Getting the Most Out of Your Annual Self-Directed IRA Contributions

Contributing to your self-directed IRA every year is vital for your financial future. But not everyone does all they can to extract the most value out of their annual retirement contributions. With that in mind, here are some tips for doing so.

Invest Early. You can get the most out of your annual contributions by depositing them into your self-directed IRA as early in the tax year as possible. Ideally, you should deposit the full annual limit (for 2023, $6,500 for most taxpayers, and $7,500 for individuals age 50 or over) on January 1 of each year.

Consider two individuals, one of whom makes a $5,000 annual contribution to their IRA every year in January 1, and another who waits until December 31 to make the same contribution. Assuming a modest 6% return, after 20 years the first taxpayer will have over $10,000 more in their account than the second, even though they deposited the same amounts during the same tax years. Simply by virtue of giving their money a little extra time to grow, the first taxpayer has a noticeably larger nest egg. When the rates of return are higher, and the timeframe longer, the difference is even more pronounced.

Diversify and Balance Across Your Other Accounts. Another way to get the most out of your self-directed IRA and the contributions you make each year is to use your account to diversify and balance your investments across all of your accounts.

Think of it this way: there’s a good chance that your overall investment portfolio (taking into account not only your retirement accounts but also your taxable investment accounts) include a range of asset types –income-generating assets as well as non-income generating assets that are more focused on capital gains. By prioritizing more of the income generating assets in your self-directed IRA (where such income will either be tax-deferred or tax-free), you may be able to save significant amounts on your tax bill.

Target Your Retirement Timeframe. You can also maximize the value of the annual contributions you make to your self-directed IRA by taking advantage of the freedoms you have with this account. Self-directed IRAs allow you to invest in highly illiquid assets such as real estate and private equity, which are ideal for some longer-term investors.

The True Value of a Tax Deduction. Remember that many other factors can impact your tax burden. One way to see exactly how much a contribution to a traditional self-directed IRA versus a raw self-directed IRA can save you on this year’s taxes is to prepare two different draft versions of your tax return and compare the numbers. If a $6,000 contribution to a traditional self-directed IRA only nets you a couple hundred dollars savings on your tax return, then you may wish to make a contribution to a Roth account instead. Some taxpayers maintain one of each account type, and then make their contribution to whichever account maximizes their utility in any given year.

The bottom line is to contribute to your self-directed IRA every single year, to the greatest extent possible. You can’t go back and catch up later if you miss the opportunity to make the maximum contribution in a particular year.