Employer Contributions to 401(k)s and More on Self-Directed IRAs
401(k)s and self-directed IRAs.
Do Employer 401(k) Contributions Count Toward Your Maximum Contribution Limit?
Al called in with this question about 401(k) limits:
“Hi, my name is Al and I was listening to the money podcast. I had a question about contribution limits to a 401(k). I understand it to be $15,500. If my employer matches part of my contributions, is the limit amount just on what I contribute, or is it what I contribute plus what the employer contributes?”
Thanks for the question, Al. First off, you’ve got it right. The contribution limit for a 401(k) for 2007 is $15,500, which is $500 more than it was last year. The limit applies to your contributions only. Employer matching doesn’t factor into the limit. So, if you were to max out your 401(k) for 2007 by contributing a full $15,500, and if your employer were to match the first $10,000 you contributed at a rate of 50 cents on the dollar, you’d have a grand total contribution of $20,500 for the year – the $15,500 you contributed plus the $5,000 employer match. As I mentioned in Episode 4, if your employer matches your contributions, it’s a really, really smart idea to contribute enough to your 401(k) to get that full employer match.
Can You Purchase a Home with Your Self-Directed IRA?
Now, for a different question. In response to Episode 7 about self-directed IRAs, listeners named David and George posted to the blog wondering whether it’s possible to purchase your own home or a vacation home with your self-directed IRA. Thanks, Jaime, for posting answers there. I wanted to provide some more information for everyone.
The answer to the question, unfortunately, is no. You may only purchase real estate you don’t personally use with your self-directed IRA. For example, you can’t buy a vacation home that you rent out and also partly use yourself. You also can’t purchase real estate with your self-directed IRA if your spouse, your kids or grandkids, or your parents or grandparents will use it. Your ascendants and descendants are defined as “disqualified persons” and cannot personally use real estate purchased by your self-directed IRA.
Keep in mind, you can lend money from your self-directed IRA to someone else as long as they are not a “disqualified person.” You can also borrow money from someone else’s self-directed IRA, again, so long as they are not a “disqualified person.” So a friend or sibling, for example, could lend you money from their self-directed IRA to finance the purchase of your own home.
Besides your ascendants and descendants, there are also some other instances of “disqualified persons.” If you’re interested in more details, consult a self-directed IRA custodian. You can find links to a few self-directed IRA custodians at the end of this page.
As always, everyone’s situation is different so it’s a good idea to consult your tax or financial advisor.
Today, we have another book giveaway. If you’ve sent me an e-mail or posted to the blog, you’re automatically entered in the give-away. And the winner is Monique in Minneapolis. Congratulations! You’ve won a copy of IRA Wealth by Patrick Rice. Please check your e-mail for instructions.
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