The Importance of Paying Attention to Your IRA Investments

Estimated reading time: 5 minutes

It’s property tax time in Mississippi as I write this in August, 2022. It reminds me of the importance of paying attention to your IRA investments. 

Every year on the last Monday of August tax liens which are still delinquent are sold at public auction (MS Code Sec. 27-41-1 (2020)). The tax collector will deliver to the purchaser of lands sold for taxes a receipt showing the amount paid, a description of the land sold, the amount of taxes due, and the date of sale, and the receipt signed by the tax collector is evidence of the purchase of the land by the purchaser (MS Code Sec. 27-41-75)). The owner, or any persons for him with his consent, or any person  interested in the land sold for taxes, may redeem the property at any time within two years after the day of sale, by paying the chancery clerk, regardless of the purchaser’s bid at the tax sale, the amount of all taxes for which the land was sold, and interest on all such taxes, including all costs incident to the sale, plus interest at the rate of 1.5% per  month. (MS Code Sec. 27-45-3 (2020)). When the period of redemption has expired, the chancery clerk will, on demand, execute deeds of conveyance to individuals purchasing lands at tax sales (MS Code Sec. 27-45-23 (2020)). 

For example, the tax sale this year is on August 30, 2022. The period of redemption will expire for 2019 tax liens, which were sold in the August, 2020 tax sale, on August 31, 2022. If you own or have a lien on a property and fail to redeem it by the deadline, you will lose your interest in the property. 

Mississippi is a tax lien state. In other words, what is sold at a tax sale is the lien on the property, which can later mature into title to the property if the property taxes are not redeemed. Other states, like Texas, for example, are tax deed states, which means that what you are buying at the tax auction is a deed to the property, subject to the limited right of the owner or other interested party to redeem the property by paying the property tax purchaser the amount he paid at the tax sale plus a 25% penalty in the first year and a 50% penalty in the second year. Be sure to learn the rules for investing at tax sales in the state where you are investing. This is especially important if you are investing through online bidding. 

 At Quest Trust Company we receive notices that the chancery clerk is required to send to owners and lienholders of the pending expiration date of the period of redemption in Mississippi every year. Those notices are forwarded to our clients. Sadly, in some cases the clients do not react in a timely manner, and their ownership or liens get wiped out by the tax sale.  

 Let me give you some examples. One client who had a recorded lien against a property received a notice that stated “the title to said land will become absolute in said purchaser unless redemption from said tax sales be made on or before the 31st day of August, 2022.” The client wasn’t sure what to do with the notice, but Quest was unable to give him any tax or legal advice. Fortunately there was a second lien on the property and the second lienholder made sure that the taxes were paid and the property was redeemed. That was a close call. 

 In another case, the client actually lost the title to a condominium worth over $200,000 for a delinquent tax bill of less than $5,000. His IRA had to hire an attorney who sued to set aside the sale due to defects in the tax sale. Fortunately, after approximately 2 years of litigation the IRA recovered title to the property. The whole mess could have been avoided if the client had just been paying attention to the payment of taxes. 

 The lesson to be learned from these experiences is this – you need to pay attention to the payment of taxes and other expenses due on property owned by your IRA or on which your IRA owns a lien. This applies to other bills also, such as insurance. Do not ignore notices which you may receive or assume that the problem will be taken care of by other parties. Remember, in a self-directed IRA you are responsible for monitoring your investments. Your custodian is a neutral party holding title to your IRA’s assets. They are not permitted to provide you with tax, legal, investment, or deal structuring advice. 

Here are some helpful tips to help keep your IRA investments safe: 

  • Always keep track of deadlines that pertain to your investments, including tax payment deadlines, loan maturity dates, the lien expiration date for loans, insurance due dates, and any other deadlines you know about. 
  • If you invest in a state where you do not live, be sure to find out what the local deadlines are that may affect your investments. 
  • Never assume that any third party, including your borrower, investment partner, or custodian, will take care of the problem if you receive a notice of some sort, such as the pending expiration of the redemption period discussed in this post. 
  • Make it a habit to learn the relevant deadlines for the jurisdiction where you are investing and enter them into your calendar when you first make the investment. 
  • Either close a real estate purchase or a loan secured by real estate at a title company or closing attorney’s office so that you know for sure that taxes, homeowner’s association dues, insurance binders, and other relevant bills are current when you first make the investment, or if you don’t do that then have the discipline to do that all yourself. 
  • Always make it a condition of any loan modification and extension to have the borrower provide evidence that taxes, homeowners’ association dues, insurance, and other bills are paid current before agreeing to the modification and extension of the loan. 
  • Take the time to at least have an idea of the foreclosure procedures in the state where you are investing if you are making a loan. 

