Quest Trust Company›Blog›Investments

Category: Investments

Leave a Lasting Legacy to Your Loved Ones with an Inherited IRA

Posted on by Sarah Shellam
Estimated reading time: 7 minutes

Dealing with death is never easy, but most people would agree that when we go, we want to leave a financial legacy behind for our loved ones and make the transition of assets as smooth as possible. There are multiple ways to leave a legacy from a life insurance policy to a living will or trust to just leaving assets or cash to your next of kin. But one of the most important ways to leave a real legacy to your family, and arguably the best way, is through an inherited individual retirement account (IRA).

What is an Inherited IRA?

An inherited IRA is basically the account you set up when you inherit a tax-advantaged retirement plan, such as an IRA or 401k. The assets from the original account holder are transferred into a newly opened IRA in the beneficiary’s name, which is why it is also known as a beneficiary IRA.

What are the Benefits of an Inherited IRA?

Many people do not realize that when you pass away, most of your assets, cash, and material possessions will be taxed before being given to your heirs. The IRS calls the death tax, and these estate taxes can range from 18% to 40% in total. Just imagine someone close to you died and left several thousand dollars to you in a checking account, and before you even take possession of those funds, the IRS takes up to 40% of it in taxes. Seems a little unfair don’t you think?

Now let’s take the same example described above, but instead your loved one left the same funds to you inside of their retirement account. Upon their death the money would be transferred to you into an inherited IRA with no additional taxes applied at that time, literally escaping 100% of the death tax. Which of those two scenarios sounds better to you?

While avoiding the Death Tax is a huge benefit, another possibly even bigger advantage of inherited IRAs comes from the investing side. This is the ability to compound the growth of those funds without having tax consequences today. For example, every investment that has earnings attached to it will always be taxable. If we made $100K on an investment, we could potentially lose 20% or more to taxation, and walk away with only $80K. However, if we did this same investment utilizing an inherited IRA, we would be able to keep the entire $100k today, giving us a chance to fully compound these funds at an exponential rate.

How Does an IRA Pass to Your Beneficiary?

Inherited IRAs typically fall into two categories: you are either the spouse of the person who passed away or a non-spouse beneficiary. If you inherit an IRA from your deceased spouse, you generally have the following three choices, but only the first one is available to spouses exclusively.

  • As the spouse, you can take the account as your own. When doing so, you are labeling this as your own IRA and not any form of inheritance. This means you can still make normal contributions to the account and follow the same IRA rules. These include being 59½ before taking penalty free distributions and Required Minimum Distributions (RMD) will still be required from tax deferred accounts starting at age 73 (this updated as of January 2023). This is a common option for a spouse when they inherit an IRA over the age of 59.

Both spouses and non-spouse beneficiaries can select from the following options:

  • You can take the IRA as an inherited IRA. In doing so, you can no longer contribute to this IRA, but you can invest into anything you see fit or feel comfortable with as long as it is not through a disqualified act. The account can still grow tax deferred (or post tax if it is a Roth IRA) but because of the 10-year rule, must be fully distributed to the account holder within a 10-year period which begins the year after the original account owner’s death. This is very common among younger spouses because they can spend the funds today penalty free (and tax free if it is a Roth IRA).
  • The person inheriting the account also has the option to disclaim it. By disclaiming, you are stating that you do not want this IRA, and it will go to the next of kin that is listed on the beneficiary form. This is important because the person who disclaims it does not get to choose who it goes to, or whether it goes to whoever is labeled as the contingent beneficiary on the IRA. If no one is listed, then it will go to the estate of the deceased. This option is not commonly used since most people would rather claim it as their own IRA or claim it as their own inheritance and still be able to invest the funds in it.

How Did the Secure Act Change Inherited IRAs?

