How Do I Fund My Self-Directed IRA?

A transfer involves moving funds directly from one retirement account to another, such as from one traditional IRA to another traditional IRA. In this process, the funds travel directly between financial institutions the IRA holder never takes possession of them.

A direct rollover is similar to a transfer, although it involves a change in account type. For instance, if you’d like to move the funds from an account with a previous employer’s 401(k) to a traditional IRA, you would initiate a direct rollover with your prior employer. Again, you would never take possession of the funds, so the transaction is not reported to the IRS.

An indirect rollover involves taking a temporary distribution from one retirement account, such as a 401(k) or traditional IRA, and then depositing it into another eligible retirement account within 60 days. In this case, you as the account holder take possession of the funds in order to facilitate the transaction.

For more in-depth information, check out our article on Transfers vs Rollovers or our SDIRA Funding Guide

An indirect rollover, or 60-day rollover, can be a double-edged sword. 

While this method may provide quicker access to funds than a direct rollover, it puts pressure on you to complete the rollover within the specified timeframe. Missing this deadline can result in tax consequences.

Additionally, the plan administrator may be required to withhold up to 20% of the taxable amount. To reclaim this withholding, you must deposit the entire distribution amount into a new retirement account within the 60-day window.

If you fail to complete the rollover within 60 days, the amount withheld for taxes could become a permanent tax liability. Further, if you're under 59½ years old, you may face a 10% early withdrawal penalty on the amount distributed.

For tax year 2024, the annual contribution limit for a traditional or Roth SDIRA is $7,000 for individuals under the age of 50 and $8,000 for individuals aged 50 and above (considered catch-up contributions). These limits apply to the total combined contributions across all your IRAs.

Certain factors, such as your income and participation in an employer-sponsored retirement plan, will determine whether you’re able to make contributions to a Roth IRA or whether traditional IRA contributions are tax-deductible.

Funding an IRA can offer various tax benefits:

Traditional IRAs offer the potential for tax-deferred growth, meaning you won't pay taxes on the earnings within the account until you make withdrawals during retirement. These deductions can also lower your taxable income for the year, potentially reducing your current tax liability.

Roth IRAs may allow you to benefit from tax-free growth. While your contributions are not tax-deductible, the earnings within the account can be withdrawn tax-free during retirement if certain conditions are met. This includes being at least 59½ years old and having waited at least five tax years since you first contributed to a Roth IRA.

Plus, in both traditional and Roth IRAs, you won't incur capital gains or dividend taxes as long as your investments remain within the account. This allows your investments to grow more efficiently compared to taxable accounts.

Note: Fully enjoying these tax benefits requires you to follow the IRS rules. This includes avoiding restricted investments and prohibited transactions.

If your 401(k) is a tax-deferred account, meaning you did not pay income taxes on the original contributions, then you cannot directly roll over funds from your 401(k) into a Roth SDIRA.

However, you may be able to roll over the funds into a traditional SDIRA, and then complete a Roth conversion from there. This generally entails a hefty tax bill in the year of conversion, though it does mean you’re able to avoid required minimum distributions (RMDs) down the line.