When navigating the world of self-directed investing, one of the most important things to understand are the rules governing how you may fund your account. Overfunding your account can get you in trouble with the IRS and incur tax penalties. Underfunding your account can result in missed opportunities and overlooked tax advantages.
Individual retirement accounts may be funded via transfer, rollover, conversion, or IRA contribution. Contributions differ from transfers or rollovers in that they do not involve moving funds from one account to another. Instead, a contribution is a deposit made directly from an individual or their employer into a retirement account. Contributions are also not to be confused with Roth conversions, which involve converting pre-tax cash or assets from a Traditional, SEP, or SIMPLE IRA into a post-tax status with a Roth IRA.
Every year the IRS sets IRA contribution limits based on the type of retirement account and the account holder's age. The 2018 Traditional and Roth IRA contribution limit is $5,500 with a possible $1,000 catch-up contribution for those age 50 and over. The annual deposit threshold will increase to $6,000 in 2019 (with the $1,000 catch-up contribution remaining intact). 2018 SEP IRA contribution limits are the lessor of $55,000 ($56,000 in 2019) or 25% of earned income. Employee contributions to a SIMPLE IRA may not exceed $12,500 in 2018 ($13,000 in 2019) with $3,000 catch-up contributions available to account holders age 50 or above. Visit the IRS website for more information about 2018 and 2019 contribution limits.
These contribution limits apply to all IRAs, including self-directed varieties that hold alternative investment options. "Self-directed IRA" is simply a moniker and not an IRS or legal designation. In other words, an IRA that holds real estate is no different than an IRA that holds stocks from a contribution limit standpoint. All IRS rules that apply to non-self-directed retirement plans also apply to their self-directed counterparts. Also bear in mind that while you may open and fund as many accounts as you want, annual contribution limits apply per person and not per account. For Traditional and Roth IRAs, the $5,500 limit applies across any such plans you hold. For example, if you have two Traditional or Roth IRAs (or one of each), you may contribute $2,000 to one and $3,500 to the other, $5,500 to one and nothing to the other, etc.
Knowing and understanding how to fund your self-directed IRA can help you make the most of your retirement savings and mitigate the risk of tax penalties. While contributions represent just one method of funding your account, they are a key part of your overall retirement strategy. For more information about IRA contributions, feel free to give us a call at 877-742-1270 or send us an e-mail at firstname.lastname@example.org.