What is a Self-Directed IRA or IRA LLC?
What is an “IRA”? It stands for “Individual Retirement Account.” Although there are a number of different types of IRA plans, they all basically share the same, fundamental concept. They allow an individual to save money in a tax-deferred or tax-free account until they reach the age of 59 years of age. At that time, the individual may start withdrawing money from their Pension plan account. These withdrawals, which are called “distributions,” are then taxed at the individual’s tax rate at the time the distribution is made. Theoretically, the individual’s tax rate at the time of distribution will be less than it was when the money was deposited.
Because the funds are deposited into a Pension Plan (such as a 401(k) Plan) as a “pre-tax” contribution, the individual employee realizes several advantages. First, the individual’s taxable income is reduced by the amount of the contribution. Second, any earnings or dividends realized from investing the funds in the Plan will not be taxed until the individual takes a distribution after the age of 59 . Third, some employers will make a “matching” contribution to the employee’s fund. The amount of funds that can be contributed is restricted by Congress, but the limits were raised for 2007 and 2008 to $15,500 for a 401(k) Plan, and employees over the age of 50 can contribute an additional $5,000 as a “catch up” contribution. Under the current regulations, an employee could possibly contribute between $100,000 to $200,000 over a 3 – 5 year period, and invest the funds to earn tax-deferred returns.
What are some of the disadvantages of putting part of your earnings into an IRA? First, the individual has no access to the contributed funds until he or she is eligible to start taking distributions. Distributions taken before the age of 59 are subject to both penalties and taxes, which could effectively wipe out a large portion of the gains. Second, the account holder has little control over how the funds are invested. Third, after leaving a company, an individual usually cannot make additional contributions to the Plan. As a result, many account holders often ignore their Plans until they get close to the age when they can take a distribution.
