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

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

We look forward to working with you.

Self-Directed IRA and the ‘Backdoor Roth’

At American IRA, many of our Self-Directed IRA clients are very successful. Sometimes, extraordinarily so. And so some of them find themselves restricted from making tax deductible contributions to a traditional IRA, or even from making new contributions to their Self-Directed Roth RAs.

That’s where the so-called ‘backdoor Roth’ contribution comes in for Self-Directed IRA owners: While there are income limits to one’s eligibility to contribute money to a Roth IRA, there are no income limits when it comes to Roth IRA conversions. You can roll over hundreds of thousands of dollars into a Roth IRA, or even more, regardless of your current income. Of course, you’ll have to pay income taxes on money you roll out of a traditional IRA, 401(k), or SIMPLE IRA into a Roth IRA during the conversion process. But depending on your current and future tax brackets and expected future returns, it could be worth it – especially if you don’t convert so much that it puts you in a higher marginal tax bracket.

For 2017, the income limits for eligibility to contribute to a Roth IRA or self-directed Roth IRA are as follows:

Baseline contribution limit: $5,500, plus an additional $1,000 per year in “catch up” contributions for those age 50 and older.

Single filers: May contribute the full baseline amount up to an adjusted gross income (AGI) of 118,000. After that point the amounts they are eligible to contribute begin to phase out, until their contribution limits phase out entirely at an AGI of $133,000.

Joint (married) filers: May contribute the baseline amount of up to $5,500 (or $11,000, including a spousal IRA), plus an additional $1,000 in catch-up contributions per person age 50 and older, up to an adjusted gross income (AGI) of $186,000. Above that AGI level, their contribution limits begin to phase out at $186,000 until they reach zero at an AGI of $196,000.


Note: If you haven’t yet made your contribution to your Self-Directed IRA for tax year 2016, there is still time! You have until April 15th, 2017, to make your Self-Directed IRA contributions for tax year 2016. This gives you time to fill out your tax return and figure out exactly how much you may be able to convert to a Roth IRA, or self-directed Roth IRA, before you are pushed into a higher marginal tax bracket.

To execute a backdoor Roth rollover with American IRA, LLC, call us first, and we’ll send you a few forms to establish an account to hold your converted Roth IRA funds. Another form you fill out will authorize us to contact your current custodian for your traditional IRA funds and have them liquidate your account and wire the proceeds directly to us.

This direct trustee-to-trustee transfer is a non-taxable event, when you roll eligible traditional IRA, 401(k), 403(b), SEP or SIMPLE IRA funds into another IRA. But if you are rolling tax-deferred money into a Roth IRA account, it counts as a conversion, and you will be charged income tax on the money rolled over. You will not be charged an additional 10 percent early-withdrawal penalty on rollovers, whether they are straightforward trustee-to-trustee rollovers or transfers.

Getting Started

For best results, try to pay the taxes with money outside of your retirement accounts. That way you won’t be paying income taxes and penalties on money you are just using to pay taxes and penalties. You also preserve the maximum amount of assets for favorable tax treatment in the Self-Directed IRA.

If you are considering a backdoor rollover and you are interested in the advantages of self-direction of your retirement assets, we want to hear from you! Contact American IRA, LLC at 866-7500-IRA(472), or visit our website at

We look forward to working with you.