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.

Advice for Managing Multiple Investment Properties Within Your Self-Directed IRA

Real estate investing, despite the housing meltdown that occurred a few years back, remains quite popular. In fact, in many respects real estate investing has become more popular over the past few years, as more families are unable to meet the stricter mortgage requirements, or simply aren’t interested in owning a home. These factors drive up the demand for rental properties.

This has made real estate a very popular investment class, particularly for individuals who have chosen the flexibility of a self-directed IRA with a custodian such as Quest Trust Company. But investment real estate generally requires a level of involvement far greater than investments in stocks or bonds. Here are some tips for managing multiple investment properties within your self-directed IRA.

Know When It’s Time to Get Help

Perhaps the most important piece of advice when it comes to investing in real estate is that you should know when it’s time to get professional help. Managing a single piece of investment real estate can be challenging enough, but when your obligations are multiplied by numerous properties – particularly when those properties are not located close to one another or are not to the same investment type (e.g., residential vs. commercial vs. farmland) – they can quickly become overwhelming.

If you currently own investment real estate, take a look at how much time you’re spending in the management of your properties. Then research how much you would have to spend on professional help for those same services. You won’t be able to deduct those costs as you would if those investments were held outside of a tax-preferred account, but you may find that expense to be worth it.

Evaluate Each Property Individually

One element of property management in the context of investing within your self-directed IRA is confirming that a particular property is suitable for your investment portfolio. Just as you periodically evaluate other types of investments (stocks, mutual funds, etc.) to make sure that they’re still a good fit for your goals and needs, you need to do the same thing with each piece of real estate you hold.

Set up a schedule to evaluate each individual piece of property in your portfolio

Ask yourself if it is performing as you had anticipated when you acquired it (or in the time period since your last review). If not, determine whether or not there is anything you can do to improve its performance. If the property is no longer suitable as an investment, then determine whether there’s a sensible way to get that property out of your portfolio.

Have an Exit Strategy

In fact, it’s important to have an exit strategy for each and every property in your portfolio. Understand when it makes sense to no longer hold a particular property, or when it makes sense to have your funds invested in something else.

Bonds or Dividend-Paying Stocks – Which are Better For Your Self-Directed IRA?

Regardless of your overall investment outlook, your preferred investment types, or even the size of your retirement portfolio, there’s a good chance that won’t at least part of your nest egg to be in assets that generate a regular income stream.

This is often a common scenario when someone enters retirement, and needs to begin living off of what they’ve accumulated in their various retirement accounts. Rather than having to sell off investments and reduce the size of their overall portfolio, many individuals choose investments that generate an income stream and can cover some or even all of that individuals or retirement expenses.

Differences in Risk

Bonds are generally considered to be a safer investment than stocks in terms of risk to capital. Bondholders receive their interest payments before the company can pay any stockholder dividends, and bondholders are generally near the front of the line in getting any type of payout if the company experiences any significant financial difficulty.

This generally results in greater market volatility and price fluctuations of stock investments over bond investments. Investors who are looking to make trades with a relatively short or medium term time frame will need to take these risk differences into account.

Differences in Potential Upside

In the most general of terms, stocks are considered to have a greater upside potential as compared to bonds. Bondholders are limited to receiving their stated interest payments, and those payment levels won’t grow over time, in contrast to the dividend payments at a common stockholder might receive. Furthermore, bondholders won’t share in the growth of the company in the same way that stock investors will.

But that certainly isn’t to suggest that it’s impossible to realize significant capital gains through bond investing. Remember that as current interest rates go up and down, the price of any given bond to instrument will tend to vary inversely to that interest rate change. This means that as current rates fall, the value of a bond will tend to increase.

Cash Distinguished

It’s important to note that when we’re analyzing and evaluating the relative pros and cons of bonds and dividend paying stocks, we’re still very much keyed into the investment elements of those asset classes. In other words, even where the primary investment goal is current income, we still evaluate and ultimately select our investments giving consideration to whether we can also realize gains on those investments too.

Bonds and dividend paying stocks should therefore be distinguished from cash or investments such as bank CDs. In general, the purpose of those investments is not to generate current income (particularly with the historically low interest rates we’ve seen over the past number of years), but liquidity and security of principal.