Good luck with your investing! 

-H. Quincy Long, CEO and Founder of Quest Trust Company

If you have any questions about Self-Directed IRAs at Quest Trust Company, our specialists are here to help. Schedule a free call today!

Understanding Self-Directed Employer Plans and Which One Is Right For MY Business

Estimated reading time: 5 minutes

Self-employment can be a blessing and a curse! On one hand, you control your own hours and you can proudly say that you are your own boss, but the privilege of being in charge also comes with responsibilities and the important matters always fall on your shoulders. The good news is that being self-employed in the world of IRAs is great! As a small business owner, you have plenty of employer plan options! From the common plans like the SEP IRA and the Simple IRA to the powerful Solo 401(k), there are plenty of options to save for retirement that fit each accountholder’s needs.

But how do you know which one is best for you?

As you begin researching all the accounts and their difference and similarities, you’ll want to examine exactly where you stand and what you’re aiming to accomplish. Take a moment and ask yourself…”How many people do I employ?”, “How much am I looking to contribute?”, and “How much management am I willing to put in?” There are no wrong answers, but they are all important factors to take into consideration when reviewing your options.

There are three main self-employed plans: The SEP IRA, the Simple IRA, and the Solo 401(k), all which are offered at Quest Trust Company. Each plan has something special to offer, so below we have listed the important information you should know about each one.

SEP IRA

The most common plan for self-employed individuals is the SEP IRA, or Simplified Employee Pension plan. Like the Traditional IRA, the plan allows for tax-deferred benefits for individuals who are self-employed, own a business, employ others, or earn freelance income. SEP IRA contributions are considered employer contributions, so the business makes them to you as the employee. SEP accounts are good accounts for business owners with one or just a few employees. Since you need to treat all employees the same as you, keep in mind that if you end up hiring people, qualified workers will receive the same percentage from your employer contribution as you do. With a 2020 contribution limit of up to $57,000 or up to 25% of your wages, this account is highly sought after for self-employed individuals who want to contribute a large portion to their retirement plan! Additionally, those contributions are tax-deductible, making this a great account for some!

SIMPLE IRA

The SIMPLE IRA is another plan, and there are many great similarities, and also differences, that make this another highly sought out self-directed employer plan. The taxes work the same way as a Traditional IRA account would, with the taxes being deferred, but contributions are able to be made by both employer and employee. Usually this plan is great for employers with about 100 or less employees. For contributions, the employer provides matching contributions up to 3% of the employee’s pay, not limited by any annual compensation limit OR make non-elective contributions equal to 2% of the employee’s compensation. One special characteristic that this plan has that the others don’t is it’s portability. When looking to move a SIMPLE IRA, employees must wait two years from the time they open the account before transferring those funds into another retirement plan. There may be a 25% early-distribution penalty if one were to withdraw money from a SIMPLE IRA during the two-year waiting period.

SOLO 401k

Lastly, one of the most powerful self-directed accounts is the Solo 401(k). Many people seek this account because of its many benefits, but it also has some downsides and things to be aware of. Something to note is that these plans are usually best suited to business owners who do not have any w-2 employees. As opposed to the other two plans, the Solo 401(k) boasts exemptions from certain UBIT tax, offers the ability to do loans to yourself, and even allows for checkbook control, arguably the most enticing. Additionally, the owner can make contributions as both employer and employee, allowing up to $57,000 in contributions, with a catch up contribution of $6,500 for those 50 or older. With so many positives, there will be negatives, too. One requirement is that the account holder has sole responsibility when it comes to tax reporting requirements; it’s important to make sure records are kept. Another important thing to note about the Solo 401(k) is that in order for it to be legitimized, the account holder must make a contribution in the year the account is opened. Once you have learned the benefits and dangers, deciding if the Solo 401(k) is right for you will be easy!

