Understanding The Self-Directed IRA Annual Contribution Deadlines

The individual retirement account structure – and self-directed IRAs in particular – can be a solid foundation for a successful retirement plan. But in order to build the largest possible retirement nest egg, it’s important to make regular contributions to your account. The rules on IRAs specify limits for how much you can contribute each year, so it’s important to make sure your savings plan and budget are synchronized with the annual limits.

The Annual Contribution Period can be up to 15 Months. The period in which you can make a contribution to your self directed IRA for a given tax year is from January 1 of that year until you file your tax return. But in no case can such contribution be made after your filing deadline (i.e., April 15 of the following year).

You May Need to Specify. Even if you only have a single IRA, it’s important to pay attention to how you designate each contribution. Recognize that if you are making a contribution early in a calendar year, before you file your tax return for the prior year, you need to specify the tax year for which your contribution applies.

For example, if you send a contribution to your IRA custodian on January 10, it won’t be clear whether you intend for those funds to apply to the tax year that’s just ended, or to the tax year that’s just beginning. You can clear up any potential confusion by making the appropriate designation in the “memo” line of the check you sent. Or if you make the deposit or transfer of electronically, indicate the applicable tax year in any “note” or “other instructions” field of the submission form. (For electronic transfers, your custodian may even ask you to specify the applicable tax year).

Easing Your Administrative Burden. But note that this contribution calendar overlap also provides you the opportunity to address two years’ worth of IRA contributions in a single sitting. Simply write two checks to your IRA custodian, specifying which check applies to which tax year. Of course, if those two contributions do not meet the contribution limits for either or both years, you can make additional contributions later, provided you are still within the applicable time period.

Use it or Lose it. With a generous contribution period that extends beyond December 31 of each tax year, it’s easy for some individuals to take the contribution opportunity lightly. But because IRA contributions are a “use it or lose it” proposition (meaning that if you don’t make a contribution in a given year – or don’t make the maximum contribution – you can’t make up for it later), it’s important to put yourself in a position to be able to make that maximum contribution year in and year out.

Consider a $5,500 contribution made by a 30-year-old to their self-directed IRA. Assuming an 8% return, that single contribution will be worth well over $80,000 by the time that person reaches age 65. Don’t miss out on this opportunity, and make sure you meet the annual contribution deadlines to the greatest extent possible.

Top Beginning Of The Year Tax Moves For Your Self-Directed IRA

Successful retirement planning is a combination of short-term and long-term decisions and actions. In the short term, you need to decide how to invest your money and how much to contribute to your account each year.

Your long-term focus will touch upon a number of different factors, including how your account will impact your overall tax situation. As you begin to prepare your tax returns for the year, here are some of the top tax moves related to your self-directed IRA.

1. Identify Your RMD Obligations (if any).
Traditional IRAs, including self-directed IRAs that are set up as traditional accounts, are subject to the IRS rules on required minimum distributions. These rules are designed to prevent account holders from letting their funds continue to grow without the holder ever having to pay taxes on that money during their lifetime (remember that deposits to traditional accounts are often made with “pre-tax” income of the depositor).

These rules on required distributions apply to individuals above age 70½, regardless of their other income. Therefore, in order to minimize your tax bill, you may wish to plan ahead for the upcoming year’s required minimum distribution and adjust your other income as appropriate. For example, you might wish to delay selling an asset or investment you hold in a taxable account if it would raise your taxable income too high, or perhaps even subject your Social Security benefit to a greater level of tax.

It’s important to note that Roth self-directed IRAs are not subject to the rules on RMDs. Converting a traditional self-directed IRA to a Roth account – provided that you are able to bear the one-time tax hit with funds from outside the account – could give you a much greater level of flexibility (and tax savings) going forward.

2. Consider a Roth IRA Conversion.
Being able to avoid the rules on required minimum distributions is only one reason that many individuals find a Roth self-directed IRA to be preferable to a traditional account. The Roth IRA structure also provides you with additional benefits when it comes to estate planning and other financial planning issues.

Therefore, it’s a good idea at the beginning of each year to explore whether converting your traditional self-directed IRA into a Roth account would be a good long-term financial move from a tax perspective.

3. Plan to Maximize the Value of Your Contributions.
If you have both a Roth self-directed IRA and a traditional self-directed IRA, you’ll need to decide how much to contribute to each account, subject to the annual contribution. Some individuals elect to make contributions to their Roth account only when they have a minimal tax deduction from a traditional account contribution, or perhaps aren’t eligible to contribute to the traditional account at all.

Understanding the various contribution options available to you, and weighing them against one another, is an important element to minimizing your tax bill in the coming year.

Traditional or Roth – Which type of self-directed IRA is for you

Traditional or Roth – this is a question every investor asks at least once in his life. Most investors ask this question several times over the course of the lifetime – traditional or Roth -which type of investment is the best? Figuring out whether a traditional or Roth IRA structure is best suited to your goals and needs is fundamental to your retirement. Here are some tips for how to decide whether a traditional or Roth IRA is best for you.

Tax Rates – Current vs. Future. A significant factor in your decision between a traditional or Roth IRA will certainly be your current income tax rate, in relation to what you expect that rate to be during your retirement. Contributions to a traditional IRA are sometimes tax deductible in the year you make them (more on that later), while contributions to a Roth IRA are never tax-deductible. Conversely, withdrawals from a Roth IRA are tax-free, while withdrawals from a traditional IRA are subject to current year income tax. In general, the more your current income tax rate exceeds your expected rate during retirement, the more advantageous it may be to choose a traditional IRA

When making this determination, it’s important to note that if you are also covered by a retirement plan (such as a 401(k)) at work, and your income exceeds a certain level, then you will not be eligible to take the above mentioned current year deduction for a traditional IRA – and in such case a Roth IRA will likely be preferable.

Other Retirement Savings and Assets. Another deciding factor between traditional or Roth IRAs is determining the aggregate retirement savings you have in other non-IRA accounts. The longer you can wait before withdrawing money from your IRA, the longer it will have to grow, and a longer time frame generally favors the Roth IRA structure.

Required Minimum Distributions. In addition, Roth IRAs are not subject to the rules on required minimum distributions (RMDs). With a traditional IRA, once you reach age 70½, you need to begin withdrawing a specified percentage of your account value each and every year. Individuals with Roth IRAs and who have other retirement assets to draw upon can allow their IRAs to grow significantly larger because they don’t have to take RMDs.

Estate Planning. Estate planning can play a huge role in your decision of choosing a traditional or Roth IRA. It’s important to note that the rules on RMDs can flow down to certain heirs of your IRA after you pass away. If you anticipate your IRA being a significant portion of your estate, then you may wish to investigate whether the additional flexibility that comes with a Roth IRA can better help you meet your estate planning goals.

Conversion. If you decide that a Roth IRA is a better fit for your situation, but your account is currently set up as a traditional IRA, don’t worry. You are permitted to convert your account from a traditional IRA to a Roth IRA, provided that you pay taxes on the amount of the conversion. Even if that tax bill is sizable, conversion could still be the best financial decision for you.

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Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.

The Dangers of Checkbook Control IRAs

A very popular idea in the self-directed IRA industry is to have what some have termed a “checkbook control” IRA. These have been under attack by the IRS. Click the link below to listen to Quest Trust Company President H. Quincy Long talk about the dangers of Checkbook Control IRA LLCs.

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