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5 Tax Tips For Self-Directed IRA Holders

The self-directed IRA is a powerful financial tool for retirement savings. It can allow you to invest in a variety of options with minimal restrictions, but it also comes with tax implications that must be addressed. Here are five tips to help you avoid the common mistakes made by self-directed IRA investors:

Know your contribution limits

The most basic rule of self-directed IRAs is that contributions are limited. For example, the IRS limits how much you can contribute to a traditional IRA each year (and if you’re age 50 or older, you also have an additional catch-up contribution available). The same is true for Roth IRAs and SEP IRAs (which are company sponsored).

The IRS also has limits on how much money can be contributed to a SIMPLE IRA by employees and employers. And if you convert funds from another retirement account into a Roth IRA, there are specific rules about what kinds of assets are eligible for conversion and how much of your balance can be converted in any given year.

Can you open IRA account in multiple numbers? As per professionals at SoFi,”Yes, you can open multiple IRA accounts.”

Understand your tax obligations

The first thing you need to understand is that your tax obligations will vary depending on your income, filing status, and whether or not you have a side gig. Here are some common taxes:

  • Self-employment tax. This is paid by individuals who work for themselves and not through an employer. If you fall into this category, chances are good that you’ll be required to pay self-employment tax.
  • State income taxes. Just because the federal government does not charge an income tax doesn’t mean states won’t and in fact, most do. So if your state levies its own income tax on residents and there are 40 states plus DC that do, you’ll want to keep track of what percentage their rate is compared with yours if/when it comes time for filing.

Make sure you’re ready to file

  • The first thing you need to do is make sure that all of the information on file with your self-directed IRA custodian is correct. You may have an annual due date and/or tax filing deadline coming up. Make sure that the right forms have been sent, so that there are no surprises when it’s time for taxes due.

Avoid the top mistakes made by IRA holders

  • Missing deadlines.
  • Not understanding the rules.
  • Not knowing the tax implications.
  • Not making the most of tax breaks.
  • Not knowing how to transfer a rollover IRA.

Consider a Simplified Employee Pension (SEP) IRA

A Simplified Employee Pension (SEP) IRA is a retirement plan that lets you contribute a portion of your income to a retirement account. It’s great for small business owners and self-employed individuals because it doesn’t require any paperwork to set up or maintain, and you can start contributing right away.

The maximum contribution limit for 2019 is 25% of compensation plus an additional $6,000 catch-up contribution if you’re age 50 or older. Total contributions cannot exceed $56,000 in any one year for an individual under age 50; this increases to $62,000 if you are age 50 or older by the end of the year in which you want to make contritions.

Let’s hope that these tips have been helpful to you. As you know how important it is for self-directed IRA holders to understand their tax obligations, avoid making mistakes and keep up with the latest information about what’s going on in the world of IRAs.

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