In order to take advantage of maximizing one’s retirement funds via a Self-Directed IRA, it is imperative that one understands the rules making IRA annual contributions. This article will explore the deadline for making any type of IRA contribution, including Self-Directed IRA, Self-Directed Roth IRA, SEP and SIMPLE IRA, in 2023 for the 2022 taxable year.
- Whether you have a traditional, Roth, SEP or SIMPLE IRA, you can still make contributions for 2022
- Contributions can be made up until you file your taxes
- Pretax contributions are a great way to lower your tax bill for last year
The Self-Directed IRA
Created in 1974, IRAs are the most popular type of retirement plan. There are approximately 60 million IRAs values at over 12 trillion dollars. An IRA can be invested in almost any type of investment except: (i) life insurance, (ii) collectibles, and (iii) any transaction involving a “disqualified person,” which is defined as the IRA owner. In other words, a self-directed IRA is an IRA that allows one to invest in IRS approved alternative assets, in addition to traditional equities.
The two most popular ways to fund a Self-Directed IRA is via contribution and rollover/transfer from another IRA or retirement plan. This article will focus on the rules involving making Self-Directed IRA contributions in 2023 for the 2022 taxable year. However, before we get into the IRA contribution rules for each specific type of IRA, it is important to understand the type of income that is available for IRA contributions.
What Income is Eligible to be Contributed to a Self-Directed IRA?
In general, compensation for purposes of IRA contributions is what one earns from working. Below are the most popular forms of compensation:
- Wages, salaries, etc. Wages, salaries, tips, professional
fees, bonuses, and other amounts one receives for providing personal services are compensation.
- Commissions. An amount one receives that is a percentage of profits or sales price is compensation.
- Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net-earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of the deduction for contributions made on one’s behalf to retirement plans, and the deduction allowed for the deductible part of your self-employment taxes.
- Alimony and separate maintenance. For IRA purposes, compensation includes any taxable alimony and separate maintenance payments one receives under a decree of divorce or separate maintenance.
- Nontaxable combat pay. If one was a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay one received.
The following are several common forms of income that is not deemed compensation for purposes of the IRA contribution rules:
- Earnings and profits from property, such as rental income, interest income, and dividend income.
• Pension or annuity income.
• Deferred compensation received
• Income from a partnership for which one does not provide services that are a material income-producing factor.
• Any amounts (other than combat pay) one excludes from income, such as foreign earned income and housing costs
Contributions Rules for a Self-Directed IRA
Contributions can be made to a Self-Directed IRA for each year that one receives compensation. For 2022, the maximum amount that can be contributed to a is $6,000 or $7,000 if age 50 or older. For 2023, those numbers will increase to $6,500 and $7,500 respectively. For any year in which one does not have compensation, contributions cannot be made to an IRA unless one receives taxable alimony, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compensation.
Self-Directed IRA contributions can be made at any time during the year or by the due date for filing the Federal Income Tax return (Form 1040) for that year, not including extensions. For most Americans, this means that contributions for 2022 must be made by April 15, 2023. It’s important to note that filing an extension for your tax return does not extend the IRA contribution deadline.
Lastly, when making a contribution between January 1 and April 15, you’ll want to notify your custodian which taxable year the contribution is for. Failure to do so might lead to confusion and your custodian reporting the contribution for the current year, even if you meant to apply it to the previous taxable year.
Can I Get a Tax Deduction for Contributions to a Traditional Self-Directed IRA for 2022?
In general, the two advantages of contributing funds to a Self-Directed IRA is that the contribution is typically tax-deductible and the income and gains grow without tax, which is known as tax deferral. The following will help you determine if your contribution is deductible:
Filing Status – Single or Head of Household
- Less than $68,000 in income = a full deduction.
- Between $68,000 and $78,000 = a partial deduction.
- More than $78,000 = no deduction.
Married Filing Jointly or Qualifying Widow(er)
- Less than $109,00 in income = a full deduction
- Between $109,000 and $129,000 = a partial deduction
- $129,000 or more = no deduction
Married Filing Separately
- Less than $10,000 in income = a partial deduction
- More than $10,000 = no deduction
Contribution Rules for Self-Directed Roth IRA
Unlike a traditional Self-Directed IRA contribution, which can offer a tax deduction, contributions to a Self-Directed Roth IRA are made with after-tax funds and are not tax-deductible. However, the primary advantage of saving through a Roth IRA is that all qualified distributions from the plan are tax free and there are no required minimum distributions (RMD)!