The main thing to understand and take away is that there is no one right employer plan. What works best for you may not be the most common, or the most well-known, but each employer plan has it’s unique benefits. And remember, one of the best things about employer plans is that you can use them for investing with your company, but if you want to create personal wealth for retirement, you can also have a Traditional IRA or a Roth IRA at the same time, allowing the best of both worlds! Once you have an idea of what you’re looking for, you’ll be able to measure which plan is the best fit for you, and if you ever need more information or help deciding which employer plan might be best for you, feel free to call a Quest Trust representative at 855-FUN-IRAs (855.386.47.27).

To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Want more information on how to invest with an employer plan? Check out this video about employer plans, who qualifies for them, and what it means for you and your small business.

The “Perfect Time” to Contribute to Your IRA might be TODAY!

Estimated reading time: 6 minutes

A common question you hear in the retirement world is “how can I retire comfortably”, and we are constantly reminded how important it is to save for the future. IRAs (Individual Retirement Accounts) and Solo 401(k)s are some of the best tools created for those who choose to save money and create wealth for retirement through investing. Vehicles like this provide tax advantages for retirement savings, deferring taxes until distribution age or potentially making it to where an individual never has to pay taxes on growth at all!

But what do you do with your IRA when a global epidemic hits and all of your plans shift? More recently, THIS has become the most common question. At first glance, the thought of maximizing your IRA and the contribution limits of IRAs can seem intimidating. Setting aside hefty sums of money for the future may not seem all too appealing when you really need it now! The truth is, contributing to a retirement plan just may not be an option for each and every person right now and that is okay! For those who can take advantage of building their IRA during this time, understanding many different ways and options to maximize it to the highest potential is important.

As a savvy saver and intelligent investor, you know that there will always be benefit to maximizing your IRA contributions every year. In order to better your future, we have broken down how you can max out your contribution limits! In reality, maximizing your contributions now builds a more stable financial future for you and your family, especially when considering compound growth when each new investment makes a profit. The good news is, if you have not made or contributed all of your 2019 contribution limits, you still have ONE MORE DAY to do so.

Normally, Tax Filing deadline falls on April 15th every year, cutting off the ability to make any more contributions for that specific tax year. With the recent CARES Act the normal April 15th deadline has been extended, allowing individuals to make IRA contributions until July 15th 2020 for the 2019 tax year. Utilize the extended deadline! With that extra time, those who may not have been able to contribute or may have forgotten have one more day to contribute until the new deadline. That change could potentially have allowed some people more time to find a new job if they had been laid off, in turn giving them the ability to contribute to their IRA!

It is extremely important to understand how much you are allowed to contribute per year, though! In theory, it would be great to dump thousands of dollars into a tax sheltered retirement vehicle, but Uncle Sam has put some limits on how much we can contribute to our IRAs per year, and if those rules are broken, there could be excess contribution penalties for doing this transaction! Choosing a good custodian that will help you monitor this just like Quest, is very important, too. The table below outlines the contribution limits for 2019 and 2020 for the accounts that Quest offers.

Some of the things you may want to ask yourself are: “Have I maxed out my 2019 contribution?” and “With this extra days I have, could I contribute more and how much?” Understanding that COVID unexpected expenses are occurring for many people right now, considering how that amount can be divided as opposed to a lump sum deposit could be worth thinking about, as well.

Did you know you could have multiple IRA accounts and max them ALL out? Yes, you read that right! Quest and other custodians usually offer many different types of accounts, as well. Just as we mentioned above, just here at Quest we have 7 different types accounts and almost all of these accounts have varying contribution limits. Granted, there are certain limitations that still apply when maxing out different types of accounts. For example, you wouldn’t be allowed to open 20 Roth IRA accounts and contribute the maximum to every account; this would need to be spread across the accounts up to the limit. But as you can see, there are categories that show Personal Plans, Employer Plans, and Specialty Plans. Each of these categories, if you qualify for them, contain plans that can all get a contribution!

