means you are not paying taxes on your rental income, which gives you more flexibility for making a profit on your real estate investments.

Hedging Yourself Against Future Rises in Taxes

When you earn a lot of income from investments, you face the possibility of a higher tax burden. By placing your rental income in a tax-protected Self-Directed Roth IRA, however, you hedge against the possibility of future tax hikes and give yourself some freedom and flexibility for your retirement investments.

The good news about Self-Directed Roth IRAs is that you will also have the ability to continue contributions so long as you have a paycheck or even contract work. So even as you protect yourself against future tax hikes and a potentially higher tax burden, you can still find ways to place some legal protections on yourself and your nest egg.

The Older You Get, the More Powerful a Roth IRA Becomes

Perhaps the most important feature of the Self-Directed Roth IRA is that it means paying your taxes upfront. As the investments grow tax-free, and you earn more money, you would likely have a higher tax burden. But withdrawing from your Roth IRA past the approved age is easy to do and tax-free. That gives you potential for a tax-free income in retirement, which is essentially like creating your own retirement program or pension.

Real estate is particularly effective in a Self-Directed Roth IRA because it has such high potential to grow—and a Roth IRA is great at protecting assets that grow. If you are looking into retirement investment or even just real estate investment, it’s always a good idea to consider a Self-Directed Roth IRA.

Like what you are reading? You can find more information as you browse www.AmericanIRA.com or simply give us a ring at 1-866-7500-IRA(472).

Build a Tax-Free Future with a Self-Directed Roth IRA

March 13, 2019/in Blog, Roth IRA /by Jim Hitt

Even if your cup of financial goals is already running over with short-term needs—a house, new car, student loan debt repayment—you must start building wealth now for a comfortable retirement down the road. Traditional IRAs and your company’s 401(k) are two avenues for getting to your objectives, but they are not the only ones and maybe not even the best.

Some advisors will tell you that a Self-Directed Roth IRA is your best choice if you believe taxes will be higher when you retire. But if you are like most people, you do not have a reliable crystal ball to show you what tax rates will be decades from now.

The simple fact is that a Self-Directed Roth IRA will help you build a tax-free future no matter how high or low tax rates happen to be. The funds you contribute to a Roth IRA today have already been taxed. When you retire and begin to take distributions from your Self-Directed IRA account, all of that money and any growth that accumulated over the years will likely come out tax-free.

Here is what you need to know:

What is a Self-Directed Roth IRA and why is it so popular?

A Roth IRA is a retirement account that, just like a Traditional IRA, urges you to save by offering you a tax benefit. But unlike a Traditional IRA, your contributions to the Roth are not tax-deductible. Instead, your contributions and investment earnings grow tax-free. When you withdraw the money in retirement, there is no tax due. With the Traditional IRA, there is an upfront tax deduction, but all withdrawals are taxed as income.

And along with those tax-free distributions comes another significant benefit: there are no required minimum distributions (RMDs) for Self-Directed Roth IRAs. That means you do not have to start taking your money out of your retirement account at age 70 ½ as you must with a Traditional IRA. You can keep on saving as long as you want.

How can a retirement saver build a secure tax-free future?

For 2019, individuals are allowed to contribute $6,000 per year to a Self-Directed Roth IRA. For those 50 years of age or older, there is a catch-up contribution of $1,000 for a total of $7,000.

Suppose a 25-year-old saver started adding $6,000 to a Roth and continued saving until retirement at the age of 68. Averaging a modest 6 percent annual rate of return over that period, that person will have accumulated over $1,135,000 tax-free dollars.

Are there any catches?

Well, every retirement account has rules, and the penalties for failing to abide by them can be severe. First, there are income limits, and here they are in a nutshell:

If you are contributing for 2018 and are single, you must have a modified adjusted gross income (MAGI) under $135,000 to contribute anything to a Self-Directed Roth IRA, and full contributions are reduced starting at $120,000. If you are married filing jointly, your MAGI must be less than $199,000, with reductions beginning at $189,000.
For 2019, the limits are higher. The modified adjusted gross income for singles must be under $137,000; contributions are reduced starting at $122,000. For married filing jointly, the MAGI is less than $203,000, with the phase-out starting at $193,000.

The second rule involves contribution limits:

For the 2018 tax year, individual contributions are capped at $5,500 ($6,500 for 50 and over).
In 2019, they increase to $6,000 ($7,000 for 50 and older).

