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Investor Insights Blog|Guide to Self-Directed Accounts & Taxes

SDIRA Concepts

Guide to Self-Directed Accounts & Taxes

Which type of self-directed account makes sense for your retirement and future? 

Deciding between a taxable, tax-deferred or tax-free account can be difficult, and understanding the benefits of each may seem complicated.

Breakdown of Accounts & Tax Treatment

Traditional IRAs and Taxes

  • Out-of-pocket contributions are made pre-tax and may provide a tax deduction in the year of contribution
  • Funds and investments in the Traditional IRA grow tax-deferred and there are no capital gains tax or federal/state income tax while inside the account
  • Distributions and withdrawals are distributed after age 59½, taxed as ordinary income, and are included as ordinary income in the year of withdrawal

Learn more about Traditional IRAs.


Roth IRAs and Taxes

  • Out-of-pocket contributions are made after tax and do not provide a tax deduction
  • Funds and investments in a Roth IRA grow tax-free and there are no capital gains tax or federal/state income tax while inside the account
  • Distributions and withdrawals are tax-free after age 59½ and are not included as taxable income

Learn more about Roth IRAs.


Coverdell Education Savings Accounts (CESA) and Taxes

  • Out-of-pocket contributions are made after tax and do not provide a tax deduction
  • Funds and investments in a CESA grow tax-free and there is no capital gains tax or federal/state income tax while inside the account
  • Distributions and withdrawals are tax-free for qualified education expenses and are not included as taxable income

Learn more about CESAs.

Quick Guide to Coverdell


Health Savings Accounts (HSAs) and Taxes

  • Out-of-pocket contributions are made pre-tax and may provide a tax deduction in the year of contribution
  • Funds and investments in an HSA grow tax -free and have no capital gains tax or federal/state income tax while inside the account
  • Distributions and withdrawals are tax-free distributions for qualified medical expenses at any age and are not included as taxable income

Find out more about Health Savings Accounts.


Small Business Accounts and Taxes: Overview

SEP IRA (Simplified Employee Pension) and Taxes

  • Out-of-pocket contributions are pre-tax up to 25% of salary and may provide a tax deduction in the year of contribution
  • Funds and investments in the SEP IRA grow tax deferred and there is no capital gains tax or federal/state income tax while inside the account
  • Distribution and withdrawals are made after age 59½, are taxed as ordinary income, and included as ordinary income in the year of withdrawal

Learn more about SEP IRAs.


SIMPLE IRAs and Taxes

  • Out-of-pocket contributions are made pre-tax and may provide a tax deduction in the year of contribution
  • Funds and investments in a SIMPLE IRA grow tax deferred and have no capital gains tax or federal/state income tax while inside the account
  • Distributions and withdrawals are made after age 59½, are taxed as ordinary income, and included as ordinary income in the year of withdrawal

Learn more about SIMPLE IRAs.


Solo 401(k)s and Taxes

  • Out-of-pocket contributions are made pre-tax and may provide a tax deduction in the year of contribution
  • Funds and investments in the Solo 401(k) grow tax deferred and have no capital gains tax or federal/state income tax while inside the account
  • Distributions and withdrawals are made after age 59½, are taxed as ordinary income, and included as ordinary income in the year of withdrawal

Learn more about Solo 401(k)s.


Roth Solo 401(k)s and Taxes

  • Out-of-pocket contributions are for owner-only businesses and spouses
    • Roth Salary Deferral can designate salary deferral contributions as Roth contributions and the portion contributed as Roth does not qualify for a tax deduction
    • Profit-Sharing are pre-taxed contributions and may provide a tax deduction in the year of the contribution
  • Funds and Investments in the Roth Solo 401(k) have no capital gains tax or federal/state income tax while inside the account
    • Roth Salary Deferral portion grows tax free
    • Profit-Sharing portion grows tax-deferred


Have questions about how to get started with one of these accounts? One of our Account Executives can walk you through the process. Contact us today.

1

What investments can I make using a self-directed IRA?

With a self-directed IRA, your investments are up to you, within the bounds of the IRS rules and guidelines. The IRS does note provide guidance on what investment types are permitted, but dictates only what is NOT permitted. Examples of prohibited IRA investments include collectible (such as artwork, stamps, rugs, antiques and gems), certain coins and life insurance. See IRA Publication 590 for more information about prohibited investments.

2

What is a self-directed IRA custodian?

All IRAs or other self-directed retirement accounts must be held by a custodial entity such as a bank, credit union, trust company or an entity that is licensed and regulated by the IRS as a “non-bank custodian.” A self-directed IRA custodian, such as Equity Trust Company, specializes in being the custodial entity for self-directed accounts.

3

What’s the difference between a self-directed IRA and a traditional IRA?

A self-directed IRA is technically no different than any other IRA or 401(k). A self-directed IRA is unique because of the investment options available. Most IRAs are used for stocks, bonds, mutual funds and CDs. A self-directed IRA allows those types of investments along with real estate, notes, private placements, and other investment options.

The above applies assuming IRS rules are followed and you meet eligibility requirements. Certain investments may be subject to Unrelated Business Income Tax, such as debt-financed real estate and Limited Partnerships, LLCs and other businesses conducted within the account. Visit irs.gov for more information.


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