Making contributions to your retirement account allows investors to put money away for retirement. When contributing to your retirement account you may have the option of contributing to an employer's 401(k) or can invest using an IRA.
IRA are an excellent retirement account option for those that are currently contributing to a 401(k) or those who don't have employer sponsored retirement options. Having the ability to allocate additional funds can provide opportunity for appreciation of assets into retirement.
Contribution limits will vary depending on which type of retirement account you are funding. In addition, the method of taxation of those investment dollars will vary depending on the type of IRA you are contributing too.
Those wishing to invest in alternative investments such as precious metals, real estate, and private funding will need to choose a self-directed IRA. The SDIRA allows individuals the opportunity to take control of investments within their retirement account.
While not specifically for market investments such as traditional stocks, bonds, mutual funds, and ETFs, the versatility of the self-directed IRA allows for both alternative investment and traditional market investments giving the account holding the ability to control all retirement options.
What are the different types of IRAs?
To start you should understand there are different IRA types. Let us cover the types of IRA so you have a better understanding of which type you may have and the contribution limit you are afforded.
- Traditional IRA. Contributions typically are tax-deductible. You pay no taxes on IRA earnings until retirement, when withdrawals are taxed as income.
- Roth IRA. Contributions are made with after-tax funds and are not tax-deductible, but earnings and withdrawals are tax-free.
- SEP IRA. Allows an employer, typically a small business or self-employed individual, to make retirement plan contributions into a traditional IRA established in the employee's name.
- SIMPLE IRA. Is available to small businesses that do not have any other retirement savings plan. The SIMPLE – which stands for Savings Incentive Match Plan for Employees – IRA allows employer and employee contributions, similar to a 401(k) plan, but with simpler, less costly administration, and lower contribution limits.
- Self-Directed IRA. This option is self managing. The other IRA options typically fall within a brokers investment guidelines. The SDIRA gives investors complete control of their investment options. You can have a Traditional SDIRA, Roth SDIRA, SEP SDIRA, and Simple SDIRA.
What Are The Benefits of a Self-Directed IRA?
The main benefit of a SDIRA is the ability to acquire alternative investments. Purchase any of the following investments:
- Real Estate
- Private Placement
- Promissory Notes
- Precious Metals
- Lumber
- Farmland
- Restaurants
- Racehorses
- Livestock
- Cryptocurrency
The benefit of owning assets within a SDIRA is the ability for potential higher ROI, to diversify your portfolio, leverage tax-advantage retirement accounts, and most importantly take control of your financial future.
What Can't I Invest In With My Self-Directed IRA?
A SDIRA gives investors the control they are looking for an alternative investment opportunities. However, not everything is allowed to be invested in a SDIRA. Here are a few items you cannot purchase using your SDIRA:
- Life Insurance - life insurance is an after life benefit. Since an IRA is for the benefit of the individual the SDIRA cannot purchase life insurance as the beneficiary (you) cannot recoup the investment.
- Collectibles - artwork, antiques, gems, rare coins. These items are typically for immediate benefit and therefore cannot be purchased within an SDIRA.
- S Corporations - investment for S Corporations are certain types of trust and individual shareholders. Therefore a LLC or SDIRA account cannot invest in a S Corp.
2023 Contribution Limits for Retirement Accounts
All contributions for a IRA are based on the total recognized accounts. You can have multiple accounts i.e. one Roth IRA, one Traditional IRA, one Self-Directed IRA or even multiples of each. There is no limit on the number of accounts. However, the yearly contribution limits are across all retirement accounts. Therefore you cannot exceed the limits for IRAs.
- Traditional & Roth IRA Contribution Limits - Standard Contribution $6,500 for those under the age of 50. Catch-up limit is an additional $1,000 for a total contribution of $7,500.
- SEP IRA Contribution Limits - Max Dollar Allocation in 2023 is $66,000 - Max Considered Compensation is $330,000
- Simple IRA Contribution Limits - Standard Limit is $15,000 and Catch-Up Limit (age 50+) is $18,000
- 401(k) and Solo(k) Contribution Limits - Standard Limit in 2023 is $22,500 with a max of $66,000. Catch-up limits are $30,000 and max of $73,500
- HSA Contribution Limits - High Deductible Health Plan Coverage is $7,750 standard limit and $8,750 for catch-up age 55+ (this is for a family plan)
Individuals contributing to employer sponsored retirement accounts can also contribute to a Self-Directed IRA, Traditional IRA, or Roth IRA.
Who Can Contribute to an IRA Account?
There are specific rules for contributing to an IRA. IRS sets the rules and the contributions are based on the earned income of the account holder. Self-directed IRA are also mandated by the IRS to have contributions from earned income.
2023 Contribution Requirements:
- Single filer or head of household with modified gross income (MAGI) of less than $138,000
- Married filing jointly with a MAGI of less than $218,000
Get more specific contribution limits and modified AGI here at the IRS website.
How to Fund My Self-Directed IRA?
Choosing to open a self-directed IRA you have a couple options for funding the account.
- Self-Funding Contributions - we covered the limits per year
- Rollover - you can choose to roll over retirement funds from a current IRA or prior employer's 401(k)
When choosing a SDIRA most investors are seeing the advantage of high returns. Maybe they are looking at investing in a real estate project that has a $50,000 minimum investment or purchasing Gold or Silver physical bars or coins, and again the Gold Dealer has a minimum investment threshold. These types of investment make it difficult to invest in if you are maxing out your personal contribution of $7,500 per year.
Choose the alternative of rolling over from an existing retirement account.
When rolling over funds from one retirement account to another you can do this without penalty. There may be a one time per year max rollover, but you can rollover a portion of your current retirement account or the whole account.
Choosing the SDIRA and rollover option will take some understanding and education. Like with all IRA accounts there are fees. The SDIRA account requires a custodian and they will have individual fees for things like; opening an account, transactions, yearly maintenance, and per transaction. Make sure you're return can cover the cost of the fees for your SDIRA account.
Taking Distributions From My Self-Directed IRA
When you choose to take distributions from your IRA you can do so without a 10% penalty once you reach the age of 59 1/2 years. You are required to take contributions starting at 72 years of age, but between those dates you are not required to take contributions.
Based on the type of SDIRA you set-up, once you take contributions you will pay taxes accordingly. This is the benefit of a SDIRA or traditional IRA, your tax bracket most likely will be lower once you reach retirement age.
When purchasing physical precious metals including gold and silver you have the opportunity to take contributions in the form of the physical metals or cash. You can choose to have the depository send the metals to you, showing a contribution with the custodian, or you can sell the metals within the IRA and take a contribution of cash from the SDIRA.
Final Thoughts
Make sure you understand your contribution and allocations before you contribute. Max out all available employer account and IRA accounts before you invest outside of a retirement account.
If you choose to invest in precious metals, work with a qualified dealer who educates and informs before they sell a product.