One important caveat: Under no circumstances are you allowed to contribute more than you earned. For example, a person under 50 and filing in 2018 earned $4,500 for the year. Even though the contribution limit is $5,500, this individual would be limited to contributing only the $4,500 in earnings.

Consider a Self-Directed Roth IRA for more investment options

Most of those investing in a Self-Directed Roth IRA are using mutual funds. Mutual funds are fine, but they limit your investment opportunities and leave you at the mercy of a fund manager. You can take control of your investments by switching to a Self-Directed Roth IRA. When you do, the possibilities are significantly expanded.

In addition to stocks and bonds within a mutual fund, you have several alternative investments from which to choose:

Real estate
Private stock
Tax liens
Precious metals
Joint ventures and partnerships

Alternative investments combined with a Self-Directed Roth IRA could be the answer to your tax-free (and secure!) retirement.

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 www.AmericanIRA.com.

What are the Differences between a Self-Directed Roth IRA and a Roth 401(k)?

February 27, 2019/in Blog, Roth IRA /by Jim Hitt

A Self-Directed Roth IRA and a Roth 401(k) have some similarities. With both types of accounts, you make your contributions after you have paid the taxes on them. And, when you reach the age of 59 ½, you can take out your earnings without paying additional taxes.

But aside from a few parallels, there are significant differences between the two. While you are allowed to have both a Self-Directed Roth IRA and a Roth 401(k) at the same time, your employer must offer a Roth 401(k) for you to participate.

Take a look at some of the other differences so you can decide which plan works best for you:

Contribution and income limits

Whether it’s a Roth or traditional 401(k), the contribution limits are much higher than the IRA. In 2019, employees will be allowed to save up to $19,000 for the year. Workers over 50 may save up to $25,000. There are no income limits for the 401(k).

Roth and Traditional IRA contributions are limited to $6,000 or the amount of earned income, whichever is less. Those over 50 may set aside $7,000. There are income limitations, however, on Self-Directed Roth IRA contributions for 2019. If your modified adjusted gross income is $203,000 or more for married couples filing jointly or $137,000 or more for single filers, you are not allowed to contribute.

Distributions are handled differently

A Self-Directed Roth IRA account can continue forever, and there are no required minimum distributions as with Traditional IRAs. The Roth can also be passed along through generations, and it continues to accumulate free earnings for each generation.

A Roth 401(k) is treated differently. Distributions from a Roth 401(k) account must begin by age 70 ½ or when the account holder retires, whichever comes later. If you want to continue getting tax-free savings, rolling over to a Self-Directed Roth IRA is an option to consider.

Withdrawals from both the Self-Directed Roth IRA and the Roth 401(k) are tax-free as long as the accounts were held for at least five years, the distributions were made because of disability or death, or the account holder has reached the age of 59 ½.

Also, with a Self-Directed Roth IRA, you are allowed to withdraw up to $10,000 to buy or build a first home, without paying taxes and the 10 percent early withdrawal penalty, even if you are under age 59½.

Your employer can match your Roth 401(k) contributions

In addition to having higher contribution limits than Self-Directed Roth IRAs, the Roth 401(k) has another distinct advantage: Your employer can match any contributions you make up to a certain percentage. It’s free money from your employer that’s on top of your elective deferrals.

One caveat: Your employer’s match will be deposited into a traditional 401(k). Since you never receive the employer’s match, it cannot be completed on an after-tax basis. For that reason, the company match must be applied to a traditional 401(k).

You will have more investment options in a Roth IRA

Employees generally have little or no control over the investment choices that an employer’s Roth 401(k) plan offers. And those options are minimal most of the time. Those who hold a Self-Directed Roth IRA, on the other hand, will have greater control and more investment opportunities from which to choose.

And when retirement savers open a Self-Directed Roth IRA, they give themselves a virtually unlimited selection that includes alternative assets such as real estate, precious metals, private stock, and private lending.

Remember, even if you have a 401(k) plan through your employer, you may open and contribute to a Roth or traditional Self-Directed IRA. If you are interested in learning more about Self-Directed IRAs, call American IRA, LLC at 866-7500-IRA (472) for a free consultation or visit us online at www.AmericanIRA.com.

