Understanding Funding a Self Directed IRA
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Making a contribution to self directed IRA accounts is relatively simple, as long as you follow a few rules. Funding a self directed IRA account can be accomplished in one of two ways.
The first contribution to such an account is usually a rollover, transfer or conversion from another retirement account, and occurs when the account is first opened. Most people start with the traditional IRA or 401K and then as they become better educated, they learn they can make investments on their own. By doing so, they open up numerous investment options that do not fall within the norm.
As you continue funding a self directed retirement account, you can only use cash or cash equivalents. Property and stocks can be purchased and held within the account, but the holdings cannot simply be transferred.
If you have an existing account and you want to open a self-directed account, the holdings in the first account must be converted to cash and then the “cash” can be transferred into the new IRA. Though there is a maximum contribution to self directed IRA accounts that is considered tax deferred, there is no maximum on roll-overs.
When funding an IRA like this, you should be aware of the maximum cash contributions for that year. For example, in 2006 and 2007, you could contribute 100% of your earned income or $4,000, whichever was less, if you were under the age of 50. The maximums generally increase to correspond to inflation.
Individuals aged 50 and over who are funding a self directed IRA can contribute more under the “catch up” rules. These individuals are closer to retirement, and are therefore allowed to contribute more to their IRA on a yearly basis.
In order to be tax-deductible, there is a maximum contribution to a self directed IRA, traditional or Roth combined. If for example, you have already contributed $2,500 into a traditional IRA, your remaining eligible contribution to your self-directed account will be $1,500, assuming the maximum for that year is $4,000.
If a contribution to your account is determined to be a prohibited transaction, the account will lose its beneficial tax treatment. For instance, you cannot “loan” money to the account to cover costs of maintaining a rental property or other holding. By the same token, you cannot “borrow” from your retirement savings.
So, you see, funding an IRA that you direct is pretty much the same as funding any other type of retirement account. You simply need to find a company that can properly manage your new IRA and has the experience and expertise to offer the real estate investment option.
IRA custodians may not offer all of the investment choices. Many individual retirement account custodians do not conduct real estate transactions. That’s one of the things to consider when you are looking for a trustee.
It’s a good idea to do some comparative shopping before you begin making a contribution to self directed IRA accounts, because the experience and fees that these companies charge, may vary greatly!
By: Paul Clinton
About the Author:
Paul Clinton: Having been involved with real estate investing for about 10 years now, Paul was amazed to learn the income potential of self directed IRA’s. But what was even more startling, was that no portfolio manager ever suggested them as an investment vehicle.
If you don’t include self directed IRA’s as part of your portfolio, you’re missing out on a huge opportunity to grow your investment, even in a down economy.
Do yourself a favor and check out Paul’s site at: http://www.Turn-Key-RealEstate.com
Categories: Self Directed IRAs Tags: Cash Equivalents, Investment Options, Ira Contribution
