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.