You may be wondering what the difference is between Personal Vs Special Vs Employer. When we talk about personal plans, we are referring to retirement plans that one can open as an individual with earned income. Employer 401(k)s often roll over directly into a personal plan like a Traditional or Roth IRA, making them very common retirement vehicles. Another plan category many custodians offer are Employer Plans. Some individuals work for themselves! For the certain ones who are self-employed and pay themselves self-employment income, they can qualify for specific accounts that allow for much higher contribution limits. Lastly, companies may offer Specialty Plans. At Quest, our specialty plans include the Health Savings Account and Coverdell Education Savings Account. These two plans have been deemed “special” due to the fact that individuals can take tax free distributions from these accounts for qualifying expenses! As the names may sound, the Health Savings Account allows for qualified health expenses, and the Coverdell ESA allows for education expenses. If you, your family, or your child qualify for one of these accounts, you may have the ability to open the accounts to max it out and then use it to partner it with your other accounts! Having a clear understanding of the many different types of accounts offered and which ones you can qualify for to contribute to will help you maximize your retirement vehicles to the very top!

The last thing you may want to consider is a Roth Conversion. A Roth Conversion is when a movement of assets from a Traditional, SEP, or SIMPLE IRA occurs and goes into a Roth IRA. This taxable event makes it to where anything else grown in the account thereon becomes tax free, as long as it is left in there for 5 years and the individual doesn’t take it out before retirement age. Is this a good time to do a Roth conversion? For more information about Roth Conversions, we recommend speaking with an educated IRA Specialist either at Quest or another reputable financial institution.

Lastly, you may consider if you have other accounts you can move over from other custodians? Diversifying your investment portfolio right now is a strong consideration many people are having. Public assets may not have as much control as private assets, and those who have had their accounts at more traditional custodians, are finding that Self-Directed IRA custodians can offer the ability for the individual to truly take control and invest in what they are knowledgeable and comfortable with. IRAs can always be transferred between other IRAs, so doing your research to see which custodian meets your specific needs and transferring an existing account to a different or new account may help you maximize your IRAs, too.

Times can be uncertain, but your retirement does not have to fall by the wayside. You still have time to maximize your future, and make the most of the contribution limits. If you don’t have an IRA or made a contribution for 2019, know that it’s not too late for you to get started either! Feel free to call Quest and we can provide more education for you, and see how we can help you get started maximizing your accounts to their full potential! Call us at 855-FUN-IRAs. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Check out this video to learn more about 2019 and 2020 IRA contributions, and how to contribute to your Quest account.

Effects of Tax Bill on IRAs and Other Accounts

Estimated reading time: 5 minutes

**Please note this article is from 2017 and some information might have been updated since then. Always check the IRS website for latest information.

Many people are wondering what ended up in the final version of the tax bill and how it affects IRAs and other accounts. First, a brief civics lesson is in order. In the United States Constitution, Article I, Section 7, Clause 1 states that “All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as with Amendments as on other Bills.” In this case, the House of Representatives proposed the tax bill, and then the Senate passed amendments to the proposed bill. Since the proposed bills were not identical, a conference committee was established to work out the differences between the two versions of the bill. Once reconciled, the modified version of the bill goes back to the Senate and the House of Representatives to be voted on in its final form. If the final bill is passed by both chambers, the bill goes to the President to be signed into law or vetoed. The reason this is significant is that confusion often arises when one chamber proposes a change which does not match the proposal in the other chamber. Until the final version of the bill is negotiated and passed by both chambers of Congress, there is no way to tell what changes were actually made.

With that bit of background, let’s discuss what changes did, and just as importantly what did not, get passed in the final version of the tax bill. First of all, with regard to the Coverdell Education Savings Account (CESA), no changes ended up being made. The House bill had several proposed changes to the CESA, including provisions to disallow any additional contributions to a CESA after December 31, 2017, and allowing a CESA to be rolled into a qualified tuition program (a Section 529 plan). The Senate amendments had no changes proposed to the CESA. Both the Senate and the House had provisions to modify Section 529 plans. In the final version of the tax bill, the Senate amendment prevailed. For distributions made after December 31, 2017, Section 529 plans may not distribute more than $10,000 in expenses for tuition incurred during the taxable year free of tax. Any excess distributions received by the individual are treated as a distribution subject to tax under the general rules of Section 529. The definition of higher education expenses was expanded to include certain expenses incurred in connection with a homeschool.