The rules regarding inherited IRAs have changed in recent years with the passage of the Secure Act which went into effect in 2020. To understand what we lost, we need to first lay a foundation of how inherited IRAs used to work. Pre-December 2019, you could inherit an IRA from someone, and that IRA would survive for your life expectancy. It could grow either tax deferred or tax free for decades. The way this was calculated can be seen on IRS publication 590-B under Life Expectancy. The year you inherited the account, the IRS would then give you a life expectancy. From there, the newly inherited IRA would last for that said life expectancy and have a RMD every year moving forward. As an example, if I was 35 years old, the IRS would give me a Life Expectancy of 51 more years. I could then grow this inherited IRA completely tax free for 51 more years.

Unfortunately, many people would take advantage of this rule, sometimes even leaving these accounts to one-year-olds hoping that the account could grow tax free for longer periods at a time. Due to these actions, a clause was put into the Secure Act in 2020, and the rules have been forever changed for inherited IRAs.

Now the IRS will not allow you to compound these investments permanently. With the Secure Act, you have 10 years to grow these inherited IRAs without any tax consequences. At the end of the 10-year period, you will need to take a full distribution of those retirement funds. If you inherited a traditional IRA (or any other tax deferred retirement account), then you will be taxed at your current tax bracket on any funds that were distributed. However, if you inherited a Roth IRA, then that distribution would be 100% tax free. Imagine for a moment that you were able to leave behind to your spouse, children, and grandchildren, a vehicle that they can use to invest in just about anything, while fully avoiding taxation from the IRS. That is how you truly leave a legacy.

Even with the changes made by the Secure Act, these are still some of the most powerful investment accounts to be self-directed. The real way to grow wealth is using a self-directed inherited IRA to invest into privately held companies, real estate, oil and gas, and much more, and still be able to avoid taxation on these investments.

How to Set Up an Inherited IRA?

We get this question a lot, but this is not an account you just set up, it is one that is inherited. This means you will be setting up your own self-directed IRA. You must list who will be the beneficiaries to this IRA, and they will be the ones to receive your legacy building account. It is important to mention that your retirement account will always supersede a will or a trust, so keep those primary and contingent beneficiaries up to date with your IRA custodian.

Inherited IRAs are one of the best ways to avoid taxes, build wealth for generations to come, and leave behind a true legacy. It’s important to take the time for estate planning to create a legacy for you and your family. Set up a self-directed IRA, maximize your contributions, and make sure that your family understands what to do when you pass. If you are interested in setting up a self-directed IRA, or have more questions about the process, you can set up a 1 on 1 with a Quest Trust Company IRA Specialist. By utilizing these accounts appropriately and educating your family on the process, you can change your family’s lives forever and build wealth for generations to come.

 

Common Questions IRA Holders Have About Property Taxes

Posted on by Quest Trust Company
Estimated reading time: 3 minutes

As the year comes to an end, Self-Directed IRA holders using their IRA to invest in assets like real estate or commercial properties have to keep up with expenses. One of those being property taxes. Below are a few of the top questions received towards as the year comes to a close. 

Who can pay my IRAs property taxes?

Investors need to bear in mind is that all expenses related to property owned by your Self-Directed IRA (maintenance, utility bills, upgrades, property taxes, etc.) must be paid from your IRA. These payments cannot come from a personal account and must be submitted on time. 

When are my property taxes due?

The due dates will be different depending on where you live, but most Texas counties will start mailing out tax bills for the property taxes. Come January 1st, property values are determined for the year. At this time, exemption qualifications are set. When this happens, a tax lien is placed on properties to ensure each tax bill is paid. Then on January 31st, you Texas property taxes are due. The delinquency date (if you didn’t pay, you now owe delinquent property taxes) is on February 1st.

If you’re unsure of the due date and don’t have an automatic payment set up, you can find all helpful dates here on the TaxEase website.

What should IRA holders do to make sure that the property taxes get paid? 

Before anything else, you should determine where the bill is mailed. This is really important for clients with new investments, as counties typically do not update the mailing address for property taxes until the next year. Clients should also check their email folders to ensure that any correspondence or needed approval from Quest is addressed. The beginning of December is a perfect time to check this and confirm the correct information we have on file for you. 

