Congratulations on making the choice to set up a self-directed Roth IRA! Now that you’ve made the choice it’s time to become familiar with the most up-to-date self-directed Roth IRA rules and regulations. There’s no need to spend hours online pouring through webpage after webpage because we’ve done all the legwork for you. Here’s a look at the current self-directed Roth IRA investment rules and regulations so you can get yourself started.
Meeting the Requirements of Eligibility
It’s important to be well-informed of the current rules surrounding self-directed Roth IRAs so that you can make all the right moves when it comes to your individual retirement account. The rules can change on a yearly basis, so even if you’ve done some research in the past, be aware that things could be different now. The Roth IRA withdrawl rules, self-directed Roth IRA investment rules, and even the prohibited transactions with self-directed IRA can all change.
The rules we will discuss here apply until April 17, 2017, when you file your taxes. That also means you have up until that point to make a contribution that applies to 2016.
When you think of the word “rules” you think of things you can and can’t do. In terms of self-directed Roth IRA rules it refers more to the eligibility requirements. You need to meet these requirements, or rules, in order to put together a self-directed Roth.
There are two relatively simple criteria you need to meet and that is the status of your tax filing, and your income for the current year. The way in which you answer these questions will allow you to either keep investing in a current Roth IRA or you can possibly open a whole new one.
There is a set income limit that the government determines each year that you cannot exceed if you want to be able to hold a Roth IRA account. Keep in mind your income can be adjusted slightly thanks to a few eligible deductions. You can deduct such things as education and student loan expenses/interest. Once you start to make these adjustments it is called "MAGI", which stands for modified adjusted gross income.
What are Your Contribution Limits?
We've put together a list of information that outlines your contribution limits based on your filing status and your income. Let’s take a look:
Single Filing Status
For these individuals if you make less than $117,000, you can contribute up to $5,500 in 2016. Keep in mind that if you are over the age of 50, you can actually contribute $6,500. If you make between $117,000 and $131,999 the contribution amount will start to be phased out. Anything over $132,000, you won’t qualify for a direct Roth IRA.
Married but Filing Separately Status
For those who are married but file their taxes separately, your contributions are as follows. If you make no money at all, you can contribute up to $5,500, with an extra $1,000 if you are over the age of 50. From $1 to $9,999 it has begun to be phased out. Once you hit $10,000, you won't be eligible.
Married and Filing a Joint Status
Lastly is the category of people who are married and who are filing jointly. For those who make $184,000 and less, you can contribute up to $5,500. Above that it is phased out and then you are no longer eligible once you reach $194,000.
A Look at Self-Directed Roth IRA Prohibited Transactions
There is also a list of self-directed Roth IRA prohibited transactions that you will want to familiarize yourself with. These rules are set out by the Internal Revenue Code and discuss what you can't invest in, and who may not take part in certain transactions. If you are looking for the code specifically you can find it at the Internal Revenue Code Sections 408 and 4975. There are a few different types of prohibited transactions, all of which can be found in section 4975.
These prohibited transactions for self-directed IRA accounts are relatively easy to understand. There are self-dealing prohibited transactions, direct prohibited transactions, and conflict of interest prohibited transactions.
The whole purpose of these rules is to make sure people aren't using their IRA as their personal cash flow, thanks to the tax benefits it offers. It is meant to be used for retirement purposes, which is why the Roth IRA withdrawl rules are so strict, and specific.
The Rules Don’t Stop There
There are still other rules that you'll need to be aware of, which include:
- The proper way in which you can make a withdrawal for free
- The fact that your age doesn't factor into your contributions, so you can make them any time
- It doesn't matter if you have other retirement savings plans
- There is no set mandatory distribution of your Roth
Be Informed, Prepared, and Money Wise
By doing your due diligence and reading up on your contribution limits, your income limits, the transaction prohibited, and the general rules, you’re sure to get the absolute best out of your self-directed Roth IRA.
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