Both the House bill and the Senate amendments proposed identical changes to the Roth conversion and recharacterization rules. The proposal was to disallow any recharacterization of a contribution to one type of IRA into the other type of IRA (a Roth IRA contribution to a traditional IRA contribution or the reverse). For example, if you made a contribution to a Roth IRA and later discovered that you made too much money to qualify for a contribution, you would not be permitted to recharacterize that contribution. However, in the conference committee a change was made which allowed the recharacterization of a contribution to one type of IRA into the other type of IRA, but did not allow a recharacterization of a Roth conversion contribution. In other words, the recharacterization rules remain the same except for Roth conversions. Beginning January 1, 2018, once a Roth conversion takes place, it may not be reversed (or recharacterized). As a result, much more thought must go into a Roth conversion decision in 2018 and future years. Significantly, no changes were made to the Roth conversion rules which allow high income earners to contribute to a traditional IRA and immediately convert that contribution into a Roth IRA. This is known colloquially as a ‘back door’ Roth contribution.

Finally, a change was made to the rules for Unrelated Business Income Tax (UBIT). Under the previous regulations, an organization that operates multiple unrelated trades or businesses aggregates income from all such activities and subtracts from the aggregate gross income the aggregate of deductions directly related to the trades or businesses. As a result, an organization was able to use a deduction from one trade or business to offset income from a different unrelated trade or business, thereby reducing unrelated business taxable income. However, the tax bill added a new provision (Section 512(a)(6)), which requires an organization to compute its unrelated business taxable income separately with respect to each trade or business and without regard to the specific $1,000 deduction generally allowed under Section 512(b)(12). The organization’s unrelated business taxable income is the sum total of the amounts (not less than zero) computed for each separate unrelated trade or business, less the specific $1,000 deduction. Beginning in 2018, a net operating loss deduction will only be allowed with respect to the trade or business from which the loss arose. As a result, an organization may not use a deduction from one trade or business to offset income from a different trade or business for the same taxable year. Fortunately, net operating losses from a taxable year beginning prior to January 1, 2018 that are carried forward to a taxable year beginning on or after that date are not subject to the rule, and can be used to offset unrelated business taxable income.

The final bit of good news is that the rules for inherited IRAs did not change in the tax bill. Given the power of an inherited Roth IRA, particularly if that account is self-directed, this is really great for those who have one and know how to work it.

  1. Quincy Long is a Certified IRA Services Professional (CISP), a Texas attorney, and is President of Quest Trust Company, Inc., with offices in Houston, Dallas, and Austin, Texas. He may be reached by email at Quincy.Long@QuestTrust.com or by calling 855-FUN-IRAS (855-386-4727). Nothing in this article is intended as tax, legal or investment advice.

Real Estate Investments with a Self-Directed IRA Can Pay Off Handsomely

Estimated reading time: 3 minutes

Real estate is a popular investment option for those who have a self-directed IRA as one of their retirement savings tools. In fact, using a self-directed IRA with a custodian such as Quest Trust Company is virtually the only way to use tax-advantaged retirement funds to invest directly in real estate, and to do so in exactly the way you choose.

There are many different ways to invest in real estate with a self-directed IRA, and the most appropriate type of real estate investment for a particular individual is going to depend on their investment goals and their account balance, as well as various other factors. Regardless of the type of real estate investment you choose, here are some ways that choice can pay off handsomely.

Income to Acquire Other Investments. Many real estate investors choose properties that generate a significant level of current income. Single family rental homes, multi-unit apartment buildings and commercial properties are common examples of income-generating real estate investments.

When you invest in income-generating properties within your self-directed IRA, you create a flow of cash that you can use to purchase additional investments within your account. This is significant because you’re limited in how much you can directly contribute to a self-directed IRA ($6,000 for the 2021 tax year, or $7,000 for individuals age 50 or over). Having additional cash flow generated by real estate within your account means that you’ll have a greater number of new investment options to choose from.

Income During Retirement. If you’ve already entered retirement and are now taking distributions from your account, an income-generating real estate investment can provide all or part of the funds for those distributions.

