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3 Ways to Fund Your Self-Directed IRA

  |  By Deanna Fong

After opening a self-directed IRA account and identifying an alternative investment opportunity, you’ll need to fund your IRA. There are different methods you can follow when it comes to funding an IRA and here are three of the most common ways:

1) Transfers

A transfer is a movement of funds (e.g. cash or assets) from an account held by a custodian to a like account held at a different custodian.  With a transfer, funds can only be moved between like-types of IRAs – e.g. from one traditional IRA to another traditional IRA.

There is no limit to the number of transfers one can initiate to fund an IRA (unlike an indirect rollover which we will discuss later) nor is there a limit to the amount of money you can transfer. Also, because the account holder never has physical receipt of the cash or assets, the transfer does not create a tax reportable event. And, if you are transferring cash, the automated customer account transfer service (ACATS) system, of which PENSCO is a member, can facilitate the movement of cash from one custodian to another within approximately three days as long as the other custodian doing the transfer is also on the ACATS system.

2) Rollovers

There are two different types of rollovers, a Direct Rollover or an Indirect Rollover.

  • Direct Rollover:

This is a transaction when funds from a qualified account (e.g. IRA, 401(k), 403(b), 457 plan) are moved to a different qualified account. The funds are either sent directly to a new custodian or a check is issued to the new custodian but sent to the client.  A rollover is not a taxable transaction; however, it is a tax reportable transaction.  A 1099-R is issued but it should not result in a taxable event.  We recommend that you consult your tax advisor before considering this option.

If you are considering rolling over funds from your 401(k), 403(b), or another qualified account, please contact your Plan Administrator to determine how to accomplish the rollover. 

  • Indirect Rollover:

This is a transaction where funds are distributed and paid to the client directly from a qualified account (e.g. IRA, 401(k), 403(b), 457 plan) and the client deposits the amount distributed to them into a qualified account within the IRS deadline. With an indirect rollover, the client has 60 days to deposit the funds into a qualified plan or IRA.  Failure to do so can result in adverse tax consequences.  As previously stated, a rollover is not a taxable transaction; however, it is a tax reportable transaction.  A 1099-R is issued but it should not result in a taxable event.  We recommend that you consult your tax advisor.

There are many factors to consider when funding an IRA by an indirect rollover.  You are only allowed to do one indirect rollover in a rolling 12-month period if you initiate a distribution from an IRA and deposit the funds back into an IRA.  Another consideration is the mandatory 20% tax withholding associated with a distribution from an employer plan (e.g., 401(k) or 403(b) plan). 

3) Regular IRA contributions

Due to yearly contribution limits, self-directed IRAs are generally not funded initially by a regular contribution. Instead they tend to be funded by a transfer or rollover from another qualified account that has been in existence and accumulating funds for a number of years. However, after opening an IRA account, you can continue to add money to it through contributions each year.  

You may also need to make regular contributions in order to maintain the investments in your self-directed IRA (e.g., taxes, insurance regular maintenance costs for real estate held in an IRA).  Keep in mind, you are required to have earned income and you must be under 70.5 to contribute to a Traditional IRA, and you must have earned income and it must be under certain IRS limits in order to contribute to a Roth IRA.

Now that you know some methods for funding your self-directed IRA, you can discuss your particular situation with your tax advisor and choose the right method for your situation -- bringing you one step closer to having greater choice and flexibility with your tax-advantaged funds.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.

Editor’s Note: This is an updated version of a post we originally published in June 2014. We welcome new comments and questions below.