Investors are always looking for new opportunities to help them build their retirement savings accounts as large as possible. In recent years, this search has led many to consider opening a “self-directed” IRA.
Contrary to some widely held (but mistaken) beliefs, self-directed IRAs are not any different from the traditional or Roth IRAs – at least from a legal perspective. The reason that self-directed IRAs have a greater number of investment choices is that the account custodian permits them. Custodians who specialize in self-directed IRAs, like Quest Trust Company, assist their clients in making any investment that’s authorized by the rules governing IRAs, rather than just simple stock and mutual fund purchases.
Opening a Self-Directed IRA is the Easy Part. Eligibility usually isn’t an issue for opening any type of IRA, including self-directed IRAs. In general, anyone can open an IRA (so long as they meet whatever requirements their custodian imposes). The real eligibility is how and when an account holder can make contributions to their IRA.
Eligibility for Full IRA Contributions. Whether or not you’re eligible to contribute to an IRA in a given year, and how that contribution will be treated for tax purposes in that year, will depend on your income level and what type of self-directed IRA you hold.
For traditional self-directed IRAs, you’re eligible to contribute the maximum amount (currently $5,000 per year for those age 49 and below, and $6,000 for those age 50 and over) and to deduct the full amount from your taxes – provided that you’re not covered by a retirement plan (including a 401(k)) at work. If you are covered by an employer-sponsored plan, then you can only deduct the full amount of your IRA contribution if your Modified Adjusted Gross Income (“MAGI”) is less than $56,000 if you have a “Single” tax status. Those who file jointly can deduct the full amount of their contribution if their MAGI is less than $90,000. For those who earn up to $10,000 more than those amounts, there is a sliding scale of partial deductibility.
Eligibility for Full Roth IRA Contributions. For Roth IRAs, there are income ranges in which a person can make a maximum contribution, a reduced contribution, or is not eligible to make a contribution at all. For IRA owners who file with a “Single” tax status, a MAGI of up to $110,000 is eligible to make a maximum contribution. A Single filer with a MAGI between $110,000 and $125,000 will be eligible to make a partial contribution. Single filers with a MAGI above $125,000 cannot contribute to a Roth IRA. Roth IRA owners who file jointly and have a MAGI of up to $173,000 qualify for a full contribution. Owners with a MAGI between $173,000 and $183,000 are eligible for a partial contribution, and those with a MAGI of over $183,000 are ineligible to make Roth IRA contributions.
Do You Have “Earned Income”? In order to make any contributions to a self-directed IRA, you need to have at least as much “earned income” as you want to contribute to your account. So if you’re living off investment income, but don’t have any salary or wages for the year, then you won’t be able to contribute to your IRA for that year.
If you anticipate having problems making a full deduction this year to a new IRA, but you already have a traditional or Roth IRA with another custodian, you can also consider a rollover to your new account.