What is a Self-Directed IRA?

Whether it’s a Traditional IRA or a Roth IRA, a Self-Directed IRA (SDIRA), gives you all the tax advantages of an IRA with the freedom and flexibility of a wider array of investment instruments. The opportunity to take control of your financial future with greater asset diversification is one reason to invest in a self-directed IRA.

  • Regular IRAs allow investments in stocks, bonds, mutual funds, ETFs, and CDs. 
  • With a self-directed IRA, your investment options increase to include real estate, tax lien certificates, private market securities, promissory notes, and other investment opportunities. 
  • Building wealth with the tax advantages of an IRA while diversifying your retirement investment fund allows you to seek higher returns than a regular IRA. 
  • Higher yields and less volatility are another advantage of an SDIRA.

There are restrictions on what is permissible within IRS guidelines for an SDIRA. 

  • For example, you cannot borrow money from your SDIRA, sell the property to it, or enter into deals with relatives for it. 
  • You should also know that your IRA custodian cannot provide investment advice. 
  • Your IRA custodian can and should advise you of all prohibited transactions for your SDIRA.

The annual contribution limits are the same as a regular IRA: for those below the age of 50, $6000, and those older than 50, $7000. With the current and future problems with pensions, health care, Social Security, and other government programs, it is more important than ever to have a solid foundation for your financial future.

Quest Trust Company IRA Specialists can answer your questions about an SDIRA. Consider the benefits of an SDIRA with Quest Trust Company as your custodian: 

  • While most companies have only one option for your SDIRA, Quest Trust Company offers seven. 
  • Quest, there is no minimum cash balance. 
  • Transaction processing can exceed over two weeks with some companies; Quest processes transactions within 24-48 hours.

Quest offers the following for FREE (Other companies charge a fee for all of the following items):

  1. Expedited Services
  2. Processing Incoming Wires
  3. Processing Incoming Checks
  4. Roth Conversions
  5. Re-Characterizations
  6. Change Account Type Fee
  7. Certified Mail Fee
  8. Paper Statement Fee
  9. Distribution Processing
  10. Required Minimum Cash Balance (No minimum cash balance)

Contact a Quest IRA Specialist today! And discover how a self-directed IRA will fit into your retirement investment strategy. At Quest Trust Company, we help you take control of your retirement. 

Important factors to consider when selecting an IRA custodian

There are different types of IRA accounts, for instance, Traditional IRA, Roth IRA, and SEP IRA. However, all IRAs have something in common. According to the Internal Revenue Service, all must have a custodian.

Who is an IRA custodian?

An IRA custodian refers to a financial institution that is responsible for holding account investments. The custodian ensures investment accounts are safely handled, and both the government and IRS regulations are followed.

There are numerous custodians in the market. While they are not hard to find, how do you single out the best IRA custodian for you? Here are essential factors to consider:

  1. Available investment options

  • Always choose a custodian with a wide range of investment options.
  • Sometimes your investment needs may go beyond those of an ordinary IRA account. Will your custodian be able to handle that?
  • Your custodian should be someone you are willing to trust with most, if not, all of your investments and financial services.
  1. Charges

  • Fees come in different forms; they could be annual account maintenance charges or commissions on trades.
  • Different custodians charge different prices. Thus, the costs depend on your custodian and account size.
  • Maintenance fees always depend on the custodian. So make sure you ask a potential custodian how much they charge.
  • Some custodians may waive the annual fee for customers whose accounts exceed a specific amount. Or depending on how much you have invested with them.
  • Also consider transaction costs charged when trading stocks, closed-end funds, and ETFs. Some custodians offer lower commissions than others while some impose charges on transactions for mutual fund families. In other cases, your transactions will not include any fees.
  1. Complex transactions

  • Make sure your custodian is well equipped to handle complex transactions.
  • While your account will start with straightforward investing like stock purchases,  with time, your needs may grow and you might seek other investment opportunities.
  • Some investments have complex rules surrounding them. Choosing a custodian without the necessary skills to handle complex transactions may cost you a fortune in terms of penalties and taxes.

Consider the above factors in your search for the right custodian. Remember, your custodian will be in charge of your retirement savings and investments. Contact a Quest IRA Specialist for further guidance to ensure you make the right choice. At Quest Trust Company we help you take control of your retirement.

