Making a Contribution to Self-Directed IRAs

Self-Directed IRAs

Your contribution to a self-directed IRA is governed by some very specific IRS rules, but it might surprise you to know that you can pull from more than just your bank account to make those contributions. In addition, a self-directed IRA (available only to Roth IRA participants) has much more open rules about when you can contribute and what you can do with those contributions.

Unlike a traditional IRA, a contribution to a self-directed IRA can be made regardless of age (there is no restriction at all). You can contribute to these IRAs even if you have a pension plan, an employer 401K, or even a Roth 401K. You can contribute whether you've made a conversion earlier that year or not, and you can contribute to a Roth IRA you've converted from a regular IRA.

The limit for annual individual contribution to self-directed IRAs is currently $5000, $6000 for those over the age of 50, with anticipated annual increases in increments of $500 depending on inflation. If your income (or combined marital income) is too high, you won't be able to make a full contribution, and if your income is too low you may not be able to afford the maximum contribution. All contributions must come from compensation or alimony income, and you can contribute up to the amount of this income or to your annual contribution limit, whichever is smaller.

Compensation income is all income that comes from employment, either for another person or through self-employment. People who live on trust funds or other passive forms of income are ineligible to create IRAs. If you have compensation-type income and your spouse does not, you can still use the doubled contribution for yourself and spouse provided for in IRA rules.

Probably the biggest limitation in how you can contribute to a self-directed IRA is how much you make right now. The IRS has rigid rules that kick in after you, as an individual, has made over a hundred thousand dollars limiting how much you can invest in funding a self-directed IRA. Amounts change every year, so if you fall into this category you need to check whether you have limitations or not.

When you contribute to a self-directed IRA, cash comes from you and from your employer. You can set one up for your spouse as well if she or he does not already have one, and contribute to that one from joint income. It is possible to roll traditional IRAs into a Roth IRA as well, though you'll have to pay regular tax on it in order to do so.

There's one other form of IRA you need to be aware of: the SEP or SIMPLE IRA. The rules governing these compared to when you contribute to a self-directed IRA are interesting, and can seriously benefit you over the long haul. Employers form the major contributor to both these IRAs, though you can contribute as well. Your contributions directly reduce the amount you can contribute to your self-directed IRA. However, if your employer contributes more to these, you can roll these into a Roth IRA later, building up your nest egg enormously.

When you're examining your different IRA options. make sure you consider every type of IRA and its benefits and drawbacks, not just the amount you want to contribute to your self-directed IRA. Careful planning can greatly increase the ultimate value of your IRAs, and wise investing with the self-directed IRA can make your retirement a paradise.