Minimize Your 2013 Tax Bill with a Self-Directed IRA

Estimated reading time: 3 minutes

One of the most popular ways for individuals to reduce their personal income tax bill is by making deductible contributions to an Individual Retirement Account.

The contribution limits to IRAs are computed on an annual basis, but once you file your taxes you don’t get to go back and make any additional contributions for years in which you failed to make the maximum. It’s therefore important to get the biggest tax break you can by making the maximum IRA contribution each and every year.

First Consider Deductible IRA Contributions

Most taxpayers will first look to see if they are eligible to make tax deductible contributions to their traditional IRA. If you’re eligible, this is one of the best ways to reduce your 2013 tax bill. This deductibility will only apply to traditional IRAs, and only if you meet certain other requirements. These requirements basically relate to your level of adjusted gross income if you or your spouse is covered by an employer-sponsored retirement plan such as a 401(k). Contributions to Roth IRAs are never deductible.

Drawbacks to Employer-Sponsored 401(k) Plans

Speaking of 401(k)s, you may hear people claim that these plans are far and away the best retirement savings vehicle. After all, the annual contribution limits for 401(k)s are higher than those for IRAs. In truth, however, it’s important to look at all of the retirement savings options you have available, and what combination of them makes the most sense for your financial situation. (For example, even if you have access to a strong 401(k), you can still open a self-directed IRA and save even more for your retirement.)

It’s important to note that one of the traditional strengths of the 401(k) program – employer matching employee contributions – has declined in recent years. Fewer employers are making matching contributions, and many of those are only continuing to do so on a lower percentage basis.

Furthermore, as employees better educate themselves about investment options, many are finding that the investment options available in their employer-sponsored plan are rather limited. Some 401(k) plans only allow employees to choose from a relatively short list of mutual funds. To make matters worse, many of these plans and funds come with high management fees.

Greater Control With a Self-Directed IRA

In contrast to 401(k)s, a self-directed IRA with a custodian such as Quest Trust Company allows a significantly higher degree of control. A full range of investments permitted by the IRS (including real estate, certain precious metals and various types of private investments) are permitted in self-directed IRAs. Savvy retirement savers use this flexibility to hold certain types of tax heavy investments within their self-directed IRAs, while holding more tax preference to investments in their taxable accounts.

Note that this technique for reducing your tax bill will work regardless of whether your self-directed IRA is set up as a Roth account or a traditional account. For more information about how you can put a self-directed IRA to work for you, contact Quest Trust Company today.

Start Your Holiday Tax Planning Today

Estimated reading time: 3 minutes

The end of the year is normally a very busy time for most individuals. We often face a crunch time at our jobs trying to get important projects completed before the close of the year, and there are all of the different family obligations we need to meet.

Since our 2020 tax returns aren’t due until Tax Filing Deadline of the next year, it might be tempting to not spend any time in November or December thinking about tax planning. But this would be a mistake, since the coming end of the tax year means that you need to make certain decisions and take certain actions before December 31. Here’s why it’s important to start your holiday tax planning today.

Contributions to Your Self-Directed IRA

Fortunately, the deadline for making your annual contribution to your self-directed IRA isn’t until you file your tax return (i.e., as late as May 17th, 2021). But while you don’t need to make the actual contribution in 202o, you will want to plan for that contribution now. If you spend too much money on gifts and travel during the holiday season, you may have a hard time coming up with the maximum allowable contribution ($6,000 for individuals under age 50, or $7,000 for individuals age 50 or older).

Plan For Your Deductions

Apart from creating a plan to maximize your self-directed IRA contributions, the most important part of holiday tax planning will be to identify the various deductions you’ll be able to take, including any tax-deductible you make. You’ll need to make any charitable contributions before December 31, 2021 if you want to claim any available deductions on your 2021 return.

It often takes a bit of advance planning in order to be sure that you have enough cash or other resources available to make the desired deductions. If coming up with the cash will be a challenge but you still want to make a tax-deductible charitable donation then consider a donation of an investment asset that has appreciated in value. Most commonly this will be a gift of stock that has risen in value. Not only will you be able to avoid having to pay tax on the amount of the gain, you’ll be able to take a tax deduction for the fair market value of the asset.

Consider Your 2014 Plans

Part of the holiday tax planning process for 2021 is to give some thought to what types of tax moves might be necessary in 2020. For example, if you anticipate a significantly higher level of income next year, there may be steps you can take now to set yourself up for greater deductions on your 2014 return.

The more time you have two prepare for all of the tax consequences you’ll face in the coming year, the better you’ll be able to address any issues at the lowest possible cost. Consider consulting with an expert for advice for the coming year.