Boost Tax-Free Retirement Income with a Back-Door Self-Directed Roth IRA

October 10, 2018/in Blog, Roth IRA /by Jim Hitt

Self-Directed Roth IRAs provide a powerful combination of tax benefits and features: There is no up-front tax deduction on Self-Directed Roth IRA contributions, but as long as the assets remain in your IRA for at least five years, there are no taxes on any income or any growth of capital for as long as you or your surviving spouse shall live. This means you can combine the current income, potential for growth of income and potential capital appreciation of real estate with decades of tax-free compounding. With proper planning, the tax benefits of the Self-Directed Roth IRA can even extend into the next generation, using the ‘stretch Roth IRA’ technique.

But real estate investing, even with leverage, is capital-intensive. It takes a significant amount of money to acquire a property, and you will need more in reserves to handle those little emergencies that plague all landlords, sooner or later. But ordinary contributions to Self-Directed Roth IRAs are limited to $5,500, or $6,500 for those ages 50 and older.

In other cases, higher-income individuals are prevented from making direct Self-Directed Roth IRA contributions at, because their income is above the $120,000-$135,000 income phase-out and cap. Your eligibility to make Self-Directed Roth IRA contributions begins to phase out when your adjusted gross income reaches $120,000 and phases out completely at an AGI of $135,000.

But there is another way: The ‘back-door’ Self-Directed Roth IRA technique.

Converting a Traditional IRA to a Self-Directed Roth IRA.

Here is how it works:

You can turn any Traditional IRA into a Roth IRA, including a Self-Directed Roth IRA, by undergoing a process called conversion. The major consequence is you have to pay income taxes on any amount you convert to a Self-Directed Roth IRA. Essentially, you are paying the tax bill you avoided when you took the deduction for the original Traditional IRA contributions, plus taxes on compounding.

Once this conversion is complete, all the dollars remaining in the account after you pay the income taxes are Self-Directed Roth IRA dollars, and grow tax-free within the Roth IRA, provided they stay in the account at least five years.

If you take a distribution before then, you will be liable for the income tax on any growth. A 10 percent penalty also applies on any distributions from the Self-Directed Roth IRA prior to age 59½, unless certain hardship circumstances apply, or you elect to take distributions in the form of a series of substantially equal periodic payments over your life expectancy or the joint life expectancies of yourself and your spouse.

Converting Other Qualified Retirement Accounts

Many people interested in establishing Self-Directed Roth IRA. But the low annual contribution limits make it difficult to do so in a reasonable amount of time using new contributions. These same people often have much more substantial balances in old 401(K) plans, SEPs and SIMPLE IRAs. These plans can also be converted to Self-Directed Roth IRAs. For these plans, conversion is a two-step process:

Execute a tax-free rollover from the tax-deferred retirement account to a Traditional IRA with American IRA, LLC.
Execute a taxable conversion of your new Traditional IRA to your new Self-Directed Roth IRA as outlined above.

Note: A recent tax court ruling affirmed that each taxpayer is limited to one IRA tax-free rollover in a given tax year. So, if you have multiple Traditional IRAs or other accounts you want to combine into a single account, you may need to spread the rollovers over several years. Your tax professional can help you with the details. Or call us at 866-7500-IRA (472) and we can walk you step by step through the process. However, American IRA, LLC does not give individualized tax advice. For information on your specific circumstances, we suggest you retain the services of a qualified tax professional.

Note: The conversion strategy works particularly well for those who can afford to pay the income taxes on the amounts rolled over out of pocket, rather than using funds from within your Self-Directed Roth IRA.

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

September 21, 2018/in Blog, Roth IRA /by Jim Hitt

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.

Self-Directed Roth IRA Conversions

August 27, 2018/in Blog, Roth IRA /by Jim Hitt

A qualified rollover contribution is one of the many ways in which a Self-Directed Roth IRA can be funded. With a qualified rollover contribution, assets are moved from a traditional retirement savings account to a Self-Directed Roth IRA. For the purpose of this overview, we will refer to qualified rollover contributions as Roth conversions.

A Roth conversion is a two-part transaction, with a distribution occurring on the traditional account side and a rollover occurring on the Self-Directed Roth IRA side.

This outline provides a high-level overview of Roth conversions.

Roth Conversion Defined

A Roth conversion occurs when amounts are moved from a traditional retirement account to a Self-Directed Roth IRA. The options for doing so are:

A conversion of assets from a Traditional IRA, Self-Directed SEP IRA or Self-Directed SIMPLE IRA[1] to a Self-Directed Roth IRA.
A rollover of assets from a traditional account under an employer sponsored retirement plan[2] to a Self-Directed Roth IRA.