Another thing clients can do to make sure property taxes get paid is monitoring the funds in your Quest account. Some situations have occurred where a request was made, but there were no funds in the account to make the payment. In the event a payment request is submitted and there are insufficient funds, a Quest representative will reach out. To ensure you there is no delay, it’s best to check back often to monitor your account balance.

At Quest, we can set up reoccurring payments for property taxes. We would require supporting documentation of the bill. Bills should be forwarded to our office if received at your residence. If you do not have automatic payments set up through your account, you can submit the payment request in your Client Portal or submit a Payment Authorization Letter along with the supporting tax bill to our team. 

What can IRA holders do to make property tax payments an automatic process?

Self-directed IRA holders should understand that many counties will only send property tax bills one time per year. In the past, some clients that have not set up their automatic property tax payment, and when they pay the first half of their taxes at the end of the year, they are penalized for the second half due within the next half year. 

There is an option to select “recurring” when you submit a request in your Client Portal. Here you can choose the frequency, like annual, monthly, etc. As long as the supporting document showing the amount of the bill arrives at our office, Quest will process the payment within 24-48 hours, given there are enough funds in the account to cover the cost.

For more information about managing real estate in a Self-Directed IRA and how they work, please visit our website or talk with a certified Quest representative. To get more education about getting started, sign up for a free consultation with an IRA Specialist HERE.

Does Your Custodian No Longer Hold Private Investments?

Posted on by Quest Trust Company
Estimated reading time: 3 minutes

New custodian requirements are causing headaches for some retirement investors and are causing them to look elsewhere. Investors that have their retirement accounts at some of the common publicly traded custodians are being told that they can no longer hold private investments under certain thresholds. 

The biggest challenge is that these custodians are no longer holding private investment opportunities for under $1M. For investors with smaller accounts that choose to remain with these certain custodians, they will no longer have the option to put their money into private investments. Assets such as real estate, notes, and private entities could all be eliminated from the list of possible investment options. 

How Can a Self-Directed IRA Help?

Self-directed IRAs could be the answer to the problem. With a self-directed IRA, you have the ability to diversify your investment portfolio by choosing from the broadest possible spectrum of investments, including those not traded on a stock exchange, and you’ll never have to worry about investment minimums or maximums. Self-direction means you get to make all the decisions about your financial future, and your custodian will provide account administration. Remember! Not all custodians are created equal!

You can build wealth faster with the freedom to purchase almost any type of investment. Common investment choices include all types of real estate, newly created and existing promissory notes, LLCs, limited partnerships, private stock, trusts, oil and gas, tax liens, and much more. All types of IRAs, including Traditional, Roth, SEP, and SIMPLE IRAs, as well as Coverdell Education Savings Accounts (CESAs) and Health Savings Accounts (HSAs), can be self-directed. 

Why Self-Directed at Quest?

Quest Trust Company is the nation’s premier self-directed IRA custodian, administering clients all across the U.S. Not only do we provide world famous account administration and customer service, we put a big focus on education and making sure our clients are equipped with all the knowledge and resources they may need. In our Education Center, you can experience live webinars, blogs, recorded videos, and more. In addition, we’re always adding the the latest online features, allowing you to fund investments online within 24-48 hours – one of the fastest funding times in the industry!

Benefits of Self-Directing Your IRA at Quest: 

  • Ability to view and manage accounts & investments online in the Client Portal
  • Submit investments and yearly Fair Market Valuations 100% online
  • Pay expenses with our team or online with the Expense Pay Feature
  • 24-48 hour processing times for almost all request involving accounts
  • Access to 35 Certified IRA Services Professionals and endless continued education

Here’s How We Can Help

For those that have a larger IRA and still want to participate in private assets, Quest can help. If you are looking for a qualified and knowledge custodian to place your private assets or start new private entity investments, call an IRA Specialists to see how we can make your move to Quest.