Just like a traditional plan, there are some income limitations for Roth accounts. If you have too much earned income during a given year, you cannot make direct contributions to a Roth IRA. The following details those limits:
Single, head of household, or married filing separately
- Less than $129,000 in income = up to the annual limit
- Between $129,000 and $144,000 = reduced contribution
- More than $144,000 = no Roth IRA contribution
Married filing jointly or qualifying widow(er)
- Less than $204,000 in income = up to the annual limit
- Between $204,000 and $218,000 of income = reduced contribution
- More than $218,000 = no Roth IRA contribution
Married Filing Separately (and you lived with your spouse
at any time during the year)
- $0 in income = up to the annual limit
- more than $0 but less than $10,000 = reduced contribution
- $10,000 or more of income = no Roth IRA contribution
The Roth IRA contribution deadline works the same way as the traditional time-frame explained above. Contributions can be made up until April 15 of the following year.
The Backdoor Roth IRA Work-Around
Just because you may be over the annual Roth IRA income limitations, you can still get funds into a Roth IRA! Back in 2010, the IRS removed the income restriction for Roth conversions. Anyone, irrespective of income, can convert traditional, pretax IRA funds to Roth. You simply make a nondeductible (after-tax) contribution to your IRA, and immediately convert those funds to Roth. It’s as simple as using the backdoor!
Keep in mind, if you have pretax funds in any IRA, you will need to consider the tax implications of the conversion.
Contribution Rules for Self-Directed SEP IRA
The 1978’s Revenue Act implemented the Simplified Employee Pension IRA (SEP IRA), which provided for a contributory retirement account, primarily for small businesses. A Self-Directed SEP IRA is the same as a SEP IRA except that the IRA will be permitted to invest in alternative assets, such as real estate or cryptos. The plan must be adopted by a US-based business and is essentially a profit-sharing plan.
In 2022, the maximum SEP IRA contribution is $61,000 and must be made in pretax funds. Contributions are based on a percentage of income/salary (20% or 25% if W-2) and must be made to all eligible employees. In other words, contributions to a SEP are akin to a 401(k) profit sharing plan. SEP IRA contributions for the 2022 taxable year can be made by the business up until the business files its tax return including extension. The following is a breakdown of the tax return filing deadlines for the most popular business types:
- Sole Proprietorship: IRS Form 1040 (Schedule C) – April 15, 2023 or October 15 2023 if extension is filed
- Single Member LLC: IRS Form 1040 (Schedule C) – April 15, 2023, or October 15, 2023, if extension is filed
- Multiple-Member LLC: IRS Form 1065 – March 15 or September 15 if extension is filed
- C Corporation: IRS Form 1120 – April 15 or October 15 if extension is filed
- S Corporation: IRS Form 1120S – April 15 or September 15 if extension is filed
Contribution Rules for Self-Directed SIMPLE IRA
The 1996 Small Business Job Protection Act saw the implementation of the Savings Incentive Match Plan for Employees (SIMPLE IRA). A Self-Directed SIMPLE IRA is the same as a SIMPLE IRA exempt that it allows for traditional as well as alternative asset investments. A SIMPLE IRA can be set up by any U.S. business however, it has some quirky establishment rules. One can set up a SIMPLE effective on any date between January 1 and October 1, provided the employer didn’t previously maintain a SIMPLE IRA plan. Whereas, for new employers that came into existence after October 1 of the year, they can establish the SIMPLE IRA plan as soon as administratively feasible after your business came into existence.
A SIMPLE IRA can be established by any employer who has less than 100 employees. In 2022, SIMPLE IRAs only allows for $14,000 maximum contribution with a $3,000 catch-up for those age 50 or older. In addition to the employee making SIMPLE IRA contributions, the employer must satisfy one of the following matching contribution rules:
- match each employee’s salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee’s compensation (not limited by the annual compensation limit), or
- make non-elective contributions of 2% of the employee’s compensation up to the annual limit
Unlike employee deferrals, which can be made up until January 30, 2023 for the 2022 taxable year, employer matching contributions can be made by the employer up until the employer files its tax return, including extension. SIMPLE IRA contributions are tax deductible and are subject to the required minimum distribution rules.
Maximizing one’s retirement wealth via a Self-Directed IRA is a great way to build retirement wealth and gain investment diversification. Whether via rollover or contribution, building wealth in the tax-advantaged account is the best way to take advantage of the power of tax deferral. In sum, the following are the key points to remember when it comes to making IRA contributions in 2023 for the 2022 taxable year:
- Deadline for Self-Directed IRA or Roth IRA contributions for 2022: April 15, 2023
- Deadline for SEP IRA contributions for 2022: Date business files its tax return, including extension
- Deadline for SIMPLE contributions for 2022: January 30, 20023 for employee contributions and date business files its tax return, including extension, for employer contributions