In either case, the amount must first be eligible for rollover, in order to be converted to a Self-Directed Roth IRA.

Amounts that are not eligible for rollover, and therefore not eligible for a conversion include required minimum distributions (RMD)s and excess contributions. A Self-Directed Roth IRA owner should consult with his/her tax professional for assistance with determining whether an amount is eligible for rollover.

Roth Conversion Methods

A Roth conversion can be direct or indirect.

With a direct conversion, the amount is paid by the delivering (non-Roth IRA) custodian/trustee to the receiving Self-Directed Roth IRA custodian/trustee, for the benefit of the Roth IRA owner; and is deposited directly to the Roth IRA. In some cases, the delivering and the receiving custodians/trustees are one and the same. There is no time limit for direct conversions.
With an indirect conversion, the amount is paid to the Self-Directed Roth IRA owner, who then has 60 days from the date of receipt to deposit the amount to the Roth IRA.

Tax Treatment of Roth Conversions

Roth conversion amounts are treated as ordinary income for the year in which the distribution side occurs. For example, if a Self-Directed Roth IRA owner takes a distribution from a Traditional IRA in December 2018 and deposits the amount to a Roth in January 2019, the amount is treated as a 2018 Roth conversion; and reported on the individual’s 2018 tax return as ordinary income.

Withholding Rules for Roth Conversions

Because the delivering side of a Roth conversion is a distribution, it is subject to the same tax withholding rules that apply to distributions. These are as follows:

For Conversions from Traditional, Self-Directed SEP IRA and Self-Directed SIMPLE IRAs

The IRA owner can choose to have 10% or more withheld for federal income tax.
If no withholding tax election is made, the custodian must withhold 10% for federal income tax.

For Rollovers from Employer Sponsored Retirement Plans

If the amount is processed as a direct rollover to the Self-Directed Roth IRA, then there is no tax withholding.
If the amount is paid to the account owner, the payor must withhold 20% of any taxable amount for federal income tax. The account owner can elect to have more withheld.

Tax Reporting

There are two sets of tax reporting that must be done for Roth Conversions; tax reporting by the IRA custodian/plan trustee and tax reporting by the Self-Directed Roth IRA owner.

The IRA custodian/plan trustee must issue IRS Form 1099-R for the distribution side of the Roth conversion and IRS Form 5498 for the funds deposited to the Self-Directed Roth IRA.

The amount must be reported on the Self-Directed IRA owner’s tax return as ordinary income.

For employer sponsored retirement plans, the plan administrator is responsible for indicating the taxable amount on IRS Form 1099-R.

For Self-Directed IRA, the IRA owner’s tax preparer is responsible for determining how much of the converted amount is taxable.

Recharacterizations

A recharacterization is a reversal of a Roth conversion[3]. Any recharacterization must be made to a Traditional IRA, even if the conversion was made from an employer sponsored retirement plan.

Any conversion amount that is recharacterized must be accompanied by any net income attributable (NIA) to the amount. The NIA must be calculated using the IRS formula provided in IRS Publication 590-A (Worksheet 1-3).

A recharacterization must be completed by the Self-Directed IRA owner’s tax filing due date, plus extensions. An IRA owner who files his or her tax return by the due date, receives an automatic 6-month extension to complete a recharacterization.

Caution: Roth conversions done after December 31, 2017 are not permitted to be recharacterized[4]

A Roth conversion amount that is properly recharacterized reverses the tax effect of the Roth conversion, and restores the amount to the Traditional IRA.

Additional Information

Assets can also be converted from the traditional side to the Roth side of an employer sponsored retirement plan. This process is referred to as an in-plan conversion. The Roth side of these plans are referred to as designated Roth Accounts (DRA).

In-plan conversions may not be recharacterized.

Individuals should consult with their plan administrators for information about in-plan conversions.

Tax Advice

Individuals should consult with their tax advisors about whether to perform Roth conversions and recharacterizations.

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 www.AmericanIRA.com.