Schedule your free 1-on-1 call: Schedule A Consultation

Tax Talk: UBIT, Solo 401(ks) and More! – Guest Article with Adam Barr

Posted on by Quest Trust Company
Estimated reading time: 9 minutes

When investing with Self-Directed IRAs (SDIRAs), understanding your responsibilities is one of the first things you need to make sure you know. In this guest article, CPA Adam Barr shares insight on helpful tax considerations and other helpful knowledge about tax-advantaged accounts. From unrelated business income tax (UBIT) to different special accounts, Adam shares what he’s learned during his time working with SDIRAs. 

Sarah: Thank you for joining me. Can you tell me a little bit about yourself?

Adam: I’m a CPA and I work as a tax manager here at MGA LLP, which is a local Houston accounting firm. We do tax and insurance services and outsource financial accounting for small businesses and the owners of those small businesses, both here in the Houston area and around the country. Even all around the world. My specialty… I’m a tax accountant, so I help a lot of my clients with tax compliance, tax planning and business planning, as well. Part of the reason we’re talking about self-directed IRAs today is that… a number of years ago I accidentally developed this as sort of a specialty. There was a vacuum in the market for CPAs who know a lot about UBTI and filing tax returns for Self-Directed IRAs. I had a little bit of experience in that field due to some clients we already had. It just sort of grew into a specialty, and now I’ve been working with Quest and helping their clients with these types of issues as they come up for the past few years. That’s a bit of who I am and what I do.

Sarah: So, you work with Self-Directed IRAs. When people are looking to begin investing with a Self-Directed IRA, what are some tax considerations, either positive or negative, that they should really be thinking about when getting started?

Adam: Yeah, sure. The positive tax advantage of having an IRA of any kind is that you have a deferral of tax. Most of the time when people are thinking about an IRA or a SDIRA, they’re talking about a traditional IRA, for which you get a tax deduction for putting money into. That allows people to defer some income into the IRA and to earn money on it tax free until they draw it out in retirement. You get a very long horizon of not having to pay tax on this money. What that helps you do is it helps you grow your money faster, because if it’s not being subject to tax and your earnings aren’t being subject to tax on an annual basis, you actually end up with a much higher net return after a long period of time. Then people need to watch out for unrelated business income tax (UBIT), which I think is something we’re going to talk about today, which can be something that people definitely want to consider before they invest in anything in a Self-Directed IRA. Depending on the type of investment, they could end up paying some tax on the income earned by that Self-Directed IRA each year. That changes what they should be expecting in terms of an after-tax investment return. I just think it’s very important that people should think about that and consider what their after tax return will be. That’s a general look at the positive and negative tax considerations related to a SDIRA.

Sarah: You mentioned UBIT. Can you talk a little bit about that? What is it for those that don’t know?

Adam: Absolutely. So, UBTI is unrelated business taxable income, and I’m going to distinguish that from UBIT, which is unrelated business income tax. So, UBIT, unrelated business income tax is the tax that your IRA has to pay on its unrelated business, taxable income or UBTI. So, the UBIT is just the tax on the UBTI. The UBTI is really the more important thing. 

Sarah: Then can you talk about that in more detail?

Adam: Sure. There are two ways in which an IRA can have unrelated business taxable income (UBTI). The first way is if the IRA is operating a trade or business. Now, a trade or business would include flipping houses and selling them for a profit, operating a retail store, or operating a restaurant. There’s any number of things. Anything that’s an operating trade or business, specifically. Not a rental property. Rental property is not considered a trade or business in this respect. In the case that you have an operating business, such as the ones that we just described, all of the income from that activity will be taxable to the IRA as unrelated business taxable income (UBTI). That would be all of the income. Now I’m going to distinguish that from the second scenario. That’s the first way in which an IRA can have UBTI. The second way an IRA can have UBTI is if it has what’s called unrelated debt financed income, which is referred to as UDFI. Unrelated debt financed income is any income that the IRA receives from a debt leveraged asset. A very common example, people will use their IRA to purchase a single family rental property, and they’ll take out a mortgage on the purchase of that property. Let’s just pretend that they take out a mortgage for 75% of the purchase price and their IRA puts up the other 25%. Their IRA will have unrelated debt financed income, because that is a debt leveraged asset. When the IRA earns the rental income from the property and pays the expenses, you’re going to have to take some portion of that as taxable income in the IRA, and the IRA is going to have to pay some tax on that. It depends on the percentage that the property is leveraged. If the rental property is 75% leveraged, as in our example, then roughly 75% of the net operating income of the property will be subject to unrelated business income tax in the IRA. Does that sort of make sense?

