A taxpayer’s contributions to Self-Directed Roth IRAs during any year may not exceed a dollar ceiling (or, if less, the taxpayer’s compensation income), reduced by deductible contributions for the year to traditional IRAs. For years after 2012, the dollar ceiling will be $5,500. For years after 2002, the ceiling is raised by $1,000 for individuals who are at least 50 years old at year-end.
The maximum contribution is the same for traditional and Roth IRAs, but this ceiling applies differently to them because contributions to Self Directed Roth IRAs are after-tax funds, whereas contributions to traditional IRAs are pretax funds. Assume A contributes $3,000 to a Self Directed Roth IRA for 2016, and B contributes the same amount for the year to a traditional IRA; both are taxed at 30 percent at all times. Although only $3,000 of salary income was required to fund B’s contribution, A’s contribution effectively takes pretax income of $4,286 ($4,286, less 30 percent thereof, is $3,000). If each of the IRAs earns 8 percent, and each of the contributors withdraws the accumulated funds on retirement 10 years after the contributions are made, A will have $6,477 ($3,000 plus earnings at 8 percent for 10 years), and B will have $4,534 ($6,477 less 30 percent thereof).
Taxpayer’s ability to make a Self Directed Roth IRA contribution begins to phase out when your adjusted gross income (AGI) exceeds $186,000 (for joint filers) and $118,000 for single filers. In addition, you are not permitted to make a contribution at all when your AGI exceeds $196,000 (for joint filers) or $133,000 (for single filers). Note: with a traditional IRA you may make a contribution even if your income is high and you are covered by an employer’s plan. However, you may not be able to deduct the contribution on your return.
Contributions in excess of the maximum are subject to a six percent excise tax unless the excess and income thereon are distributed to the owner not later than the due date of his or her return for the year (taking extensions into account). Income included in a distribution made within this time is included in the owner’s gross income for the year of the contribution, not the year of the distribution.
As with traditional IRAs, contributions to a Self Directed Roth IRA are deemed made on the last day of the year if made before the following April 15. Contributions to a Self Directed Roth IRA, unlike a traditional IRA, can be made by taxpayers older than 70 1/2.