How to Maximize the Growth of Your Investment IRA

When starting to plan for retirement, it’s important to start looking into tools that will help make the financial transition into retirement go as smooth as possible. Most people who are looking into ways that they can simplify the retirement process usually turn to an Individual Retirement Account. These are accounts that can have annual contributions, which can be tax deductible. Investments are only taxed when they are withdrawn from the account, but they are taxed in the same way that a regular income is taxed. There are certainly ways that people can get more out of an IRA account, which we will explain below.

The Earlier, The Better

IRAs grow when money is compounded. Investments can usually create more returns by reinvesting. If you give your money more of a chance to go through the cycle of compounding, the better chances of success for your IRA will be. This will allow your money to go through the compounding cycle without the impact of taxes taking over. Read more about this topic in our post How to Save for Retirement in Your 20s, 40s, and 60s.

Don’t Wait Until Tax Day to Contribute

\Waiting until tax day is not a good idea. A lot of people who have IRAs only make contributions to their accounts when their taxes are done. Doing this denies the chance for your IRA to grow as much as possible over the course of the year. A contribution at the beginning of the year gives the IRA a longer time to compound. Instead of making one big contribution, experts recommend putting a small portion of your money into your account throughout the year because it will benefit you most in the future

Specialize by Using your IRA

It’s crucial to set investment goals. Having investment goals will help determine what goes into your account. Experts recommend funds that are trade exchanged because they have low expenses and the other fees aren’t as much as other accounts have proven to be if you’re looking into basic retirement plans. More advanced retirement plans have distribution across many different accounts based on the taxation, also known as an asset location. Bonds that earn an income should be invested into IRAs and other financial gains and assets should be put into accounts that can be taxed.

Not every strategy for stocks is something that can be considered beneficial. It doesn’t just depend on how much you get taxed from each account, but you also have to consider what your personal situation is at the time of investment and how much you are anticipating getting back from your investment. Assets that are considered inefficient are in favor of getting put into an IRA, but other funds, like index funds, should be put into an account that can be taxable. Lower-return funds don’t have a specific end location; they can go anywhere.

IRAs can also be used for way more than what you would expect. People often find themselves investing in many different specialized funds, such as foreign equities, real estate, or investments in stocks that are considered to be small-cap stocks. Speak to your financial advisor about the best course of action for you.

What is the Penalty for an Early Withdrawal from an IRA?

If you’re asking this question, then you’re most likely needing a financial boost and are wondering if your retirement funds are an option. While most financial advisors would recommend never touching your retirement funds unless in a true emergency, there are some circumstances where you may avoid penalty on an early withdrawal. Before discussing these, we will explain how an early withdrawal can hurt you more than just in penalties.

Penalties, Taxes, and Other Losses

If you take a distribution from your Traditional IRA before 59 ½ or take a distribution from your earnings in a Roth IRA before having the account for at least 5 years or age 59 ½, whichever comes later, then you will incur a 10% penalty on the distribution amount. So, if you take a $10,000 distribution, $1,000 will automatically go toward paying a penalty. Note, distributions on your Roth contributions are penalty-free at any time.  

Besides the 10% penalty, you will have to also pay taxes on the amount distributed from a Traditional IRA. Be careful because the distribution counts as taxable income, and it could bump you up to a higher tax bracket depending on the amount withdrawn. You may also have to pay income tax on distributions made from a Roth IRA under certain circumstances. We’ll cover these in more detail below.

If those two points aren’t enough to scare you into keeping your retirement money where it’s at, consider the compounded interest you will lose out on if you take a distribution before retirement. Using the $10,000 example, in just 10 short years with a 5% interest rate that money could have grown to nearly $16,500 without any additional contributions. In 20 years, the number reaches to $27,000.

Remember, distributions aren’t always easily replaceable. Both Traditional and Roth IRAs have contribution limits of $5,500 per year (or $6,500 if you’re are 50 or older). This means you will only be able to replace about half of your distribution in the $10,000 example by the end of the year, if you haven’t met the limit already.