Sarah: Absolutely.

Adam: I use the rental property as an example of UDFI, but it can be anything. Anything that you purchased with that, an asset that you purchased with that the income from it will be taxable in the IRA.

Sarah: Perfect. I know I get a lot of people that call in and they’re actually, they’re concerned about it. Is UBIT something that they should be concerned of?

Adam: It’s not a monster hiding under your bed. It’s just something to be considered. I don’t think you should be afraid of it, but you do definitely want to consider it. As I alluded to earlier in our conversation, it affects what I’ll call your after tax return. Just like anything else in life, it doesn’t matter how much money you make. It matters how much you keep. If you’re going to earn rental income and you’re going to pay a little tax, you want to look at your return on your investment as, “what did I earn after paying that tax?” Is that an acceptable rate of return for you? So, I mean, it’s not something to be afraid of, but it’s something to be aware of.  You have to think about, well, if I invest in a debt leveraged asset in my IRA, I’m going to have to pay a little tax and I’m going to have to also get some help with preparing an annual tax filing to report that taxable income to the IRS and pay the tax. There’s a little bit of administrative effort and there’s some costs involved in preparing the return, but it doesn’t necessarily mean that it’s a bad idea. It still might be a really good investment. You just have to consider it.

Sarah: Let’s move on a bit to the potential accounts that could be exempt from that UBTI. We mentioned it and we discussed what it was, but what if someone wants to just completely avoid it, is that possible?

Adam: In some cases? Yeah. I think you’re talking in the direction of a solo 401(k).

Sarah: You got it. 

Adam: So, the answer is yes, that works depending on your circumstances. Solo 401(k)s have a bit of a loophole under the current tax law that says that they are not subject to the unrelated debt financed income (UDFI) rules. If you use a Solo 401(k) to purchase a debt leveraged asset, then the income from that asset will not be subject to UBTI, and you will not pay any tax and you will not have any form 990T tax return filing requirements. Now, if that same solo 401(k) owns an operating business, whether it’s debt leveraged or not, that is considered trade or business income and would be UBTI and would be subject to tax. So, it depends on the circumstances, but if we’re talking about the classic example of a rental property, such as a syndicated multifamily investment… if you hold that within a solo 401(k), then I would not anticipate there being any tax consequences.

Sarah: Yeah. People call in all the time and they want to open Solo 401(k)s as they are concerned about UBIT and we tell them it’s not something to be too worried about and to speak to a qualified CPA. Or… do you even qualify for solo 401(k)?

Adam: That’s the other big question. You have to be able to have a Solo 401k(). You can’t just make one. Right. You have to either have self-employment income or you have to own your own business or something like that. And you guys are probably pretty familiar with those roles. 

Sarah: Yes, and there are Certified IRA Specialists at Quest that can always answer questions clients may have. So, just to round it out here, do you have any final tips that you would give to people looking to start investing or that may already have an IRA or a 401k? Or anything you’d like to add that maybe I didn’t ask or anything that is important for our readers?

Adam: For some reason, I get a question a lot, so I bring this up every chance I get. I get the question, “well, a Roth IRA is a tax-free IRA. So UBTI doesn’t apply to a Roth IRA, correct?” And I always say that is not correct. UBTI applies to Roth IRAs in exactly the same way it applies to traditional IRAs. I think people get confused, because they think about Roth IRA withdrawals being tax free, and they assume that means UBTI does not apply, but that is not the case. It’s exactly the same rule. Lastly, the best time to start investing for retirement is last year. The second best time is right now. I’m a big proponent of putting away money for the future and utilizing these tax-deferred vehicles to do that. If you’re not sure what you want to invest in, you can still just go ahead and make that IRA contribution now and figure it out later, because you only get one. I always like to think of it this way: You only get one chance to make an IRA contribution. For example, for tax year 2020. If you just say, “I’ll figure it out next year”, then you’ve missed that opportunity forever. Right? Sure, you can make a contribution this year, but you could’ve made a contribution for 2020.

