Funding a Self-Directed IRA: Contributions, Transfers, and Rollovers Explained

Retirement investing is among the most important financial decisions you can make. Historically, common options for retirement savings were pensions or other retirement accounts like IRAs or 401ks that invested in stocks or mutual funds.

In fact, 60 percent of adults have a 401(k) or traditional or Roth IRA, according to the Federal Reserve, with more than $39.9 trillion in total U.S. retirement assets in Q1 2024, according to NerdWallet.

However, the increasing popularity of self-directed IRAs has provided a new and exciting opportunity for investors who want the benefits of traditional retirement accounts, with one important distinction.

A self-directed IRA enables individuals to invest tax-advantaged funds into alternative investments, such as private equity, real estate, secured and unsecured promissory notes, and precious metals.

Investors can set up a self-directed IRA in several different forms:

• Traditional IRA: A tax-deferred retirement savings account that may be funded with pre-tax dollars. Investors pay taxes on the withdrawals, which can begin without penalty six months after turning 59.
• Roth IRA: A tax-advantaged retirement savings account that uses post-tax dollars. Investors can withdraw funds tax-free, provided they are at least 59 ½ years old and have had the account open for at least five years.
• SEP: A Simplified Employee Pension (SEP) IRA is a tax-deferred retirement savings account for self-employed individuals and small business owners. Contributions are made by employers, and withdrawals are taxed as income.
• SIMPLE IRA: A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a tax-deferred retirement plan for small businesses that allows employees and employers to contribute. Contributions are made pre-tax, and withdrawals are taxed as income.

How to fund a self-directed IRA

There are three ways you can fund your self-directed IRA, depending on where the funds are coming from.

• Rollovers: This involves moving funds from one retirement account to another. For example, if you’ve left a company and still have a 401(k) under that company’s plan, you can roll those funds into a self-directed IRA, allowing you to actively manage your investments. If you receive a check for the rollover, you must deposit the funds into your new account within 60 days to avoid tax penalties. Alternatively, with a direct rollover (meaning the funds are payable directly to your new account), you may avoid penalties.
• Transfers: A transfer involves moving funds directly from one IRA to another (of the same type), without you taking possession of the funds. Transfers are not taxable and are not reported to the IRS, making them a straightforward way to move funds between IRAs.
• Contributions: You can also contribute to your self-directed IRA from your personal checking or savings accounts. However, annual contribution limits apply. For 2024, the limits are $7,000 for those under age 50, and $8,000 for those 50 or older.

What to consider when funding a self-directed IRA

There are several factors one must consider when signing up for a self-directed IRA.

• Contribution limits: For 2024, the annual contribution limit is $7,000 for those under age 50, and $8,000 for individuals 50 or older.
• Fees: Self-directed IRAs often come with additional fees compared to traditional IRAs. These fees cover services like asset custody, account maintenance, and transaction processing, especially when dealing with alternative investments. Typical fees include:
  • Account maintenance fees
  • Asset maintenance fees
  • Transaction and service fees for buying, selling, or transferring assets
  Before investing, be sure you understand the fees associated with investing in a self-directed IRA. For example, you can find Forge Trust’s fee schedule here.
• Tax implications: Tax implications depend on the account type you choose. For example, traditional IRA contributions may be tax-deductible, but you’ll owe taxes when you withdraw the funds in retirement. Roth IRA contributions, on the other hand, are made with after-tax dollars, meaning qualified withdrawals are tax-free.
• Custodianship: Self-directed IRAs, like other IRAs, must be administered by a trustee or a custodian, such as Forge Trust. While custodians administer the account and handle paperwork, the account holder is responsible for managing their investments. Custodians cannot act in an advisory capacity beyond educating customers about the marketplace and which asset classes are available.
• Rules and Regulations: Self-directed IRAs are subject to the same rules and regulations as other retirement funds. Generally, there is a penalty for withdrawing money before turning 59 ½, but there are some exceptions. With Roth IRAs, contributions are not deductible, but qualified distributions are tax-free.

Forge Trust provides white-glove service for funding a self-directed IRA

Forge Trust specializes in custodying alternative investments, including real estate, private stock, private equity, promissory notes, private placements, precious metals, and more. We offer custom account opening and a seamless transfer process.

As part of leading private equity financial institution Forge Global, we serve 1.3 million accounts with $13 billion in assets under custody. You can be confident that Forge Trust is a great choice as your IRA custodian to handle your portfolios with the proper attention, diligence, and care.

To learn more about how Forge Trust can help fund a self-directed IRA, click here.