Self directed Roth IRA Archives

Posts

Take Full Advantage of a Self-Directed Roth IRA

May 24, 2019/in Blog, Roth IRA /by Jim Hitt

A Self-Directed Roth IRA is a retirement savings account that offers you a variety of investment choices, all of which can grow tax-free. You fund a Roth with after-tax dollars, which means you do not get to take a tax deduction upfront as with a Traditional IRA. In return, however, your money grows tax-free, and when you withdraw it at retirement, you do not owe taxes on it.

While the purpose of Self-Directed Roth IRAs is to help you save for retirement, there is a certain amount of flexibility within them. For instance, you may withdraw money penalty-free for medical expenses, college, emergencies, and, if you qualify, purchasing your first home.

Anyone who has earned income may open a Self-Directed Roth IRA, although there are income eligibility requirements that will determine how much, or even if, you may contribute.

A Self-Directed Roth IRA should be earmarked for your retirement, but occasionally life’s events can interfere with your plans. The Roth can give you options when you have no others.

You are allowed to withdraw your contributions before you turn 59 ½ without penalty

You may withdraw contributions to a Self-Directed Roth IRA at any time without tax or penalty. But you may only withdraw the earnings on your funds when you turn 59½ and five tax years have passed since your first contribution. As mentioned, there are some exemptions from this rule.

Some people open Self-Directed Roth IRAs as a kind of backup savings account. It allows them to save for retirement knowing that the money is available in case they are hit with an emergency.

You may use your Self-Directed Roth IRA funds to pay for school

You are allowed to take penalty-free distributions from your Self-Directed IRA (before turning 59 ½) to pay for qualified, higher-educational expenses. As long as you have owned the account for five years, you may take qualified distributions—contributions and earnings—to pay the educational costs for your wife/husband, children, grandchildren, and, of course, yourself. The distributions may not be more than the actual schooling expenses.

Withdrawing funds from a Self-Directed Roth IRA as a first-time homebuyer is OK

According to Self-Directed Roth IRA rules, a first-time homebuyer may withdraw funds from the account as long as the following conditions have been met:

The account has been opened for at least five years.
you withdraw $10,000 or less for the purchase.
The funds are used directly for a down payment, closing costs, and other acquisition expenses.

If these rules are followed, the withdrawal will count as a qualified distribution.

How does the IRS define a first-time homebuyer? Well, they consider you a first timer if you have not owned a home in the last two years. So, if you owned a principal residence six years ago, there is a good chance you will qualify as a first-time buyer.

Other exemptions from paying a 10% penalty for early withdrawals

In addition to the exceptions for higher education expenses and for being a first-time homebuyer, the following are also listed by the IRS as qualified distributions:

You have reached the age of 59 ½.
You have become totally and permanently disabled.
You are the beneficiary of a deceased IRA owner.
You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income for the year.
You are paying medical insurance premiums during a period of unemployment.

Some of the most significant benefits of a Self-Directed Roth IRA come at retirement

Some people feel they need relief from a high tax bill right now. For them, contributing to a Traditional IRA provides them with a tax deduction they cannot get with a Roth.

But by taking that tax break today, they will be missing out on many of the valuable benefits that a Roth can offer down the road.

A tax-free stream of income in retirement.
No required minimum distributions.
Being able to contribute as long as you want.
You can leave your beneficiaries tax-free income that can be stretched over their lifetime.

With all of the valued benefits of a Self-Directed Roth IRA, contributing to this tax-free option is worth giving serious consideration.

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.

Use Your Self-Directed Roth IRA to Invest in Real Estate

May 8, 2019/in Blog, Roth IRA /by Jim Hitt

Investing in real estate through a Self-Directed IRA has become popular among those who choose alternative assets for their retirement savings. And that is not surprising since there are so many choices within real estate to help investors grow their money: apartment buildings, multi-unit homes, condominiums, commercial property, land, and single-family homes are all available to give retirement savers control of their assets and diversity in their portfolios. But did you know you can also have these same opportunities within a Self-Directed Roth IRA and collect rental income tax-free?

This is just one of the benefits of the Self-Directed Roth IRA for real estate. Many others can provide advantages to both you and your beneficiaries. Here are some of them:

Tax-free distributions

Contributions to Self-Directed Roth IRAs are made after you have paid the taxes, and the earnings on the contributions are also distributed tax-free if you meet two conditions:

You have held the Roth for at least five years.
You are 59 ½ years of age or older, you become disabled or die.

Once you meet these criteria, you will qualify for tax-free distributions that include rental income from the real estate and any gains in value when you decide to sell the property.

No required minimum distributions (RMD)

Traditional IRAs require that you begin taking your money out (and pay your taxes!) when you turn 70 ½. These withdrawals, called required minimum distributions or RMDs, do not apply to the Roth IRA, which is a huge advantage for those who own real estate. It’s not hard to imagine the liquidity problems that investors could face if they are invested in real estate and did not have enough cash to make their annual withdrawal.

This will not happen with a Self-Directed Roth IRA because there are no minimum withdrawals to make. You may leave your money invested in property and allow it to keep generating tax-free income as long as you choose.

You may continue to contribute

Contributions to a Traditional IRA are not allowed after you reach 70 ½, but you may contribute to your Roth IRA indefinitely. This is an advantage for those who continue to work after their “normal” retirement age. You can keep adding funds to your Roth account and purchasing more real estate.