Sarah: That’s a great point to end on. Thank you so much for taking the time to speak with me and share your knowledge with me! This has been very helpful, and I know our readers will benefit greatly from this information! Whether you’re trying to understand UBIT or just want more information about the types of tax-advantaged accounts, feel free to reach out to an IRA Specialists at 855-FUN-IRAs (386.4727). If you’d like to contact Adam Barr for more help, he can be reached at abarr@mgallp.com. 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.

The Best Alternative Investments That You’ve Never Heard Of

Posted on by Quest Trust Company
Estimated reading time: 3 minutes

After years of diminishing returns on the stock market, more and more financially savvy people are looking towards alternative investments. But what are alternative investments?

Strictly speaking, these are any investment assets which fall outside of the scope of “traditional” investments such as stocks and bonds. They benefit from being less restricted, allowing investors to choose what, when, and how they invest.

By 2023, it is estimated that the alternative investments market will hit a whopping $14 trillion in size, as more and more people seek to avoid the restraints and disappointing returns of conventional investments.

If you’re looking to invest outside the box, here is a list of alternative investments that you absolutely need to consider in 2020. 

1. Venture Capital 

One of the most popular options for alternative investment funds in 2020 is venture capital or VC. This is essentially when you use your money to invest in a growing company that has long-term potential.

By providing venture capital to a company, you stand to profit from the future growth of that company. This is why Silicon Valley is the world’s epicenter for VC funding, owing to the high number of “unicorn” startups that are based there. 

2. Real Estate

By some measures, real estate is the most popular asset class in the world. In times of market turmoil, real estate has historically proven to be a sound investment. With the right knowledge of high-growth real estate markets, you could yield considerable returns by investing in real estate.

To do so, you could switch out your traditional IRA with a Self-Directed IRA, which removes the restrictions placed on traditional IRAs to allow you to invest in real estate for your retirement. Alternative real estate investment comes in all shapes and sizes, so do your research before committing. 

3. Commodities 

The commodities market is vast and incredibly diverse. This means that you should always consult commodities experts before you consider dipping your toe into this oftentimes volatile market.

Popular commodities include oil, gold, coffee, and steel, and are usually traded on futures markets. If you play your cards right and open a commodities contract at the right time, you could make a substantial profit. 

4. Private Equity 

Private equity is a cornerstone of alternative investment management. In a nutshell, this involves investing in companies that are not publicly traded. This is usually about playing the long game, as you will have to wait for the private equity fund you have invested in to sell your holdings, either as part of an IPO or as a merger or takeover. This can easily take several years, but the returns can be substantial. 

Self-Directed IRA: A Vehicle for Alternative Investments 

No matter what kind of alternative investments appeal to you, it is important to have access to the funding vehicles that actually allow you to make those investments. One effective way to do this is with a self-directed IRA.

Traditional IRAs have strict limitations on how the money in it can be invested. However, a self-directed IRA gives you the power to control how you invest in your future. 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.

How Real Estate Syndication Works

Posted on by Quest Trust Company
Estimated reading time: 2 minutes

Real estate syndication is a strategy that investors can use to pool their resources and invest in large real estate projects. 

If you’re looking to invest in large real estate projects but don’t have the funds to get a project started on your own, syndication is a great strategy that you can use to get your foot in the door. 

Here’s what you need to know about real estate syndication:

What is real estate syndication?

Syndication is the process of pooling resources with other investors to invest in a large property or real estate project, such as an apartment complex or a commercial retail development. 

Syndication is not only the process of pooling financial resources, but also intellectual resources in order to make smart decisions about the properties you invest in. In a syndicated relationship, one party invests the money, while another party invests time and labor to find the property and run the day to day operations. 

