Have you ever wondered how to fund a self-directed IRA? Once the IRA is opened, there are multiple ways to fund the account. A client can do an IRA transfer, a rollover from an old qualified plan (such as a 401(k)), or they can make an annual contribution.
Three different ways to fund a self-directed IRA:
An annual contribution is money that is sent from a client’s personal checking or savings account to their IRA via check or wire. There are limits to the amount of funds a person can contribute based on age and the type of IRA that they have. Click here to view the contribution limits.
A transfer is an IRA-to-IRA transfer of assets between like-kind IRAs. If a client wants to do a transfer, they contact the administrator they are moving the funds to, not their current administrator. The client fills out a transfer form, and the transfer is initiated by the receiving administrator. The receiving administrator signs off on the request as the accepting administrator and confirms the funds will be placed in an IRA account. A transfer between administrators is a nontaxable event. When the current IRA administrator receives the transfer request, they will send over the assets via check, wire or in-kind. Since a taxable event did not occur, a transfer is considered a non-reportable event and will not be reported to the IRS.
There is no limit to how many transfers a client can do per year. Transfers can take about two weeks, but can be quicker depending on delivery options that are selected on the transfer form and the administrator you are transferring funds from. This is usually the easiest option if time is not an issue.
A rollover is the third way to fund a self-directed IRA. This is when money is taken out of an old qualified plan (i.e. 401(k)) and needs to be put back into an IRA. There are two types of rollovers, a direct and indirect rollover. A direct rollover is when the old qualified plan administrator sends the funds directly to the IRA. An indirect rollover is when the old qualified plan administrator sends the funds to the client personally. With an indirect rollover the client then has 60 days to deposit the funds back into their IRA to avoid tax consequences.
The first step when completing a rollover is to contact the old qualified plan administrator and fill out their rollover paperwork. This will initiate the rollover of funds. Depending on if it is a direct or indirect rollover they will then send a check to the new IRA administrator or the client personally. When the new IRA administrator receives the funds, they will code it as an incoming rollover. Midland Trust requires a rollover certification form that will be filled out by the client for record-keeping purposes. The previous plan administrator will report the transaction on a 1099-R form. This will notify the IRS that a taxable event has occurred. If the receiving administrator receives the funds within 60 days or immediately, the taxable event is offset by the rollover. The receiving administrator will send in a 5498 form to confirm receipt of the rollover. There will be no tax due if the amounts match.
Rollovers are only allowed to be done once a year and can be done in a few days which can sometimes be quicker than transfers.
As you can see, there are several ways to fund a self-directed IRA depending on your circumstances. Be sure to discuss the rules with your CPA or tax professional to determine which option is best for you.
For more information contact Midland Trust today.