How to Maximize Your SDIRA Tax Deductions

 |  General Self-Directed IRAs

By J.P. Dahdah, CEO of Vantage

The tax filing deadline is right around the corner.

Here’s the good news: The Self-Directed IRA (SDIRA) is one of the most powerful financial tools to help you lower taxes while saving for retirement. SDIRAs offer a unique opportunity to take control of your retirement funds and use them to invest outside the stock market. With the right strategies, SDIRAs can also help you maximize deductions and reduce your tax burden.

Today, let’s look at key strategies to maximize your tax deductions by contributing to a Self-Directed IRA.

Understand Contribution Limits: Before delving into contribution strategies, it’s important to understand the IRS contribution limits. As of 2024, individuals under the age of 50 can contribute up to $6,000 annually to their IRAs, while those aged 50 and above can make catch-up contributions of up to $1,000, totaling $7,000.

Knowing these limits will help you maximize deductions without exceeding allowable thresholds. If you are self-employed, for example, you are also eligible to contribute to a SEP IRA or SIMPLE IRA which offer much higher contribution limits. So, be sure to evaluate which type of IRA best serves your tax objectives.

Utilize Traditional IRA Contributions: Contributions to a Traditional IRA are tax-deductible in the year they are made, providing an immediate reduction in taxable income. By maximizing contributions to a Traditional IRA, you can lower taxable income, potentially pushing you into a lower tax bracket and reducing the overall tax liability.

Take Advantage of Catch-Up Contributions: For individuals aged 50 and above, catch-up contributions provide an excellent opportunity to maximize deductions. By contributing an additional $1,000 annually to their IRAs, older investors can accelerate their retirement savings while benefiting from increased tax deductions. If you are 50 or older, consider a catch-up contribution.

Consider Spousal Contributions: Married couples can maximize tax deductions with spousal IRA contributions. Even if one spouse does not have earned income, they can still contribute to a spousal IRA based on their partner’s income, effectively doubling the potential tax deductions for the household. As you plan your IRA contributions, look at spousal options where available.

Explore Employer-Sponsored Plans: While Self-Directed IRAs offer significant flexibility and control over investment choices, investors with access to employer-sponsored retirement plans such as 401(k)s should consider maximizing contributions to these accounts as well. Employer contributions and pre-tax contributions made to 401(k) plans further reduce taxable income and complement contributions to a Self-Directed IRA.

Leverage Roth IRA Conversions: While contributions to Roth IRAs are not tax-deductible, individuals can strategically convert funds from Traditional IRAs to Roth IRAs to optimize tax efficiency. By paying taxes on the converted amount upfront, investors benefit from tax-free withdrawals in retirement, effectively reducing future tax liabilities.

With the tax filing deadline looming, now is an important time to consider all the options that can help reduce your tax bill. Use these contribution strategies to minimize your tax burden and ensure you are saving enough money to reach your retirement goals.