In fact, some investors are able to build the real estate investments within their self-directed IRAs to the extent that they’re able to finance their retirement living expenses solely based on the income they receive from those investments. And such a scenario would allow the account holder to receive that income without having to to sell any of those properties. In fact, those properties may continue to appreciate in value over time, potentially leading to significant long-term capital gains whenever the account holder chooses to sell.

A Retirement Primary Home or Vacation Home. Finally, another way that real estate investing with a self-directed IRA can pay off handsomely is by the account holder investing in property that they will actually use themselves during retirement. This might be single-family home or condominium that they’ll use as their primary residence. Or it could be a property that they’ll use as a vacation home or part-time residence during retirement. It could even be a piece of undeveloped property that the account holder will use to build a home upon.

If you choose to use your self-directed IRA to purchase real estate, it’s important to fully understand the tax-implications of doing so. For example, taking a distribution of the property will trigger a significant tax liability if your account is set up as a traditional self-directed IRA, while no such such liability will accrue if your self-directed IRA is set up as a Roth account.

Creating an Automatic Savings Plan With Your Self-Directed IRA

Estimated reading time: 3 minutes

Most individuals understand that it can sometimes be challenging to come up with money each year to contribute to their retirement accounts. Even those who’ve already set up their own IRAs, and who understand the value of saving over time, may still find it difficult to make the maximum contributions to their accounts each year.

One of the reasons this is problematic is that too many individuals consider their retirement contribution something that they pay attention to once a year, most likely at the end of the calendar year (when they’re certain to be facing other demands on their personal finances). Putting an automatic savings plan in place can be a particularly effective way of making the maximum contributions to your self-directed IRA each year.

What is an Automatic Savings Plan? An automatic savings plan is simply a process by which you automate the act of saving. It is generally accomplished through the use of automatic debits and payments for one account or another. For example, you might set up a monthly automatic transfer to be made from your primary checking account each month, and the funds contributed to your self-directed IRAs. This can be done for any financial purpose or to help you reach any particular goal, but it’s especially useful for allowing you to meet your retirement savings goals.

What are the Sources of Your Self-Directed IRA Contributions? The most important aspect of an automatic savings plan is that the contributions happen automatically. Simply setting a monthly or quarterly calendar reminder for yourself to make a contribution may not be enough. Giving yourself the opportunity to forego a contribution means there’s a possibility that could happen.

You must identify the accounts that you’re going to use for making your automatic contributions. Consider your checking account, savings account, taxable investment account, or some combination of them.

What is Your Budget? Before you can determine the specific parameters of an automatic savings plan, you need to have a savings goal in mind. While contributing the maximum amount to your self-directed IRA is ideal, that may not be reasonable with your current budget. In addition to helping you identify how much you can contribute to your self-directed IRA through an automatic savings plan, preparing a personal or household budget may aid you in learning more about other expenses you might be able to cut back on.

The timing of your automatic savings plan is also important. Do you want your contributions to be made monthly, or perhaps quarterly? Or would bi-monthly work better for your particular budget and cash flow?

Finally, once you have an automatic savings plan up and running, go back and reevaluate your plan at least once a year. As you advance throughout your career, could you make larger contributions to your account? Could you make your contributions earlier in the year to give your money more time to grow? Staying on top of your automatic savings plan can help you reach your long-term goals.

Comparing a Self-Directed IRA With Other Retirement Plan Options

Estimated reading time: 3 minutes

There are a large number of reasons why a self-directed IRA can be the most powerful tool you have in saving for retirement. A self-directed IRA with a custodian such as Quest Trust Company can provide you with an ideal mix of investment flexibility and control, all in an account that can help your investments grow on a tax-deferred or tax-free basis.

However, even if you make your self-directed IRA your primary retirement savings vehicle you still may want to commit additional funds toward your retirement. You can certainly make additional investments with a taxable investment account, but using tax-advantaged retirement account can help your retirement nest egg grow significantly larger.

Let’s compare the self-directed IRA to other retirement plan options you may have available to you.

The 401(k). If your employer offers a 401(k) plan, then you may wish to participate once you’ve maximized your annual contributions to your self-directed IRA. A 401(k) will allow you to contribute pre-tax dollars, and you won’t have to pay tax on your investments until you take a distribution from your account. Furthermore, some employers match some or all of their employee contributions with additional funds.

