How Taxes Work if you have a Self-Directed IRA

Saving for retirement is a very important responsibility that all people share. When you are looking to save and prepare for retirement, using tax-advantaged accounts can be a great option. Depending on which type of account you select, you can either receive tax benefits now or in the future when you take money out of the account. One of the most common types of investment retirement accounts available today is the IRA, which offers various investment and tax benefits.

As you are looking to open an IRA, you will be able to choose between traditional and Roth IRA programs. With a traditional IRA, you can receive a tax deduction now for any contributions but will need to pay income taxes on withdrawals. With a Roth IRA, you will not receive tax benefits now but won’t have to pay in the future. In either situation, you can choose to open a self-directed IRA, which offers more control and investment options. There is much you need to understand about potential taxes with a self-directed IRA.

When Taxes are Applied

When you are going to open up a self-directed IRA, the way you are taxed on the account is the same as it would be with a standard IRA account. If you open a traditional self-directed IRA, you will receive a tax deduction up to IRS limits each year. While this can save money today, you will need to pay taxes on any money withdrawn in the future. These distributions will be taxed like normal income.

If you open a Roth IRA, you will make contributions on a post-tax basis, but will not be taxed on any money you take out in the future. However, you will not receive any tax benefits today. It is important to remember that for both traditional and Roth IRAs, any growth you receive will not be taxed until you start to take withdrawals. This means you can buy and sell securities and other investments along the way without worrying about further taxation.

Early and Late Withdrawal Considerations

You also need to remember that an IRA is intended to be an investment tool to prepare for retirement. This means your money in the account can be locked up until you reach retirement age. Presently, you are not permitted to withdraw funds from the account until you are 59.5 years of age. If you do so prematurely, you can be hit with a 10% penalty in addition to any taxes. Also, when you reach 70.5 years of age, you will be obligated to start taking required minimum distributions, or RMDs, which will obligate you to start taking money out of this account and paying taxes on it in some situations.

Consult an Advisor

Planning for retirement is very important and there are a lot of factors to take into consideration, not the least of which is how taxes can impact your nest egg and savings. When it comes to self-directed IRA taxes, the amount you pay can vary considerably based on the type of account you open, when you take distributions, and how your investments perform. Speaking with an advisor is often helpful as they can outline the tax benefits of each option and ensure you are making an informed decision.

A self-directed IRA continues to be a great investment account that you can use to save and prepare for your financial future. These accounts offer more investment options and control than standard IRA accounts. If you are going to open an IRA of any kind, it is important that you understand the impact that taxes can have. There are various factors that you should understand about taxes and how they can impact your IRA.