If you also have a Traditional IRA, you may consider converting some or all of it to a Roth IRA. A Roth IRA conversion entails taking a distribution of your Traditional IRA and contributing the distributed amount to your Roth IRA. You will have to pay taxes on the transaction, but there are no 10% early distribution penalties for the conversion regardless of your age.

Some real estate investors are buying their future retirement home in their Self-Directed Roth IRA. They purchase the property at today’s price, and later they can distribute it tax-free and use it as their residence.

The Self-Directed Roth IRA also benefits your heirs

Taxes are always an essential factor when you are passing down your assets to your beneficiaries, but they have several options on how to receive tax-free distributions from the Roth IRA they inherit from you:

If you have had a Roth IRA for at least five years, your heirs can take a lump-sum tax-free distribution. This option is the perfect strategy for passing on real estate to them.
There is also a five-year-rules option, which allows your beneficiary to hold the assets in an inherited Roth account until the fifth anniversary of your death. At that point, all the assets must be distributed, or they will be subject to a 50% penalty.
There is also a life-expectancy option in which your beneficiary may deplete the account by taking a small distribution each year. The distributions must start no later than December 31 of the year following your death, and the amounts are calculated using the beneficiary’s age and the life expectancy the IRS has set. If the real estate generates enough rental income to fund the annual distribution, the asset may never have to be sold and can continue to provide income for your beneficiary for a lifetime.

You may even consider having a separate Roth IRA for multiple beneficiaries. This strategy avoids having to divide up assets, which can get complicated with assets such as real estate.

Build Wealth with a Self-Directed Roth IRA

April 12, 2019/in Blog, Roth IRA /by Jim Hitt

As most of you know, there are two types of IRAs, and they are distinctly different. The Traditional IRA, which is a tax-deferred account, allows you to take your deduction up front and pay your taxes later, presumably at retirement. The Self-Directed Roth IRA is funded by money on which you have already paid the taxes.

So why, you might ask, would you want to miss out on tax savings right now when retirement could be decades down the road? The answer: tax-free growth and withdrawals. Yes, tax-deferred is good, but nothing beats tax-free!

And the advantages do not end there. Your Traditional IRA will be subjected to required minimum distributions (RMD). The RMD requires that when you turn 70½, you must begin taking out a designated portion of your IRA each year. And you will start paying taxes on the money that you contributed and any earnings that accrued over the years.

There are no RMDs with a Self-Directed Roth IRA, so you may allow both your contributions and earnings to continue growing as long as you wish. Keep in mind that there are both contribution and income limits on a Self-Directed Roth IRA, unlike a Traditional IRA that has contribution limits only.

It’s always better to start early

Let’s say you are a thirty-year-old who has settled into a career and can start saving for retirement. My goodness, you are thinking, that’s all but forty years away. I have plenty of time to worry about retirement. Well, you are partially right; time is on your side but only if you use it to start accumulating wealth for the later years. Here’s how it can work:

The contribution limit for the 2018 tax year is $5,500. Let’s assume you contribute that amount to a Self-Directed Roth IRA starting at age 30 and continuing until you reach your retirement age of 68. Let’s further assume that you average 7% annually on your investments (that’s not unreasonable considering that the stock market has averaged 10% annually over the last one hundred years). You will retire with $1,049,219!

By the way, if you were to average 10% over 38 years, you would be looking at closer to $2.5 million! That’s the power of the combination of time and tax-free compounding. Of course, many of you who are reading this have passed thirty and might even be closing in on retirement or even already there. Does that mean it’s too late to build a nest egg with a Self-Directed Roth IRA?

It’s never too late to build wealth with a Self-Directed Roth IRA

With the Self-Directed Roth IRA, you can keep contributing as long as you have at least as much earned income as your contribution. And if you set up your account with a diverse portfolio that includes alternative investments, you will give yourself an opportunity at above-average growth that could be completely tax-free.

Consider the example of a 50-year-old who has accumulated $75,000 in a 401(k) with his employer. If this worker contributes 3% of his $75,000 annual salary and his employer matches it until retirement at 67 years of age, the 401(k) will have grown to $365,000. By opening a Roth and contributing the maximum each year ($7,000 since he is 50 years old), the Self-Directed Roth will have grown to $252,000 by averaging 8% annual returns. That’s over $600,000 at retirement with nearly half of it being tax-free.

Get started today

Please understand that nobody can guarantee the results of any investment. These examples show how the tax-free benefits of a Self-Directed Roth IRA, in conjunction with a diversified portfolio from a Self-Directed IRA, can help you build wealth at any age through a consistent savings schedule.

Discover the power of Self-Directed Roth IRAs with alternative assets such as real estate, private placements, private lending, tax liens, precious metals, single-member LLCs, and private stock.

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.

Interested in learning more about Self-Directed IRAs, download our free e-guide. Contact American IRA, LLC at 866-7500-IRA (472) or visit us online at www.AmericanIRA.com.

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, download our free e-guide. Contact American IRA, LLC at 866-7500-IRA (472) 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. Interested in learning more about Self-Directed IRAs, download our free e-guide. Contact American IRA, LLC at 866-7500-IRA (472) 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.

Posts

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.

Recent Posts

Pin It on Pinterest