Guide to Self-Directed Accounts & Taxes

Which type of self-directed account makes sense for your retirement and future? 

Deciding between a taxable, tax-deferred or tax-free account can be difficult, and understanding the benefits of each may seem complicated.

Breakdown of Accounts & Tax Treatment

Traditional IRAs and Taxes

• Out-of-pocket contributions are made pre-tax and may provide a tax deduction in the year of contribution
• Funds and investments in the Traditional IRA grow tax-deferred and there are no capital gains tax or federal/state income tax while inside the account
• Distributions and withdrawals are distributed after age 59½, taxed as ordinary income, and are included as ordinary income in the year of withdrawal

Learn more about Traditional IRAs.

Roth IRAs and Taxes

• Out-of-pocket contributions are made after tax and do not provide a tax deduction
• Funds and investments in a Roth IRA grow tax-free and there are no capital gains tax or federal/state income tax while inside the account
• Distributions and withdrawals are tax-free after age 59½ and are not included as taxable income

Learn more about Roth IRAs.

Coverdell Education Savings Accounts (CESA) and Taxes

• Out-of-pocket contributions are made after tax and do not provide a tax deduction
• Funds and investments in a CESA grow tax-free and there is no capital gains tax or federal/state income tax while inside the account
• Distributions and withdrawals are tax-free for qualified education expenses and are not included as taxable income

Learn more about CESAs.

Health Savings Accounts (HSAs) and Taxes

• Out-of-pocket contributions are made pre-tax and may provide a tax deduction in the year of contribution
• Funds and investments in an HSA grow tax -free and have no capital gains tax or federal/state income tax while inside the account
• Distributions and withdrawals are tax-free distributions for qualified medical expenses at any age and are not included as taxable income

Find out more about Health Savings Accounts.

Small Business Accounts and Taxes: Overview

SEP IRAs (Simplified Employee Pension) and Taxes

• Out-of-pocket contributions are pre-tax up to 25% of salary and may provide a tax deduction in the year of contribution
• Funds and investments in the SEP IRA grow tax deferred and there is no capital gains tax or federal/state income tax while inside the account
• Distribution and withdrawals are made after age 59½, are taxed as ordinary income, and included as ordinary income in the year of withdrawal

Learn more about SEP IRAs.

SIMPLE IRAs and Taxes

• Out-of-pocket contributions are made pre-tax and may provide a tax deduction in the year of contribution
• Funds and investments in a SIMPLE IRA grow tax deferred and have no capital gains tax or federal/state income tax while inside the account
• Distributions and withdrawals are made after age 59½, are taxed as ordinary income, and included as ordinary income in the year of withdrawal

Learn more about SIMPLE IRAs.

Solo 401(k)s and Taxes

• Out-of-pocket contributions are made pre-tax and may provide a tax deduction in the year of contribution
• Funds and investments in the Solo 401(k) grow tax deferred and have no capital gains tax or federal/state income tax while inside the account
• Distributions and withdrawals are made after age 59½, are taxed as ordinary income, and included as ordinary income in the year of withdrawal

Learn more about Solo 401(k)s.

Roth Solo 401(k)s and Taxes

• Out-of-pocket contributions are for owner-only businesses and spouses
  • Roth Salary Deferral can designate salary deferral contributions as Roth contributions and the portion contributed as Roth does not qualify for a tax deduction
  • Profit-Sharing are pre-taxed contributions and may provide a tax deduction in the year of the contribution
• Funds and Investments in the Roth Solo 401(k) have no capital gains tax or federal/state income tax while inside the account
  • Roth Salary Deferral portion grows tax free
  • Profit-Sharing portion grows tax-deferred

Have questions about how to get started with one of these accounts? One of our Account Executives can walk you through the process. Contact us today.