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7 Things You Need to Know About Self-Directed IRAs and Taxes

hubcutWith the April 15 tax deadline mere weeks away, everyone can benefit from a refresher on the tax advantages of Self-Directed IRAs.

  1. Reduce your taxes when you start taking distributions by contributing to a Roth IRA. Roth contributions don’t reduce your current tax obligations, but you won’t owe taxes on the distributions you take later. The 2014 maximum contribution to a Roth IRA is $5,500 for people 49 and younger; $6,500 for people 50 and older.
  2. You pay no taxes on the earnings grown in your tax-advantaged retirement accounts until you decide to distribute.
  3. If you took required distributions from a Traditional IRA in 2014, you don’t have to fill in any additional forms. You just include the amount of the distributions as ordinary income.
  4. If you received non-qualified distributions from a Roth IRA (other than a rollover, qualified charitable distribution, one-time distribution to fund a Health Savings Account, recharacterization, certain qualified distributions, or a return of certain contributions), you will report that income on Form 8606. However, if you received qualified distributions, your custodian simply needs to report a code Q on the IRS form 1099-R. In this case Form 8606 is not required.
  5. If you inherited an IRA, you must include any distributions you took as ordinary income. 
  6. Depending on your income, you may qualify for a Retirement Saver’s tax credit. This gives you an added tax break to encourage retirement savings.
  7. Lower your 2014 tax bill by contributing to your self-directed retirement account. 
    • The maximum contribution to a Traditional IRA is $5,500 for people 49 and younger; $6,500 for people 50 and older.
    • If you have a Simple IRA plan, employees can defer up to $12,000; employees 50 and older benefit from an additional $2,500 catch-up contribution.
    • A SEP IRA allows you to shelter a maximum of 25% of your compensation, up to $52,000.
    • Read the complete list of contribution limits, including those for Coverdell ESA and Health Savings Accounts.

If you want more information about 2014 distributions from IRAs, read this up-to-date IRS publication.

Self-Directed IRAs:
The Basics Guide

Learn about your investment options, Self-Directed IRA rules, and much more!

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