There are many types of retirement options that individuals can invest in, and an Individual Retirement Account, or IRA, is one of them. Typically, the account is administered by a trustee. However, it is “self-directed” as the account holder directly manages the account. There are two types of self-directed IRA: traditional IRA and Roth IRA. With a traditional IRA, you can make contributions that are tax-deductible, with a Roth IRA, on the other hand, you receive distributions that are tax-free. Those who want to expand their investments to include a tax-advantaged account usually resort to self-directed IRAs. The main difference between a regular IRA and a self-directed one is that regular IRAs are limited to certificates of deposit, bonds, stocks, and ETFs, while self-directed IRAs allow you to broaden your horizon.

Here are the benefits, rules, and contribution limits of a self-directed IRA.

Benefits

Self-directed IRAs come with the same tax advantages, including tax-free gains and tax deferrals, as traditional IRAs. Any income that your IRA investment will generate will enter your account with no taxes, and you’ll pay the taxes when you receive the distribution. This allows your investment to grow without imposed taxes. You’ll also have various benefits, such as real estate and private business entities with a self-directed IRA. This way, you can build a robust portfolio that can help you bring returns about. You will also be enabled to make efficient and quick investments without having to wait for approvals as you will be granted direct access to your funds. You can immediately wire the money or write a check to make an investment without having to talk to your trustee. With a self-directed IRA, you have the opportunity to save the money that you would’ve paid on a custodian fee with other retirement accounts. They also provide limited liability, asset, and creditor protection, which are especially advantageous if you plan on investing in real estate.

Contribution Limits

Any contribution that you make as a self-directed IRA owner must be made to the IRA administrator who immediately transfers it to your LLC. Generally, the contribution limits to IRAs are quite low in order to limit the amount of money that you can save for retirement every year. Although IRAs are designed specifically for retirement purposes, they try to limit the funds so that you don’t have enough to build an inheritance. You are free to pay under the maximum contribution account, as there are no regulations for a minimum yearly contribution in action.

It’s important to keep in mind that you can’t exceed the maximum the following year even if you don’t meet it this year. The total amount that you can contribute is $7K if you’re above 50, and $6K if you are 50 or under. If you’re a single individual, your limit begins at $125K and ends at $140K. For a married couple, it begins at $198K and ends at $208K. If one spouse generates income for the year, you can file a joint-return to start a self-directed IRA so that the both of you can make contributions. However, keep in mind that the amount of money that you both contribute should neither exceed your joint return’s taxable compensation nor surpass the maximum limit for the year regardless of which spouse receives the compensation.

Rules

The main principle behind the regulation of a self-directed IRA is that you can’t use the account for self-interest or for the intention to escape tax laws. Compliance and regulation key constituents are identifying ineligible individuals, as well as the kinds of transactions that they can’t complete using the IRA. In case of violation, an individual’s whole IRA may be entitled as taxable starting the year in which the violation was committed. The individual will be suddenly held accountable for taxes that we previously deferred in addition to a 10% early withdrawal penalty. A disqualified or an ineligible self-directed IRA holder maybe anyone who influences investment-based decisions or controls investments, receipts, assets, or disbursements. This also applies to some of their relatives or family members. You should also keep in mind that you can’t use an IRA to purchase assets or stock from a disqualified individual, or purchase/ sell lease assets or lend/ borrow from or to a disqualified individual, or buy a stock from a corporation with a controlling interest for a disqualified individual.

There are several types of retirement accounts. However, a self-directed IRA is probably the most advantageous one. With the combined benefits of tax-free gains and direct access to funds, a self-directed IRA can come quite in handy. However, there are a few regulations and contribution limitations that you should keep in mind.