In this week’s episode, IRA Financial’s Adam Bergman Esq. answers questions about the function of the Self-Directed IRA custodian, contributing to both a Solo 401(k) and Roth IRA and in-kind IRA distributions of Bitcoin.
Question 1 from Kevin S in Saginaw, MI: Why can’t I open a Self-Directed IRA with my local bank – why do I need to use a custodian?
The reason is simple – banks and other financial institutions don’t want you to invest your money in alternative investments. They are a custodian, and you can open an IRA; some will even let you open a Self-Directed IRA. However, you will always need custodial consent for everything you want to invest in. Plus, they won’t let you invest in anything you want.
The other reason is that banks make their money by pushing their investment products on you, like mutual funds, ETFs and the like. The more money you have in the plan, the more money the bank makes. If you take 80% of your IRA to make a real estate investment, the bank gets nothing.
However, when you choose a special custodian, such as IRA Financial Trust, you have the freedom to invest in what you want, when you want. On top of that, you can choose the checkbook control option, and you never need anything else from the custodian, unless you want it. The main job of the custodian is to set up the plan, answer any questions you have and prepare you for any IRS document reporting. IRA Financial, and similar custodians, only make money by setting up the account and maintaining the plan for you. So, if you want to invest in alternative assets, such as real estate, Bitcoin or gold, make sure you choose the right custodian!
Question 2 from Joseph A in Waltham, MA: If I set up a Solo 401(k) plan, can I also make contributions to a Roth IRA?
The easy answer is yes, you can contribute to a Roth IRA, even if you have a Solo 401(k) plan. This is assuming you are under the income limits set forth by the IRS. If you “earn too much money,” you cannot directly contribute to a Roth IRA. Having a Solo 401(k), or any 401(k) plan, does not limit what you can do with a Roth IRA.
IRAs and 401(k) plans each have annual limits, and you can generally max out each one. However, if you do have a 401(k) plan available to you, you cannot contribute to a pretax IRA if you make too much money on the year. Simply put, you can max out your 401(k) contribution with pretax funds, but you cannot double-dip and get a tax deduction with your IRA. However, since Roth IRAs are funded with after-tax money, it’s perfectly fine!
Question 3 from Mike P in Virginia Beach, VA: I have Bitcoin in my IRA with you through Gemini – can I take an in-kind distribution of the Bitcoin?
Yes, you can distribute the Bitcoin from your Gemini account. For example, you can move the Bitcoin from Gemini to a wallet you own personally and then take a full distribution of the Bitcoin, or whichever cryptocurrency you own. As an IRA Financial customer, Mike would let us know the value of the Bitcoin withdrawal and we would complete a 1099-R form for the IRS.
If you owe taxes on the distribution, you would report that on your personal tax return. If you are under age 59 1/2, you would owe a 10% early withdrawal penalty. If the Bitcoin was held in a Roth IRA, there would be no taxes due if your Roth has been opened at least five years and your at least age 59 1/2.
Related: In-Kind Distributions & Conversions
AdMail – Keep it Coming
We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at [email protected].
As with his other podcasts, you can check out AdMail on SoundCloud. Be sure to subscribe to know when the next one pops up! Thanks for listening and have a great day, Self-Directed Nation!