Self-Directed Traditional IRA Overview
What is a Traditional IRA?
A Traditional IRA account is a retirement savings vehicle for individuals to save money at a tax-deferred rate. Contributions made into a Traditional IRA are done at a pretax rate and may be tax-deductible. Earned interest, capital gains, or dividend income made from the IRA funds also grow at a tax-deferred rate and are only taxed upon withdrawal.
A self-directed Traditional IRA with Accuplan allows the account holder to self-direct their retirement funds outside stocks, bonds, or mutual funds. The account holder ultimately dictates where their money is being invested. Assets can range from real estate, cryptocurrency, businesses, and more.
What are the Tax Benefits?
There are two significant benefits to a traditional IRA. First, funds growing at a tax-deferred rate and are only taxed upon withdrawal. Second, contributions generally lower your taxable income in the contribution year. This affects your AGI (adjusted gross income), which may help you qualify for more tax incentives that you otherwise wouldn’t have been eligible for without the lowering of your taxable income from your contributions to your traditional IRA.
For 2021, the annual contribution limit is $6,000 for savers under the age of 50. If the account holder is over 50, they can contribute an extra $1,000, $7,000 in total contributions annually. This contribution limit applies across all IRA accounts. So, if the same individual owns multiple IRAs, then the annual limit is spread across all IRAs.
Add all limits from the contributions page here for traditional accounts but not the limits based on MAGI.
The IRA owner can start withdrawing from their Traditional IRA starting at age 59½. Funds withdrawn from a traditional IRA before reaching 59½ will be subject to penalty fees and taxes.
Are there exceptions to the early distribution penalty tax?
Yes, there are several exceptions to this penalty tax. A few of the major exceptions to the early distribution penalty tax are:
- Qualified higher-education expenses
- Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
- Medical insurance premiums
- Costs associated with buying or building a first home
Once you reach age 59½, you can withdraw funds from your Traditional IRA without restrictions or penalties. Keep in mind that your deductible contributions and earnings (including dividends, interest, and capital gains) will be taxed as ordinary income.
Required Minimum Distributions
An RMD is a minimum amount that the Internal Revenue Service requires an IRA owner to withdraw from their IRA. Once the owners of a Traditional IRA reach age 72, RMD takes effect. An RMD is an annual distribution each year once they have reached a certain age.
Adversely, if IRA owners take distributions too early, those funds could be subject to early withdrawal penalties.
The deadline for taking RMDs is December 31 each year. You can delay taking your first RMD (and only your first) until April 1 of the year after turning 72. If you waited to take your first RMD, you’d be required to take your first and second RMD in the same year. If you don’t make withdrawals, you’ll have to pay a 50% penalty on the amount you should have withdrawn.
How Does Accuplan Improve the Traditional IRA?
Accuplan allows you to do more with a Traditional IRA. Most retirement accounts, be it a Roth, Traditional, or 401K, rely on stocks and bonds as the investment option. The IRS allows many more asset types than simply stocks and bonds.
With Accuplan Benefits Services, you can set up a self-directed Traditional IRA and invest in tangible assets like real estate or gold or paper assets like private equity or loans. A self-directed retirement account allows you to take control of your retirement account and invest in what you want. With Accuplan, the possibilities are endless.
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Create an account online, or contact us for further information.
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Frequently Asked Questions
Anyone can set up and make contributions to a Traditional IRA if the following eligibility requirements are met:
- The owner of the account has received taxable wage or salary during the tax year, and
- If the IRA owner is not turning 70½ by the end of the year.
If individuals and their spouses have both received a salary or wage over the year, then both individuals can establish an IRA. If filing jointly, however, only one person is required by IRS law to receive compensation to contributing on behalf of their spouse.
The short answer is yes. If you have earned income, you may put money into both a 401k and Traditional IRA. All contribution limits remain the same as mentioned above, plus you’ll still receive all the tax-deferred savings. What may change is the tax breaks you’d receive on your contributions. These tax breaks are based on your income. They may be little tax breaks or gone altogether depending on your MAGI (modified adjusted gross income).
Your MAGI determines many different benefits that you may receive. Still, for retirement accounts, it determines if you are eligible to contribute to a Roth and if you can deduct your traditional IRA contributions.
To calculate your MAGI, you’ll first calculate your AGI (adjusted gross income). Then you’ll add any deductions back specified by the IRS, which, more times than not, is irrelevant, and you won’t need to add any back. MAGI is always the same or greater than your AGI.