Unfortunately, your investment options with a 401(k) are generally quite limited. The plan administrator decides what investments are available, and such investment choices don’t always include the types of options you’re looking for.

The Traditional IRA. An IRA with a traditional custodian like a bank or discount broker will provide you with the opportunity to save on a tax-advantaged basis, but again you’ll be limited in the types of investments you can make. You’ll generally be able to invest in publicly traded stocks, bonds and mutual funds. But many retirement savers also want to be able to invest in things like precious metals, real estate, and private debt and equity, and that won’t be possible with an IRA from a traditional custodian.

403(b) Plans. 403(b) plans (also known as Tax-Sheltered Annuities) are offered by certain public schools, churches and tax-exempt charities to their employees. These accounts allow eligible individuals to make contributions to their own individual accounts, and employers may choose to match those employee contributions.

Unfortunately, 403(b) plans often involve high administrative costs. Furthermore, the investment options in 403(b) plans are selected by the employer or plan administrator, and are much more limited as compared to a self-directed IRA.

Taxable Investment Accounts. As far as making this a dedicated retirement plan, only do so if you’re already maximizing the contributions you make to your self-directed IRA and other tax-advantaged accounts. If you do use to use a taxable investment account to help you save for retirement, consider strategically choosing investments for that account which do not generate an ongoing tax liability (i.e., those which do not generate taxable income).

There are also other tools that some retirement savers use to help them plan for their future; including whole life insurance policies and annuities. However, for overall flexibility and tax-advantages, the self-directed IRA is sure to be your most powerful tool.

Will Your Real Estate Investments Get Hit by Rising Interest Rates?

Estimated reading time: 3 minutes

One of the biggest stories in the financial markets has been the Federal Reserve raising interest rates for the first time in a number of years. This change could have impacts on virtually every type of investment, but some believe that the changes will be felt with particular strength among real estate investments.

A Rise in Mortgage Rates. A rise in baseline interest rates will likely lead to the interest rates on new mortgages, as well as the interest rates applicable to adjustable rate mortgages when it’s time for their next adjustment.

But while the interest rates that are set by the Federal Reserve are certainly tied closely to home mortgage rates, there’s not a direct and immediate 1:1 relationship. In other words, even though we would now expect mortgage rates to begin an upward trend, it’s not clear when the increases will start, and how quickly they’ll rise.

Impacts on Real Estate Affordability. Traditional wisdom would say that rising interest rates exert a negative impact on the price of real estate, at least when it comes to residential properties. That’s because residential buyers generally have a monthly budget in mind when they shop for a new home, and the monthly payment that they’re budgeting for includes both an interest component as well as a principal repayment portion. As interest rates increase, a larger portion of that monthly budget will go to interest, which means that there’s less money available for principal repayment, which means that the total mortgage size will be smaller.

But in many cities around the nation there is strong demand for residential properties (particularly for single family “starter homes” and condominiums). Rising interest rates may reduce the number of interested buyers for a particular home, but there is still likely to be healthy demand for these properties.

Real Estate as an Income-Generating Investment. Real estate can be a great investment for purposes of income generation within your portfolio. Consider single family homes or residential condominiums or similar properties that you may hold in your portfolio. If interest rates rise to the point where those types of properties become less affordable to potential buyers, then those potential buyers are less likely to purchase real estate and more likely to rent their homes.

Greater demand in the rental market will have the effect of driving up rental rates, which will provide a financial benefit to the owners of rental properties. Given that you’re not likely to use financing when you purchase any investment properties with a self-directed IRA (because doing so eliminates many of the tax advantages of your account), rising interest rates could help you generate a larger stream of income with your real estate holdings.

In short, while the Federal Reserve’s decision to raise interest rates might provide some financial challenges, there’s no reason it will negatively impact proper real estate investments within your self-directed IRA.

Why the Self-Directed IRA Continues to be Your Best Option for Retirement Savings

Estimated reading time: 2 minutes

As 2021 continues, you’ve probably got a lot on your mind when it comes to personal finances. Hopefully, one of the things you’re thinking about is your long-term retirement savings, because consistently saving over time is the foundation to reaching your retirement goals. It’s also important to reevaluate your retirement activities every year.

