Make Annual $53,000 Contributions to a Roth IRA Account

 

Warning – the following information is likely to lead to self-torment and abuse. The author takes no responsibility for any self-inflicted injuries you sustain for not having this information available to you before setting up your Self-Directed Roth IRA!

Roth IRAs are well renowned for their tax-favored status however the annual limit for contributions is limited to $5,500 ($6,500 for those age 50 and older). Another road block to this attractive plan is an income limitation that prevents married couples with adjusted gross income of $193,000 and single individuals with adjusted gross income of $131,000 or more from making Roth IRA contributions.  Fortunately, there is a workaround to both the contribution and/or income limitation with a Roth Eligible Qualified Retirement Plan “REQRP”.

I recently attended a real estate investor conference, and I casually observed over 100 people flock to create self-directed Roth IRA accounts. I was astounded how these investors would willingly pay several hundred dollars to create a self-directed Roth IRA complete with shackles and leg irons. The only redeeming benefit of this type of plan is it does not come with a gag ball so you can direct your Roth IRA contributions into real estate or other alternative investments. (Self-directed does not mean you get actually to handle the investments, you must work through an IRA custodian or third party administrator for a fee no less.)

If you are content with minimal control and limited contributions, then you can stop reading here because what I am about to write next will make you break down in frustration if you succumbed to the self-directed Roth IRA hype.

Escape the Bondage with a REQRP

Rather than following the herd down the Roth IRA rabbit hole you should seriously consider creating a REQRP and allow yourself to contribute up to $18,000 per year to a Roth IRA, or $24,000 if over 50 years of age, and avoid any income limitation. Unlike a traditional Roth IRA, a REQRP does not fall under the same rules because it is a qualified retirement account. Consider the following example:

John would like to purchase a $50,000 rental in Indianapolis as soon as possible with ROTH money. Assuming John has the choice of using either a Self-Directed Roth or a REQRP here is what he is facing:

Roth IRA – contributing $5,500 per year, it will take 9 years to accumulate $50,000
REQRP – contributing $18,000 per year, it will take 3 years to accumulate $50,000
By the time John saves enough in his Self-Directed Roth IRA to purchase his first house, he could have bought 3 rentals in his REQRP.

To be fair to the Self Directed Roth IRA purveyors, John could buy the house sooner in his Roth IRA with the use of qualified non-recourse financing; however, investors are seldom told this creates taxable income for your Roth IRA.

If you are still reading, then I assume the REQRP has piqued your interest, and you may be kicking yourself for setting up that Self Directed Roth IRA. This next paragraph will probably have you slamming your head into the wall after you realize the colossal mistake you made.

How to Make a $53,000 Annual Roth Contribution

The heading is correct. If you set up a REQRP and you include Roth Maximizer provisions with in-service distributions you can increase your annual Roth contribution up to $53,000 a year. Few professionals are aware of IRS rules governing QRPs and others elect not to include the Roth benefits in their plans. If you work with Anderson, this is not your problem because we create plans that give you full control over your investments and permit annual $53,000 Roth contributions – the key is knowing how. Here is the how.

An individual who establishes a REQRP can elect to make contributions of up to $18,000 to his Roth QRP account. Additionally, if the plan so allows, the individual participant can make additional nondeductible contributions of up to $35,000 to his QRP such that the total combined annual contributions do not exceed $53,000. If you are married, your spouse, who must also be a plan participant, is eligible to make the same contribution. Consider John’s situation above. If John’s plan contained Roth Maximizer provisions, he could have purchased his rental in year ONE.

If you are interested in establishing a REQRP with the special provisions, I indicated above contact my assistant Deborah Lewis at dlewis@alglaw.com and request a REQRP consultation. There is still a limited window of opportunity to establish this plan in 2015 and make a sizeable contribution today.

4 comments On Make Annual $53,000 Contributions to a Roth IRA Account

  • Clint:

    Does having a REQRP require creating a whole new plan like creating a new Roth IRA? Can the current 401k or 403b be used for REQRP? I currently have $38k in a 401k w/my current employer Bank of America and have been told I won’t be able to roll over until I’m 59.5 years old or have a qualifying event i.e. termination of employment.

    On Thu, Nov 12, 2015 at 9:42 AM, Clint Coons Blog wrote:

    > Clint Coons posted: ” Warning – the following information is likely to > lead to self-torment and abuse. The author takes no responsibility for any > self-inflicted injuries you sustain for not having this information > available to you before setting up your Self-Directed” >

    • Sagun,

      Typically you can not roll out of your existing 401k until you separate from service, i.e., quit, or reach age 59 1/2. Thus, you will not be able to invest in real estate with your current plan. If you have IRAs that you would like to use for investing then you would need to create a new QRP and roll your IRAs into the plan.

  • Thanks, Clint. Are you referring to the construction of a solo 401k?
    Are there any benefits to having a defined benefit deferred compensation plan on top of this?

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