The party investing the labor in the property is called the sponsor. Sponsors still invest some money, but the amount is much lower than what the investors put in. However, they still get a fair share of the profit. Syndicated partnerships are usually structured as an LLC.

Why get involved in real estate syndication?

Syndication has become much easier in recent years, as investors and sponsors can easily connect online. Crowdfunding has made real estate syndication much more accessible for the average person, because you can contribute relatively small amounts of money to a real estate project that is interesting to you, and reap the benefits accordingly. 

If you have a property that you are interested in, syndication is one of the best ways to get the project off the ground quickly. 

Real estate is a great investment, as it can serve as an excellent source of passive income for a very long time, and doesn’t fluctuate financially the same way that many other types of investments do.

Interested in real estate investing? Talk to the expert team at Quest Trust Company. Quest offers flexible investment account options designed to meet the needs of modern investors.

Steps to set up a solo 401k

Posted on by Quest Trust Company
Estimated reading time: 2 minutes

Image Credit: http://taxcredits.net/

401k accounts are retirement accounts that are set up and managed by your employer. However, if you are a freelancer or entrepreneur that runs your own business, you may want to set up a 401k just for yourself. 

Many people don’t realize they have this option, but it’s a great way to build up your savings for retirement. Setting up a solo 401k can be tricky at first – here are the basic steps to get started.

Choose a 401k provider

The first step to opening a solo 401k is choosing a provider. Many financial institutions offer solo 401ks to their customers, so they’re fairly easy to find. There are several things to take into account when choosing a 401k provider, but the most important factors are fees and investment options. 

You’ll want to make sure your provider has investment options you like, and that you have enough flexibility when putting your plan together. You should also look for a provider with low fees, as high transaction fees can really add up.

Fill out your application

Once you’ve decided on a provider, you’ll need to work with them to fill out your paperwork and get the account set up. 

You’ll need to fill out your employer kit with a plan adoption agreement for a solo 401k. These are complex and can be confusing to fill out on your own, which is why it’s so important to have a provider you trust walk you through them. 

You will also need to prepare your employee disclosures about your business to send to the IRS for tax purposes.

Open your account

Once you have all of your paperwork filled out, you can set up an account and make contributions as you see fit. Since you are both employer and employee, you can make one sum contribution instead of worrying about employer matching.

When you’re setting up a retirement account, it’s important to make sure you’re working with a reputable financial institution you can trust. 

Quest Trust Company offers an individual 401k as well as many other retirement savings options, including self-directed IRA and Roth IRA accounts. We offer truly self-directed investment options as well as fast processing times and low fees. Contact a financial expert at Quest Trust Company today to set up your account.

How is an IRA Taxed?

Posted on by Juan Deshon

Estimated reading time: 3 minutesNo matter what type of IRA you choose, you will eventually pay taxes on it. The question becomes, do you want to pay taxes up front or on the back-end at retirement? If you would rather pay taxes now (for example: you think your tax rate will be lower now than in the future), then a Roth IRA is the way to go. There are income restrictions for qualifying for a Roth, however you can get around this by rolling over funds from a Traditional into a Roth account. If you would rather pay taxes on your distributions upon retirement and enjoy a tax write-off now, then Traditional IRAs are right up your alley. This, of course, is the most simplified explanation. And we all know taxes are a bit more complicated when further investigated.

How Are Roth IRAs Taxed?

With Roth IRAs you don’t get a tax write-off when you make contributions, and you will owe taxes on your contributions based on your income and tax bracket at the time of the contribution. If you qualify for the Saver’s Credit, the amount you owe in taxes may be reduced.

One of the greatest benefits of a Roth IRA is that you do get to pull funds out tax-free under the right conditions. As long as a Roth IRA has been open for 5 years or you are over 59 ½, whichever comes later, you can take distributions on your earnings tax-free. Qualified home purchases and disability requirements also qualify for tax-free status.

If you haven’t had the account for at least 5 years or haven’t reached age 59 ½ yet, you may have to pay a penalty in addition to tax on certain distributions. Distributions on contributions are always penalty free, but not always tax free. Distributions on earnings may be subject to both tax and penalty depending on the circumstances. To learn more about Roth IRA withdrawals, click here.

