Investing in an Individual Retirement Account (IRA) is a great way to start saving for your golden years. Whether you are interested in a Self-Directed IRA (SDIRA), 401(K), or other IRA plan, investment professionals at Royal Legal Solutions can help. Below is a list of the most frequently asked questions we receive from people looking to learn more about investing in their future.
General SDIRA Questions
While SDIRAs have been around for decades, they are not the most well-known means of saving for your retirement. As a firm that specializes in SDIRAs, Royal Legal Solutions is here to help you understand how these types of investment accounts work.
How is a SDIRA different from other retirement plan options?
IRAs, 401(K)s, and SDIRAs are all used to earmark funds you intend to use during your retirement. At their core, each is a vehicle that is used to promote savings and investments that become available to your upon retirement. The majority of these accounts allow for unhindered growth as the invested funds and their earnings are generally tax-deferred. Each allows for investments in publicly traded securities and derivations of them, including stocks, bonds and mutual funds. However, that is where a SDIRA distinguishes itself. SDIRAs allow you to invest in much more than that. These alternative assets, like real-estate, precious metals, and renewable energy, allow for you to have a much more diverse portfolio. IRAs and 401(K)s are typically held at banks, insurance companies, or general investment firms and managed primarily by investment professionals.
Investment firms that offer custodial management of your SDIRA, on the other hand, tend to specialize specifically in these types of accounts. Also unlike IRA and 401(K) accounts, you control every aspect of your SDIRA. The investment professionals who retain custodial-only access are simply there to ensure you do not unintentionally break rules set out by the IRS.
What is the typical timeline to open a SDIRA or 401(K)?
At Royal Legal Solutions, opening a new SDIRA or 401(K) is easy. On average, the account process can take between two days and three weeks. The main drivers that dictate this timeline are how you plan to fund your account and, if you have a current retirement plan, who the custodian is. Our investment professionals strive to make this process as easy and quick as possible. We know every day it takes to set up your account is another missed opportunity to grow your finances.
Does having a SDIRA make me more likely to be audited by the IRS?
Currently, the IRS cannot legally target taxpayers for audits based on the type of investment accounts they have. In 2015, the IRS began asking for additional information on IRA reports in the form of Form 5498. However, because not all investors digitally submit their reports and the IRS cannot presently support manual submissions, targeting SDIRA owners would be considered a discriminatory practice. While this may change in the future, a SDIRA will not trigger an audit.
My current CPA believes there is an incurred 39% tax if I switch to a SDIRA and has warned against doing so. Is this true?
Your CPA is likely not as familiar with the SDIRA process as a specialized firm would be. They may also be under the assumption that you are attempting to take an early distribution from your current IRA in order to fund your SDIRA. This is untrue. Opening a SDIRA is typically considered a custodian-to-custodian transfer of your current IRA. Because of this, the startup process and investments are non-reportable and non-taxable.
Funding My IRA
IRA Business Trusts knows that IRAs, the tax regulations that govern them and investment complexities can give anyone a headache. Our professionals are here to help make sure your IRA experience runs smoothly.
Can I claim all of my IRA contributions?
You can contribute to your IRA account. However, if you have an IRA account through your employer, you may not be able to deduct the total of your traditional IRA contributions due to IRS threshold constraints. The investment professionals at Royal Legal Solutions can work with you to help determine the best way to save you money while investing in your future.
How can I transfer funds into my new account?
There are two ways to roll funding between your accounts. For a non-taxable and non-reportable option, you can elect to make a direct custodian-to-custodian transfer from your old account to your new one. You may also opt for a distribution-and-rollover transfer. These events are reportable, but are not taxable when the old funds are rolled into a new account within 60 days of distribution from the previous custodian.
How long does a transfer take?
For the custodian-to-custodian option, a transfer may take between seven and twenty days. If you are considering a distribution-and-rollover method, it only takes a couple business days for your bank to transfer the distribution to your new IRA.
How do 401(K) rollovers works?
We will provide you with the necessary information you need to initiate a 401(K) rollover. As the plan owner, you must provide this information to your plan administrator to start the rollover process.
What is the difference between an indirect and direct rollover?
Indirect rollovers occur when the funds from your current plan are distributed directly to you. A 20% tax withholding fee will be taken from your total by your administrator. Once you deposit your distribution, you have up to 60 days to invest any percentage of those funds into your new IRA or 401(K) without an additional penalty tax. Direct rollovers bypass these taxes. With these, your current administrator issues your funds directly to your new plan.
Managing My IRA
Whether you are new to investing or just want expert assistance, IRA Business Trusts keep our costs affordable to ensure your investment funds go where they are supposed to: towards your future.
What rules apply to an LLC I invest in?
If your investments include owning a percentage of an LLC, all transaction must meet IRA guidelines. When LLC returns are distributed to investors, including you, they need to be issued at the same time and pro-rata.
How much can I contribute annually to my IRA?
Contributions to your IRA and 401(K) are subjected to annual limits as dictated by the IRS. For IRAs, if you are under the age of 50, your annual maximum contribution is $5,500. If you are 50 or older, your annual contribution is capped at $6,500. Simplified Employee Pension IRAs are different and have an annual limit of $54,000. The 2018 solo 401(K) contribution limit is $55,000.
What is a RMD?
RMD, or Required Minimum Distribution, is the lowest amount of money you are obligatory to withdraw from your retirement account once you reach the age of 70.5. (Roth IRAs differ. They do not require any withdrawals until after the owner has died.) Your RMD is calculated by the IRS-published life expectancy factor and your balance as of 31 December of the previous year. RMDs are calculated on an annual basis with the first one starting on 01 April once you turn 70.5. You are required to withdraw your annual RMD amount by 31 December every year.
Do I pay taxes on RMDs?
Yes, the account owner is taxed at their income tax rate when they withdrawal their RMD.
What if I fail to withdraw my RMD that year?
Regardless of whether the IRA is yours or you inherited it, failure to withdraw the designated RMD by 31 December will result in a 50% penalty fee.