Can You Deduct Your Self-Directed IRA Contributions Deductible In 2015?

Being able to deduct your self-directed IRA contributions from your tax return can be a great incentive for you to maximize those contributions each year. But not all IRA contributions are deductible.

Roth vs. Traditional Self-Directed IRA. The first consideration in determining whether you can deduct your 2015 contributions to your self-directed IRA is whether your account is set up as a Roth account or as a traditional account. Contributions to Roth accounts are never deductible, and contributions to traditional IRAs are sometimes deductible. Let’s examine the circumstances under which contributions to your traditional self-directed IRA can be deducted on your 2015 tax return.

You Aren’t Covered By an Employer Sponsored Retirement Plan. If you don’t participate in an employer retirement plan (such as a 401(k) plan, profit-sharing plan, SEP, SIMPLE-IRA or certain defined benefits plans that you participate in), then your contributions to your self-directed IRA will be fully deductible, regardless of your income, if either (a) your tax filing status is single or (b) you file a joint return with your spouse but your spouse is not covered by a retirement plan at their employer.

If you file a joint return but your spouse is covered by a retirement plan at their job, then you’ll be able to deduct the full value of your contribution if your joint income is $183,000 or less. You can take a partial deduction if your joint income is between $183,000 and $193,000, and no deduction is available if your joint income is $193,000 or more. For purposes of these income thresholds, it’s not your gross income, but your Modified Adjusted Gross Income (“MAGI”) that’s relevant.

You Are Covered by an Employer Sponsored Retirement Plan. If you are covered by a retirement plan at work, then your ability to deduct your self-directed IRA contribution will again depend upon your MAGI and your filing status.

If you file a single tax return, then you’ll be eligible for a full deduction if your MAGI in 2015 is$61,000 or less. You can take a partial deduction for an MAGI between $61,000 and $71,000, but no tax deduction for your contributions if your MAGI is $71,000 or greater.

If you’re married and file a joint return, then you can take a full deduction for your contribution if your joint MAGI is $98,000 or less, or a partial deduction if your joint MAGI is between $98,000 and $118,000. Your deduction will not be deductible if your joint MAGI is $118,000 or more.

While being able to get a current year tax deduction for contributions to a traditional self-directed IRA can be valuable, even non-deductible contributions (such as to a Roth self-directed IRA or to a traditional account in years where your MAGI is too high) can be extremely valuable to your retirement future. The ability for your investments to grow in a self-directed IRA for years or decades on a tax-deferred or tax-free basis is something you shouldn’t pass up.

 

Should You Use Your Self-Directed IRA to Buy Investment Properties While Interest Rates are Low?

The ability to invest in real estate is one of the most common reasons why retirement savers first start becoming interested in the self-directed IRA. An individual retirement account with a self-directed IRA custodian such as Quest Trust Company individuals to out their retirement funds to work in investments that traditional IRA custodians simply wouldn’t allow.

Adding to the desirability of investment real estate for retirement savers is that interest rates on mortgages and other types of borrowing continue to be quite low.

UBTI

Even if interest rates are low, you may not be able to derive the benefit you hope from borrowing money to buy real estate with your self directed IRA. This is because the tax laws that authorize individual retirement accounts put some limitations on how those accounts may be used. In particular, the activities of IRAs must be related to the fundamental purpose of the account, and that means to make investments. Borrowing money to make investments, however, is called out as an activity that’s at odds with the fundamental investment purpose.

As a result, when an IRA borrows money, the investment gains that result from that borrowing are considered to be unrelated business taxable income (or “UBTI”), which means that you’ll face a current year tax bill because of your investment borrowing. In many cases, this can greatly reduce or even exceed the advantages you gain by taking out a mortgage.

Investment Quality

If you choose to borrow money within your self-directed IRA in order to invest in real estate, be sure you are doing so because you are presented with a quality investment opportunity, rather than simply because interest rates are low. You should have a plan for how each piece of property you acquire is going to become a productive part of your portfolio, and your anticipated timeframe for that to occur.

Note that this doesn’t necessarily mean every piece of investment property you acquire needs to be productive right away. “Fixer uppers” are certainly appropriate for investment; just be sure you take into account any repair or remodeling costs into your financial analysis.

Fees

Regardless of how you choose to use your self-directed IRA to acquire investment properties, you should have a comprehensive understanding of the costs and fees that come with holding the property. For example, many real estate investors will tell you that as they build larger portfolios of property, they find that their costs on a per property basis tend to decline. This is because they are able to leverage certain economies of scale when it comes to property managers, repair and maintenance professionals, and other types of support they need in maintaining those properties.

