When navigating the world of retirement investing, one of the most important things to understand are the rules governing how you may fund your account. Overfunding your account can get you in trouble with the IRS and incur tax penalties. Underfunding your IRA can result in missed opportunities and overlooked tax advantages.
Individual Retirement Accounts may be funded via a transfer, rollover, conversion, or contribution. A contribution differs from a transfer or rollover in that it does not involve moving funds from one account into another. Instead, a contribution is a deposit made directly from an individual or their employer into a retirement account. Contributions are also not to be confused with conversions which involve converting funds from a Traditional, SEP, or SIMPLE IRA into a Roth IRA.
The IRS has set careful limits on the amount of funds that may be contributed to an IRA. These limits are based on the type of retirement account and your age. For individual accounts, Traditional and Roth IRAs, the contribution limits are generally smaller than employer accounts, SEP and SIMPLE IRAs. The 2014 contribution limits for Traditional and Roth IRAs is $5,500 with a possible $1,000 catch-up contribution for those age 50 and over. 2014 contribution limits for SEP IRAs is $53,000 and Simple IRAs is $12,000 with a possible $2,500 catch-up contribution for individuals over age 50. While the contribution limits for 2015 have not been published yet, the IRS does change these limits periodically. You can visit IRS.gov for the most accurate and up-to-date information on contribution limits.
These contribution limits apply to all IRAs, including those accounts which hold alternative assets or are self-directed. Remember that “Self-Directed IRA” is simply a moniker and not an IRS or legal designation. All IRS rules which apply to non-SDIRAs also apply to SDIRAs. It is also important to note that while it is possible for an individual to hold multiple IRAs, these contribution limits are per person, not per account.
Knowing and understanding how to fund your SDIRA can help you make the most of your tax-advantaged retirement accounts and help you avoid tax penalties. While contributions represent just one of the ways you can fund your account, they are an key part of your overall retirement plan.
