Self-directed IRAs can be used to invest in a wide variety investment types, from common investments like publically traded stocks, bonds and mutual funds, all the way to investments such as real estate, private equity and precious metals.
But saving and funding your own retirement is really only one part of the equation. You may also want to consider issues that no one really enjoys thinking about – for example, what happens once the self-directed IRA account holder passes away, and their account is transferred to their heirs and/or death beneficiaries?
It’s important to realize that self-directed IRAs are legally identical to the standard IRA types that other retirement savers will open with traditional custodians such as a discount investment broker or a local bank or credit union. (The differences arise from the fact that the custodian of a self-directed IRA, such as Quest Trust Company, is able to help the account holder invest in the full range of investment options that are legally permitted within the IRA structure.)
This means that you can take different estate planning goals into account by using your self-directed IRA, and the way you do so sometimes depends on whether your self-directed IRA is structured as a traditional IRA or a Roth IRA.
With either type of IRA, if your account passes to your spouse then they’ll be able to roll over your account holdings into their own account. Any required minimum distribution calculations will then be based on your spouse’s age. A spouse may also decide to disclaim all or part of the assets, in which case they’ll pass on to the next eligible beneficiaries. This latter option can sometimes be a powerful family estate planning tool.
If assets from a self-directed IRA pass to a non-spouse beneficiary, then they’ll need to begin taking required minimum distributions by the end of the calendar year following the account owner’s death. If the self-directed IRA was established as a Roth IRA, and assuming that the account was established at least five years before that distribution, then the beneficiaries will be able to take their required minimum distributions from the inherited account on a tax-free basis. If your self-directed Roth IRA is large, this can end up saving many tens or even hundreds of thousands of dollars in taxes.
Finally, it’s important for the holder of a self-directed IRA to make sure that it’s clear to his or her heirs what assets are actually held within the IRA. Since many people still don’t understand that IRAs can be used to hold investments such as real estate and private equity (provided that the IRA is with a custodian like Quest Trust Company, which specializes in providing self-directed IRA services), there can sometimes be confusion when a person’s estate goes through probate. It’s important that your executor be advised that any of the less common investment types you hold in your self-directed IRA be dealt with in the manner required by applicable IRS regulations.
With a little advance planning, and making sure your heirs have a solid understanding of the laws and regulations that apply (particularly those governing required minimum distributions), you can use a self-directed IRA to save on taxes and further your estate planning goals.