[1] An amount may be converted from a SIMPLE IRA to a Roth IRA, only if it has been at least 2-years since the first SIMPLE contribution was made to the SIMPLE IRA

[2] Qualified plan, such as a 401(k) or pension plan, 403(b) and governmental 457(b)

[3] A recharacterization can also be used to change a regular traditional IRA contribution to a regular Roth IRA contribution and vice versa

[4] Repealed under the Tax Cuts and Jobs Act (Pub. L. No. 115-97)

Upgrading Your Retirement Plan with a Self-Directed Roth IRA

June 29, 2018/in Blog, Roth IRA /by Jim Hitt

The retirement plan is simple: invest as much money as you can while you are working so that you can enjoy a retirement full of wealth and security. But when it comes to making individual decisions—which types of assets to invest in, which types of accounts to use—most people do not know where to start. But those who have used a Self-Directed Roth IRA often find that this one decision had such a dramatic impact on their ultimate bottom line that they almost wonder if the process should be more complicated.

Why focus on the Self-Directed Roth IRA? Because this is a unique retirement account type that makes it possible to build a tremendous amount of wealth over the long-term, which then adds up to unique abilities come retirement age. For those who are comfortable forgoing some short-term wealth for long-term rewards, the Self-Directed Roth IRA may just be one of the most intriguing ways to plan retirement. Here is what you will need to know:

Understanding the Self-Directed Roth IRA

A Self-Directed Roth IRA is a unique kind of retirement account. Self-Directed Roth IRAs were first introduced in the Taxpayer Relief Act of 1997—ultimately being named for Senator William Roth of Delaware. The best way to understand the Roth IRA is first to understand how a Traditional IRA works.

A Traditional IRA uses pre-tax dollars for contributions; you then pay your income taxes when you take distributions from the account. This is a tremendously beneficial plan because it affords the account holder with plenty of protections for their wealth, including the ability to use that pre-tax income.

The Self-Directed Roth IRA works in reverse. You use taxed income to make contributions to a Self-Directed Roth IRA, which then grow tax-free. Then, when you reach retirement age, you no longer have to pay taxes on that money, as you already paid taxes on the income when you first made the investments. The taxes you do not pay (legally) because of this arrangement can add up to tremendous stores of value, especially if you have made contributions to your Self-Directed Roth IRA throughout life.

Why the Self-Directed Roth IRA Functions Like an “Upgrade”?

Many people give priority to their Self-Directed Roth IRA because of the tremendous amount of wealth that it can build while growing tax-free. Because you have used money that was already taxed, the money you take in retirement is then tax-free, which means that the additional gains that came about because of your investments are then not tax, either. This can represent one of the most transformative and efficient ways to build wealth, as it gives you a large nest egg that will not be subject to further taxation so long as you follow the rules.

But it is also important to know those rules, including:

You can take a “qualified distribution” only once you have contributed to a Self-Directed Roth IRA and five years has passed. This regulation is in place to ensure that people do not use the Self-Directed Roth IRA as a get-rich-quick scheme.
The Self-Directed Roth IRA, like any Roth IRA, has relatively low contribution limits—$5,500 for those 49 and younger in 2018, and $6,500 for those 50 and older. However, it is important to take note of the higher “catch up” contribution limits, which means that even older investors closer to retirement can take advantage of the wealth-building present in a Self-Directed Roth IRA.
Penalties on early distributions can be substantial, just like in any Self-Directed IRA, so do not get any delusions about how you will be expected to treat this account. Make no mistake: A Self-Directed Roth IRA is a retirement account like any other. It just so happens to have tremendous advantages.

The Self-Directed Roth IRA can be one of the most powerful ways to change the way you think about retirement. It can also serve as one of the most powerful upgrades to your retirement strategy. But because of the low contribution limits, the time to get started is now. For more information, contact American IRA at 866-7500-IRA, www.AmericanIRA.com or visit our Self-Directed Roth IRA page today.

A Comprehensive Guide to Self-Directed Roth IRA Income Thresholds

May 30, 2018/in Blog, Roth IRA /by Jim Hitt

The Self-Directed Roth IRA may be one of the most powerful wealth-building tools in existence—and yet many people do not quite understand how it works, what limitations it contains, or how it might best be utilized. One particular area of confusion: income thresholds. These income thresholds can play a major part in how you use a Self-Directed Roth IRA—or whether you even use them at all—which is why it is so important for investors to understand what they are. That is why we have put together this brief but comprehensive guide to income thresholds of which you need to be aware:

Self-Directed Roth IRA Limitations Based on Income

What is an “income threshold” in this context? The simplest explanation is that the IRS sets limits in the types of individuals that are qualified to invest in a Roth IRA—which includes the Self-Directed Roth IRA. Those limitations are clear when it comes to the income you can receive while also investing in a Self-Directed Roth IRA.