Exceptions to the Early Withdrawal Penalty

Luckily, there are a few exceptions to the 10% penalties, but you still may owe taxes and lose out on the compounded interest on your distribution. You can avoid the penalty and the taxes for a Traditional IRA or a Roth IRA distribution if you have had the Roth IRA for 5 years or more and:

    • Are 59 ½
    • You have suffered permanent or total disability
    • You are using up to $10,000 in a first-time home purchase
  • You are inheriting the IRA from a deceased relative

You can avoid the penalty, but still owe taxes on a Traditional or Roth IRA if:

    • You are using the funds for a qualified education expense
    • You haven’t had the account for at least five years, but you meet one of the criteria from the previous list.
    • You are taking substantially equal distributions over a period of time
    • You are using the funds to pay a medical expense that exceeds 7.5% of your AGI
    • You are using the funds to pay for health insurance while unemployed.
  • You are a member of the military and are taking a qualified reservist distribution.

Two last points to keep in mind. Rollovers do not count as distributions as long as you complete the transfer within 60 days. For the 5-year Roth rule, each contribution includes its own time clock. So, the most you can distribute in earnings is whatever was earned from the funds from at least five years ago, if you are younger than 59 ½ that is.

What is a Backdoor IRA?

Roth IRAs are fantastic ways to grow your retirement tax-free and access contribution funds at any time. However, not everyone can contribute to one. The contribution limits on a Roth IRA vary based on income and marital status. The most someone can contribute to a Roth IRA is $5,500 per year (as of 2018). This limit starts to taper off the higher in income you go, and eventually reaches $0 when you earn too much to qualify for Roth contributions. As of right now, however, there is a loophole of sorts to these limits with what is called a “backdoor IRA”.

What is a Backdoor IRA?

If you earn too much to contribute to a Roth IRA, you can still contribute to a Traditional IRA, and then roll over the funds into a Roth IRA. There are no age limits or income limits on a rollover. Keep in mind, however, that recent changes to IRA laws bar anyone from recharacterizing their rollover back to a Traditional IRA once the transaction is complete. Rollovers are final, so proceed with caution.

Remember, Roth IRA contributions are made post-tax, so rolled over funds from a Traditional IRA that were made pre-tax will be subject to taxation that year. If your investments lose money, and with no option to recharacterize, you may not have enough funds to pay the taxes owed and be on the hook for the deficit.

What are the Benefits of a Backdoor IRA?

Now that congress has restructured the tax brackets, you may qualify for a lower tax bracket than you were previously. If so, this is a great time to roll over your funds into a Roth IRA, so you pay the lower taxes now. Congress can change tax brackets again in the future, so it’s wise to take advantage of the lower taxes if you can swing it.

Distributions upon retirement for a Traditional IRA are taxed at the tax bracket you qualify for at the time. If you believe you will be at a higher tax bracket at the time you need to take distributions from your Traditional IRA, then you may consider making a rollover to a Roth IRA. Roth IRAs don’t require any minimum distributions at a certain age, so you can keep growing your funds as long as you need. Roth IRAs also allow for distributions on contributed money at any age penalty-free. Having investments in a variety of accounts, including Roth IRAs, allows more flexibility in retirement and helps diversify your portfolio.

How to Do a Backdoor IRA Conversion

There are two methods for completing a backdoor IRA.

Method One: Convert your entire Traditional IRA into a Roth IRA.

Method Two: Sell shares from your Traditional IRA and transfer those funds into a Roth IRA.

Remember, this strategy is only beneficial if the taxes you will save outweigh the costs of the transfer, including any fees associated. Always consult your financial advisor before moving funds from a Traditional IRA into a Roth IRA.

Should You Open Up Multiple IRAs?

IRAs, or individual retirement accounts, are useful for many different reasons, especially if you are self-employed. There are many benefits that you can get from these retirement funds, and you are able to open up as many as you’d like. However, if you decide to open multiple accounts, it’s important to be aware of the pros and the cons. If you’re not sure why you’d need multiple accounts, these pros and cons might be good to look over and decide if maybe opening multiple accounts would be good for you.

The Basics

Before you decide whether or not multiple IRAs is a good idea for you, it is important to make sure you know about the tax benefits as well as the limitations of an IRA. Some points to remember about these accounts is that there is a maximum contribution amount allowed each year and having multiple accounts will not raise this amount. It is based off the combined contributions to all the accounts. However, this does not mean there are no other benefits that multiple IRAs could have.