How Are Traditional IRAs Taxed?

With Traditional IRAs, you can write off your yearly contributions if you meet certain income requirements, but you will owe taxes upon distribution at retirement based on your tax bracket at the time. Traditional IRAs require savers to start taking minimum distributions at age 72 that are based on how much is in the account and your age.

You may also be taxed and fined on Traditional IRA distributions if you withdraw funds before age 59 ½. Just like with Roth IRAs, there are extreme exceptions to this rule. However, one should consider all of the costs, including loss of compounded interest and taxes, before withdrawing early.

To pay taxes required on any qualifying distributions, you will just need to include your contributions and distributions on your yearly tax filing paperwork and use this to figure the amount owed. A tax professional can help you through the process if you are unsure.

One last note on retirement account taxes: You can make a distribution that moves you into a higher tax bracket. If it’s an RMD for a Traditional IRA, you may not have a choice. However, you may want to perform some calculations first to ensure you’re not paying more in taxes than you need to. Always consult your financial advisor before taking any out-of-the-norm distributions.

Tips for Investing Out of State

Posted on by Juan Deshon

Estimated reading time: 3 minutesWith an investment like real estate, sometimes it makes more sense to take your money to a different state. Whether the market is slow, stagnant, or just not good in your area, many other places around the country are experiencing amazing growth that’s predicted to last a while. Those who get in on the action now can reap major rewards in just a few short years. Most of us can’t afford two mortgages to make this happen, but we do have available retirement funds at our disposal. Conventional IRAs don’t allow for real estate investments, but Self-Directed IRAs do. Like any investment, real estate investments take education, research, and analysis to increase your chances of coming out ahead. Learn more about how to wisely invest in out-of-state opportunities below.

Learn the Local Laws

Before investing out of state, it’s best to research and understand the local laws pertaining to your investment. If you are planning on investing in a rental property, you may want to check out the tenant-landlord laws in that state. What does the evection process look like and when are tenants liable for damages? Establishing a relationship with a real estate lawyer in that state is also a good idea in the event you need one or have a legal question about your property.

Complete a Market Analysis

Obviously, you will want to investigate the area and understand what the market projections look like in the next five and ten years, or however long you are planning on keeping the investment. Look for previous pricing patterns and learn what new businesses could be driving in jobs for particular areas. What are some of the economic decisions being voted on in the next election and how will they impact your investment? There are dozens of factors at play when it comes to real estate investments, and it’s important to understand most, if not all of them before jumping in. Learn more about Real Estate IRA Rules here.

Narrow Down Your Options

Once you’ve decided on a general area of where to invest, it’s time to choose a specific neighborhood or property. What types of renters does the neighborhood attract? Low income neighborhoods may score you a great deal at first but are more at risk for missed rents or vandalism. Check crime rate statistics and understand how quickly rental properties find qualified tenants in the area. Rural renting can sometimes prove more difficult, which means lost income potential for you.

Analyze Each Property

Just like inspecting your own home before purchasing, you will want to complete a full inspection of your investment as well. Will it need a lot of repairs before any income can be generated from the property? How long will repairs take? Besides initial repairs, it’s also important to be aware of future repairs. How old is the HVAC and water heater? What shape is the roof in and what is the seasonal weather like in the area? Don’t forget to calculate taxes, insurance, and property management costs into the equation as well.

Assemble a Trustworthy Team

Being out of state can be a hinderance when there are emergencies to handle. Having a trustworthy team on the ground can ease your anxieties but will also add to the expense of the investment. Some crucial players you will want to consider for your dream team are real estate attorneys, property managers, contractors, inspectors, insurance providers, and CPAs. Remember, you are essentially hiring them to work for you, so don’t take these decisions lightly. After all, your retirement funds are at stake!

Investing in real estate with a Self-Directed IRA is an exciting adventure no matter where you are. These tips will help you make a smart choice when it comes to choosing the right investment.