You may find that you have several different options for conducting your retirement savings and investing activities. There’s the IRA, of course, which could take the form of an account with a traditional custodian such as a bank or discount broker, or a “self-directed” IRA with a custodian such as Quest Trust Company. You might also consider participating in an employer-sponsored retirement plan such as a 401(k).

When you take a broad view approach to considering your various retirement saving options, you may likely find that the self-directed IRA presents you with the most advantages.

Investment Options. The value and importance of having the greatest number of investment options available to you cannot be overstated. An IRA with a traditional custodian will limit your options to things such as stocks, bonds, and mutual funds. With an employer-sponsored retirement plan, you’ll have even fewer choices; perhaps just a handful of mutual funds options. A self-directed IRA allows the account holder to invest in all these options, plus real estate, private equity and private debt, precious metals, and more.

Real Estate. The ability to invest in real estate is one of the things that first draws the attention of many individuals to the self-directed IRA. You can use a self-directed IRA to invest in all types of real estate, including residential properties, commercial real estate, industrial real estate, farmland, and even undeveloped land.

However, the rules and regulations for IRAs do not permit an account holder to borrow money for purposes of acquiring investments to hold within an IRA. Doing so could threaten the tax-advantaged status of your account, so you’ll need to choose real estate investments that you can purchase, and maintain, solely with funds from your account.

Private Equity and Private Loans. Self-directed IRAs can be used to take an interest in privately held companies through a wide variety of investment types, and can even be used to issue private loans (including mortgages to individuals). These investment opportunities simply don’t exist with IRAs through traditional custodians or employer-sponsored retirement plans.

Finally, because the legal structure of the self-directed IRA is the same as the familiar IRAs that you may have had (or perhaps still have) with a traditional custodian, you can choose the exact type of self-directed IRA that best fits your needs.

What are Your Options for Taking Early Distributions from an SDIRA?

Estimated reading time: 3 minutes

Let’s get one very important thing out of the way at the outset, and it’s that the money and investments in your IRA are always completely owned by you. You are never locked out from your account, and you’re not prohibited from withdrawing your money at any time. However, if you take a distribution from an IRA before you reach age 59½, then you’ll have to pay a financial penalty to the IRA for doing so. That’s one of the trade-offs for being able to make contributions for a tax-advantaged account in the first place.

So one option for taking an early distribution from your account, albeit one that’s very expensive and potentially damaging to your retirement security, is simply to take the distribution and pay the 10% IRS penalty for doing so. This gives you access to your money, but permanently impacts the ability of your account to grow, because you’re not allowed to later replace the funds you take out of your account.

However, if you need early access to your funds then you may be able to use one of the limited exceptions that allow certain types of penalty-free distributions. Just remember that if your IRA is set up as a traditional account (as opposed to a Roth), then you’ll still have to pay whatever taxes are otherwise due upon the distribution.

Qualified Medical Expenses. You are permitted to take a penalty-free early distribution from your self-directed IRA in order to pay for unreimbursed medical expenses, where such expenses exceed 10% of your adjusted annual gross income. However, the permissible amount of the penalty distribution is not the full amount of such expenses, but the amount of that is in excess of 10% of your AGI.

Furthermore, in certain instances where you find yourself unemployed for a long period of time, you may also be able to take penalty-free distributions from your account to pay your health insurance premiums.

Qualified Educational Expenses. Another important option for taking early distributions from your self-directed IRA is for qualified educational expenses. This exemption from the early distribution penalty provisions allows you to withdraw funds from your account to pay for certain higher education expenses for yourself, your spouse, or your children or grandchildren. The expenses must relate directly to attendance at a school or institution that is eligible for federal financial aid programs (which means that certain types of trade and professional schools may not apply).

Assistance for First-Time Homebuyers. If you’re a first time homebuyer, then you’re permitted to take a penalty-free distribution of up to $10,000 from your IRA in order to help pay for the down payment and other closing costs. You may also use this exemption to help your children or grandchildren. And it’s important to note that the definition of “first time” homebuyer merely requires that you not have owned your primary residence for at least the last two years.

Again, however, you should try to avoid taking early distributions from your self-directed IRA wherever possible. Given the opportunities for growth that you’re giving up when you take an early distribution from your account, it’s worth considering all of your other options before taking those funds.