Want to make sense of these Self-Directed Roth IRA income thresholds? Here is what you will need to know about these limitations and qualifications:

To invest in a Self-Directed Roth IRA, you will have to earn an income in the year in which you make a contribution. Disability retirement benefits may also count as income. That establishes, essentially, a minimum income threshold: if you earn zero dollars, you cannot contribute to a Self-Directed Roth IRA.
There are also upward limits on income for Self-Directed Roth IRA For 2018, those limits are $135,000 for single filers and $199,000 for married couples filing jointly. (It is worth noting that both of those figures increased over the limits in 2017, which suggests a little more flexibility for higher-income earners).
Contribution limits change based on age. For anyone 50 or older, it is possible to make $6,500 in contributions to a Self-Directed Roth IRA—a so-called “catch-up” period that allows aspiring retirees to make up for lost time with higher limits. For those younger than this, the contribution limit remains at $5,500 for 2018.

These limits are critical to understanding whether or not an individual can make a valid contribution to a Self-Directed Roth IRA. They should not only assist in the planning of retirement contributions but can also highlight any additional retirement account needs if you are able to go over these contribution limits.

Making Use of the Self-Directed Roth IRA Limits

How does an investor make “use” of a limit to something like a Self-Directed Roth IRA? By understanding them. For example—a single person earning less than $135,000 per year can make up to $5,500 in Self-Directed Roth IRA contributions. But if this same individual has more retirement money to set aside after that, knowing this in advance can lead them to opening an additional account, such as a Self-Directed Solo 401(K). These accounts come with high contribution limits and would give the investor plenty of flexibility to continue to put money aside for retirement with tax protections.

To properly strategize, it helps to know what you should expect in the calendar year. Your tax filing status and your current year’s income will both play heavily into whether or not you are capable of investing using a Self-Directed Roth IRA.

The Benefits of the Self-Directed Roth IRA

Why bother with a guide like this? Because a Self-Directed Roth IRA, in addition to allowing you to invest in a diverse list of assets from real estate to precious metals, allows you to use taxed earnings to create tax-free investments. By paying your taxes up front, you can create a truly tremendous amount of wealth as you utilize the power of compounding interest over time. For that reason, many people first make the maximum contributions to their Self-Directed Roth IRA when going about their yearly retirement strategies.

For more information on Self-Directed IRAs or Self-Directed Roth IRAs, call us today at 866-7500-IRA (472) or visit us at www.AmericanIRA.com.

Here’s Why 2018 Is a Great Year to Start a Self-Directed Roth IRA

March 14, 2018/in Blog, Roth IRA /by Jim Hitt

Roth IRAs have long been a good deal for Self-Directed IRA investors – and they are a better deal now. The reason: Tax rates are unusually low in 2018. That means the tax benefits of the Roth IRA – chiefly unlimited long-term tax-free growth for the life of the investor – are available at fire sale prices.

Currently, Republicans control the Presidency and both houses of Congress. The Tax Cuts and Jobs Act represents sweeping tax cuts for the vast majority of investors. But they will not last forever. A best case scenario means the tax cuts for individuals will sunset in 2025 and taxes will go back to the status quo ante. As such, distributions from your Traditional IRAs and Traditional Self-Directed IRAs will be subject to similar higher tax rates before the law took effect at the beginning of 2018.

Further, it is likely that Democrats will retake some or all of the federal government by that time. Congressional Democrats opposed the tax cuts, citing the effect they would have on the deficit, as well as claiming the tax cuts overwhelmingly benefited the rich and corporations. Once they win some elections, they will probably be looking to increase taxes on the affluent.

Now is the time to make some big moves establishing a Self-Directed Roth IRA, or converting existing Traditional IRA or 401(k) assets to a Roth Self-Directed IRA. Having at least part of your portfolio in a Roth IRA is a useful hedge against future tax increases.

Roth IRAs, including Self-Directed Roth IRAs, have some other important advantages:

1.) There are no required minimum distributions to worry about. With tax-deferred retirement accounts, you must begin taking distributions by April 1st of the year after the year in which you turn age 70 1/2, or you will face severe penalties from the IRS. This is a complicated set of rules that needlessly tags a lot of investors who do not have professional help with their retirement assets. But those rules do not apply to Roth IRAs. You can allow your assets to accumulate tax free for as long as you like. The Roth Self-Directed IRA is a great choice for those who do not expect to need to tap their retirement accounts for many years into retirement.

