September 29, 2021

How To Fund Your Self-Directed IRA

Happy woman on her desktop computer funding her Self-Directed IRA.

Congratulations! You have decided to open a Self-Directed IRA and begin your journey to a richer retirement. You have already filled out an account application and are ready to start investing in the alternative asset of your choice. The next step is to fund your Self-Directed IRA account, which can be done in a variety of ways.

There are 3 possible ways to fund your Self-Directed IRA: 

  1. Transfer funds from an existing IRA.
  2. Rollover funds from a qualified retirement account, like a 401(k).
  3. Contribute funds to your account.

Transfer 

The first option to fund your Self-Directed IRA is to complete a transfer from your current financial institution to your Self-Directed IRA custodian. Let's take a look at a common scenario:

  • John has a Roth IRA at Fidelity and has chosen to transfer his funds to a Self-Directed Roth IRA at Madison Trust Company. He is doing this so he can invest in real estate and cryptocurrency, as opposed to just stocks, bonds, and mutual funds. John starts the transfer by filling out Madison Trust's Transfer Authorization Form. Here, he enters his Fidelity account type, the account number, and the amount he would like to transfer. A Madison Trust representative will sign the Letter of Acceptance section of the form, which details that Madison Trust Company is appointed as custodian of the funds and assets from the prior custodian/trustee, and submit the request to Fidelity. Then, Fidelity receives the request, determines that the account holder has enough funds in the account for the desired amount to be transferred, and sends the funds via check or wire to Madison Trust. The transfer is complete!

You may complete any amount of transfers you like during the year. No tax reporting or withholding occurs when a transfer occurs.

Rollover  

Another option to fund your Self-Directed IRA is to undergo a rollover. Plan administrators require rollovers to be initiated by the plan participant. This means it is your responsibility as the account holder to reach out to your current plan administrator and complete their rollover paperwork. You will specify that the funds are being rolled into an IRA so that the transaction is coded as a rollover and not as a taxable distribution. A rollover check payable to "Madison Trust Company Custodian FBO [your name] [your Madison account number]" will be issued.

Two types of rollovers may be used to fund your account: direct and indirect.

  1. direct rollover is when the funds are moved directly from a qualified retirement account (401(k), 403(b), or other qualified employer account) to a Self-Directed IRA. In this case, the account owner does not touch the funds. The custodian issues a 1099-R with code H placed in Box 7, which tells the IRS and account holder that a direct rollover occurred and it is not a taxable event.
  2. An indirect rollover is when the funds are distributed from the current retirement account (IRA, 401(k), 403(b), or other employer account) and re-deposited into a new retirement account (a Self-Directed IRA) within 60 days. It is important that the rollover is completed within 60 days, or else it will count as a distribution of account funds and have any applicable taxes and early withdrawal penalties applied. In addition, an indirect rollover is reported to the IRS as a distribution, and 20% taxes may be withheld. This money is returned as a tax credit for the year when the rollover process is completed.

Be sure to keep in mind the following two important rules of rollovers. (You can find out more on the IRS website.)

  • Only one rollover is permitted within a 12-month period.  
  • The rollover must be from one account to another account, without splitting funds among multiple accounts.  

Contribution  

The last way you can fund your Self-Directed IRA account is via contribution. To make a contribution to your Madison Trust Self-Directed IRA, there are two steps:

  1. Issue a check or wire to your Madison Trust IRA using the delivery instructions.
    • Checks should be made payable to "Madison Trust Company Custodian FBO [your name] [your Madison Trust account #]" and mailed to Madison Administration Company at One Paragon Drive Suite 275, Montvale, NJ 07645.
  2. Provide Madison Trust with a Deposit Information Form. In Section C, please select "Annual Contribution."

How Much Can You Deposit in a Self-Directed IRA?

Each year, you can contribute up to $6,000 ($7,000 if you are age 50 and older). You can even contribute all of your taxable compensation for the year if it is less than the limit.

The deadline to make contributions is the tax return filing deadline (not including extensions). For example, a 2021 IRA contribution could have been made until April 18, 2022. Your contribution is reported to the IRS on Form 5498 for the relevant tax year.

Now that you understand how to fund your account and know how much you can deposit in a Self-Directed IRA, you are free to invest in the alternative asset of your choice, with a few exceptions. Be sure to do your due diligence and speak to a financial advisor about the investment options that best fit your current financial situation and goals.


Still have questions about your investment?

Still have questions about your investment?
Corporate Headquarters:
Madison Trust Company 401 East 8th Street • Suite 200
Sioux Falls, SD 57103
Mailing Address:
Madison Administration Company One Paragon Drive • Suite 275
Montvale, NJ 07645
Hours:
Monday - Thursday: 9:30AM - 5:30PM EST
Friday: 10:00AM - 4:00PM EST
Saturday/Sunday: Closed
Contact:
(800) 721-4900
[email protected]
F: 845-947-1212
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