Low interest rates can be a factor in deciding whether or not to buy investment real estate with your self-directed IRA, but it should not be the only factor.

Becoming More Active in Your Self-Directed IRA Investments

Unfortunately, because the purpose of an IRA is to build a retirement nest egg that won’t be drawn down upon for many years, or even decades, some account holders mistakenly assume that means they need to hold their investments within the account for years or decades as well. The truth of the matter is that you should generally evaluate portfolio investments within a self-directed IRA with the same criteria that you use for any investments in a tax advantaged account.

While self-directed IRAs aren’t the ideal account type for rapid day trading activities, you still may be able to benefit from becoming more active in your investing process. The first step towards being more active is to arm yourself with knowledge.

Identifying New Investment Opportunities

In order to take a more active role in your retirement future is to identify all the new investment opportunities you’ll have available for your retirement nest egg when you have a self-directed IRA. Unlike the investment options you have with an IRA at a traditional custodian – mainly stocks, bonds and mutual funds – you will have significantly more options with a self-directed IRA.

Take the time to begin learning more about the opportunities available in investment real estate, private equity, private debt, and precious metals. Some of these asset classes may be ones that you have never had experience with before, so take the time to learn as much as you can about them before you begin investing.

Understand Your Investment Personality

Not every “good investment” is suitable for every individual. We each have our own investing personality, and it can vary significantly from individual to individual. Some people are simply not comfortable with high risk/high reward investments, while others may be unsatisfied with a “slow and steady” approach.

You can begin the process of identifying your investment personality by first considering some of the objective factors about your retirement planning, including how long you have to invest before you anticipate retiring, as well as other sources of retirement income you may have. Also consider your prior investing habits, your experience and knowledge of various types of investments.

Finally, you’ll need to evaluate your tolerance for risk

Don’t just consider this issue in a vacuum – attach some dollar figures to your thought process. Would you be able to tolerate a 10% drop in the value of your portfolio at any point over the next 10 years? What about a 20% decline at any point between now and your target retirement date? Are you truly comfortable accepting the possibility of investment losses if the trade-off is potentially higher gains?

Once you know more about the investment opportunities that are available, as well as your investing personality, you’ll be in a much stronger position to actively manage your account and to maximize your retirement nest egg.

Why You Should Consider Consolidating Multiple Retirement Accounts Into a Single Self-Directed IRA

Over time, many of us accumulate a number of different financial accounts. For example, we might start a new 401(k) or other employer-sponsored retirement plan each time we change jobs. Or we might open a new IRA in order to receive the benefit of a promotional offer that our broker is sponsoring.

Unfortunately there are a number of downsides to maintaining multiple retirement accounts. In most cases, you can benefit from consolidating multiple retirement accounts into a single self-directed IRA.

Investment Options.

Let’s consider two possible scenarios; one in which you have five different IRAs with a $50,000 balance in each, versus a situation where you have a single self-directed IRA with a $250,000 balance. Your nest egg in each of these situations is identical, but your investment options going forward are not.

With the single self-directed IRA, you can make investments of up to $250,000. Given that a self-directed IRA custodian such as Quest Trust Company will not limit your investment choices in the same way that a traditional custodian would, you can use those funds to purchase real estate or to invest in private companies. You can even issue mortgages to real estate buyers or investors.

Those types of investments often require a higher account balance compared to what you would need to purchase stocks or bonds. Simply put, you’ll have more investment choices if you consolidate your multiple retirement accounts into a single self-directed IRA.

Furthermore, if some of your retirement accounts are 401(k)s that you have left at prior employers, rolling these over into your self-directed IRA can open up a new world of investment opportunity. Most employer-sponsored plans are severely limited in terms of available investment options.

Ease of Administration.

Don’t overlook the fact that having to manage multiple IRAs can present you with a significant administrative burden. Even with just four or five separate accounts, you’re going to have to spend a lot of time managing all the paperwork and statements that those various accounts produce. In addition, when it comes time to retire it can be even more of an administrative burden to execute a withdrawal strategy over multiple accounts.

Ease of Contribution Strategies.

If you maintain multiple IRAs, it can be a challenge to decide how to make contributions such that you grow all of your accounts. Remember that the IRS annual contribution limit regarding IRAs is an overall amount, not a per-account maximum. This means that if you’re looking to contribute $5,500 this year, and you have four or five separate IRAs, you need to figure out a plan for how to divide up that contribution amount. In contrast, having a single self-directed IRA simply means that you make the maximum contribution to that one account.

Finally, having a single IRA also makes sense because it allows you a greater level of insight into your investment risk and portfolio makeup. This insight can help you build the largest possible nest egg for your retirement.