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These days, investors who do a lot of research into retirement accounts are interested in squeezing every last drop out of the tax-advantaged accounts available to them. And that’s a good thing! It means that people are interested in using their know-how to take control over their financial destiny. However, the wide range of information out there that’s available can be a bit overwhelming for anyone who is just dipping their toes into the water.
Fortunately, a Self-Directed Roth IRA is fairly simple to understand. That’s particularly true when it comes to Self-Directed IRAs and the contributions you can expect from them. But what are the contribution limits in 2022, and what does that have to do with learning about Roth IRAs? Here’s what you’ll need to know.
Contribution Limits with a Self-Directed Roth IRA
First, some basics: a Roth IRA is a retirement account to which you make post-tax contributions. This means that you don’t receive any tax benefits in the immediate present when you make a contribution to a Roth IRA, other than putting those funds into a tax-protected account. Of course, the funds in that account can then grow tax-free. And upon hitting retirement age, you can begin to pull your money out of the Roth IRA without incurring additional taxes; after all, you’ve already paid them.
With that in mind, you may find it interesting to know that both Traditional IRAs and Roth IRAs share the same contribution limits, despite having different approaches to these contributions. For the year 2022, that means you will have a $6,000 contribution limit to your Self-Directed Roth IRA. However, this number increases to $7,000 if you’re at the age of 50 or older, which allows older investors to have “catch-up” contributions.
And that’s it. In other types of accounts, there may be certain rules depending on your income. But for Roth IRAs, the contribution rules are generally straightforward. This is in contrast with eligibility requirements, which will be different depending on your income status.
Can You Deduct the Contributions to a Roth IRA?
Many people might hear about deducting contributions to an “IRA,” so they get confused when they first hear that you can’t deduct contributions to a Roth IRA. What’s the difference? If people are talking about deducting contributions to an IRA, it’s typically a SEP IRA or a Traditional IRA. For a Roth IRA, contributions will be designated as post-tax contributions. This is taxable money that you pay out of your own pocket toward the retirement account. If this seems like a disadvantage, remember what happens on the backend: you’ll be able to pull this money out tax-free upon hitting retirement age. You may also have some access to the contributions you’ve made toward the account thanks to this flexibility. However, because the growth can occur with tax protections, taking out the growth on the Roth IRA can be more complicated.
Understanding the quirks of the Roth IRA is important if you want to begin your investing journey. But so is understanding what it means to self-direct. When you take control of a Self-Directed Roth IRA, you get a lot of potential options in your retirement account. This can mean investing in a wide range of potential retirement assets, from precious metals to tax liens to real estate. And knowing your limits with a Self-Directed Roth IRA can be the first step.