2.) Roth IRA withdrawals do not count against you when it comes to calculating Medicare surcharges. If your income is higher than $85,000 ($170,000 for married couples), Medicare rules require you to pay a higher rate for Part B and Part D coverage. But any income you take out of a Roth IRA, including a Self-Directed Roth IRA, does not count toward this limit.

3.) Roth IRA income does not count against you when calculating Social Security Income Tax.

For these reasons, 2018 is an excellent time to start rolling over assets from tax-deferred retirement accounts to Roth accounts, or to open a new Self-Directed Roth IRA or 401(k).

About American IRA, LLC

American IRA, LLC is one of the leading third party administrators of self-directed retirement accounts in the country. Though our offices are in Asheville and Charlotte, North Carolina, we work with motivated and successful practitioners of Self-Directed IRA strategies and Self-Directed 401(k) strategies from all over the United States. Our founder and CEO, Jim Hitt, has been engaging in Self-Directed IRA investing in his own portfolio for over 35 years.

To learn more about getting started with Self-Directed IRA investing, or to open an account and begin investing, call us today at 866-7500-IRA(472). Or visit our website at www.americanira.com.

Self-Directed Roth IRA or Solo 401(k)? Which should I Contribute To First?

April 14, 2017/in Articles, Blog, Roth IRA /by Jim Hitt

As it is so often in investing, the answer is “it depends.” Both the Self-Directed Roth IRA and the Solo 401(k) are very popular among investors who embrace the advantages of self-directed strategies. But they are not only taxed differently – they are also structured differently.

Consider prioritizing your Self-Directed Roth IRA first under the following circumstances:

You are relatively young, or have an extra long time horizon.
You want to pass a lot of money on to heirs
You are sensitive to a possible estate tax down the road. Roth IRAs have a lower estate tax footprint, since they move money that your estate will eventually have to pay in taxes out of the taxable estate.
Your income is lower now than it will be in the future.
Your tax bracket is lower now than it will be in the future. That is, would you rather pay your income tax rate now? Or would you rather pay the rate you’ll be in when you retire? If you’re probably paying a lower rate now, then emphasize the Self-Directed Roth IRA.
You’re in a state that provides a lot of creditor protection to IRAs in the event of bankruptcy.
You don’t want to have to worry about required minimum distributions down the road
You don’t own a company or have a lot of self-employed income you can contribute to a self-directed Solo 401(k)
You’re not getting a match from an employer’s 401(k) other than a solo 401(k) that you control
You have a weak 401(k) plan at work that won’t let you self-direct, and has lousy mutual funds and other investment options, or only offers high-expense funds.
You don’t expect to need to borrow money out of your 401(k) in the future.
You want the more flexible hardship withdrawal options that IRAs come with.

On the other hand, maxing out a solo 401(k) plan, or any other 401(k) plan that has your desired features may work best for you under the following circumstances:

You can pick up an employers’ matching funds.
You own a C corporation and would pay high taxes and double taxation on money that doesn’t go into a tax-deferred 401(k) plan.
You want to maximize the amount you can contribute and only run a single plan for the time being.
You want to be able to take a loan out of your Solo 401(k)
You want to retire early and be able to make early withdrawals. 401(k) rules let you take money out of your plan at age 55 without a 10 percent penalty if you’ve left the company. IRAs make you wait until age 59½.
You want to leverage, for example, to buy real estate within your retirement account with a mortgage. In an IRA, you’d have to pay an additional tax, called the unrelated business income tax, on income and capital gains attributable to other peoples’ money. In a 401(k), you may be able to avoid that tax. Speak with your tax advisor for more information.
You want extra protection against creditors, including the IRS. 401(k)s are much tougher for creditors to crack.

American IRA, LLC provides top-notch administration for owners of Self-Directed Roth IRAs or self-directed 401(k)s. Our services allow you to tap the tremendous tax advantages of using self-directed retirement accounts but also maximize your choices and options.

For more information, call American IRA, LLC today at 866-7500-IRA(472), or visit us on the Web at www.americanira.com.

We look forward to working with you.

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Contribution and income limits

Think about a Roth conversion

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.

As it is so often in investing, the answer is “it depends.” Both the Self-Directed Roth IRA and the Solo 401(k) are very popular among investors who embrace the advantages of self-directed strategies. But they are not only taxed differently – they are also structured differently.

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