Getting Started with a Self-Directed IRA When Your Nest Egg is Small

Investing can be a tough proposition for many, especially those who are just starting out and only have a small amount of money. It can feel like investing such a tiny amount of money will never help us meet our investment goals or have enough in our retirement fund. However, investing small amounts of money now can lead to healthy returns later on down the road. You might have initially been drawn to a self-directed individual retirement account (IRA) because of the flexibility that this account type offers by allowing you to invest in alternative investments like real estate, promissory notes, and private entities. However, it can be hard to know how to get started, so we are offering a few tips to help you get on your way to successful investing.

If your nest egg is relatively small because you're just starting out with your retirement savings and don't have a lot of investing experience, then don't feel pressured to start investing in the most complicated and advanced investment types right away. Even though the self-directed IRA structure permits investments in a wide range of alternative assets, you're still free to choose ones that you have more experience and familiarity and are comfortable with the level of risk.

When your self-directed IRA balance is relatively small, it's vital that you make the maximum contributions to your account each and every year. If you fail to make the maximum contribution in any given tax year (the contribution limit for the 2023 filing period is $6,500, with an additional $1,000 allowed for taxpayers ages 50 and over), you won't be able to make up for that lost opportunity in later years. If you can maximize your contribution every year, it will help your nest egg grow that much faster.

It's a common misconception, but taxpayers are not limited to having a single IRA. In fact, it can be good practice to maintain both a traditional self-directed IRA (which grows tax deferred) as well as a Roth (which grows tax free), and then decide where to make your deposits each year based on the tax deduction advantages you might be able to get from contributing to the traditional account. The key is to deposit the maximum each year, regardless of the self-directed IRA you choose, and remember that it's always possible to convert a traditional self-directed IRA to a Roth account whenever you decide that you only want or need a single account.

Another way to grow your self-directed IRA is through the use of rollovers. Whenever you leave an employer, you're permitted to roll over the funds you've accumulated in your 401k to an IRA, and there is no limit to the amount you can rollover. This can be a great technique to increase the amount of money in your IRA and open you up to more investment options. Another benefit of a rollover is you can maintain tax-deferred status of your retirement assets without having to pay current taxes or early withdrawal penalties.

REITs can be a great option because they allow investors to invest a small amount of capital in pooled real estate projects and housing developments. REITs provide an attractive alternative for those looking to diversify their investments without directly investing in real estate. Also, because they distribute a large portion of its rental income to shareholders in the form of dividends, they can provide a steady cash flow to investors as a source of passive income. Since REITs are professionally managed by experienced real estate professionals, they are responsible for acquiring, managing, and disposing of properties in the portfolio, which help provide comfort to you knowing that you are minimizing risk with a more secure investment opportunity.

Another great option when you don't have a lot of funds to invest on your own is partnering. Self-directed IRAs can be used in partnership with other entities for investment opportunities. This strategy involves splitting ownership percentages between the IRA and the other party/parties involved. Each party has a percentage of ownership in the investments which is set at the beginning and remains the same throughout the investment. Profits are distributed based on the ownership percentage, and expenses are split accordingly. We go into more detail on the topic in our article Maximize Your Investments Funds With Partnering.

This is one of the most powerful tools for real estate investors. An option is basically a contract between the buyer and seller giving the buyer the option to purchase the property for a fixed price within a certain timeframe. The buyer has the right, but not the obligation, to buy. Property owners agree to options for several reasons, including timing income for tax purposes, obtaining non-repayable money, and negotiating flexible options. This is especially true for owners in pre-foreclosure situations.

Quest Founder H. Quincy Long goes into much more detail about real estate options in this video Real Estate Options: Learn About This Creative Investment "Option" for Small IRAs - YouTube.

There are so many choices available that it can be overwhelming when you are getting started developing your investment strategy. That's why at Quest, we believe in providing free education to encourage more investors to take control of their retirement and achieve their financial goals. We offer 2-3 educational events per week to help investors learn more about their options with self-directed accounts. For more information about our events and how to register, go to Self Directed IRA Live Events & Webinars | Quest Trust Company. If you have any questions about your options, you can schedule a free 1 on 1 consultation with one of our IRA specialists.