The Pros

One of the most popular reasons people will invest in multiple different IRAs is because they have different assets that they want to invest that are allowed in on IRA but not another. This could include things like real estate and precious metals, which can only be invested in self-directed IRAs, or stocks and bonds, which can be invested in traditional IRAs.

Not only does having multiple accounts allow you to invest different options, but if you have different assets in different accounts then it is much easier to track how well each investment is doing. This helps make the evaluation of your retirement funds easier.

It also is helpful because then you can take advantage of both the traditional and the Roth IRA tax advantages. If you split whatever you were going to invest in one account, you can put half into the traditional IRA with tax deductions when you withdraw and half in the Roth IRA which has tax free earning and withdraws.

The Cons

 

Multiple accounts mean that you have more to pay attention to. You have to manage each account individually, so it is possible to miss something or make mistakes which can be more stressful if you are not detail oriented. It is possible to combine accounts so there is some flexibility if there are any changes.

Setting up multiple accounts also has an additional fee attached to it, so that is a cost to consider, although it is small. Along with this, there are minimum balance requirements for separate IRAs, so it is important to make sure you have enough to contribute to each account so that they are over the minimum balance. If you don’t have enough to contribute to both accounts, you’ll have to be willing to wait until you have the proper amount.

Whether you decide to open multiple accounts or not, the most important considerations are to educate yourself and ask your financial advisor any questions you may have before getting into new accounts.

FAQs for Small Business IRA Contributions

Although not required for small business owners in most states, small business IRAs are a great way for owners and their employees to save for their futures. There are two major accounts you can set up as a small business owner, each with different set-up requirements, flexible options, and employee participation rules. One is called the Simplified Employee Pension (SEP) IRA, and the other is called the Savings Incentive Match Plan for Employees (SIMPLE) IRA. Here are the most common questions small business owners have with regards to these two account options:

SEP

  • What are the contribution limits of a SEP? All contributions to an employee’s plan must come from the employer. Employees cannot contribute to their SEP plans. The maximum contribution an employer can make to the plan is 25% of the employee’s salary, or up to $55,000 if 25% exceeds this amount. The same goes for your own account as the business owner.
  • Do I have to contribute the same percentage for each employee? Yes. Many plans require you to choose a percentage you would like to contribute for each employee. If you choose 3%, everybody gets a 3% contribution no matter how much they earn. This can lead to different total amounts. Remember, whatever percentage you choose also applies to your own account.
  • How do the tax deductions work? The contributions your business makes to each account don’t count toward the individual employees’ gross incomes. So, they won’t have to claim it as taxable income when filing. Contributions are tax deductible for the employer, including their own personal plan. The funds will grow tax deferred and the employees will pay income taxes on any distributions.

SIMPLE

  • What are the contribution limits of a SIMPLE IRA? An employer can choose to contribute 2% to all employees who earn at least $5,000, and up to $275,000 (2018) in income, or employers can offer up to 3% matching for employees who electively take a salary reduction contribution for their plans. In each case, the employee cannot contribute more than $12,500 to their plan per year, or $15,500 if older than 50. If the employer chooses to make 2% contributions, they must give this to every employee regardless of whether or not they make their own contributions to the plan.
  • How does matching work? For employers who choose the matching plan (rather than the flat 2% plan), employees will decide how much of their income they would like to contribute directly into their SIMPLE IRA. The employer then matches up to 3% of their income into the plan. If the employee decides to contribute 2%, the employer will also match the 2%. If the employee decides to contribute 5%, the employer will only have the ability to match up to 3%.

How do the tax deductions work? Just like with SEP IRAs, employers can deduct contributions to a SIMPLE IRAs annually. The employee only pays the taxes on the distributions when they list it as taxable income on their tax returns.

Pros and Cons of 401(k) to IRA Rollover

If you’ve recently left your employer, you may be wondering what to do with the funds in your old 401(k). Besides keeping it in the account, there are a few other options you’ll want to consider. No one option is perfect for everyone, so you will need to reflect on your specific situation and discuss the best choices with your financial advisor before moving any funds. If your new employer doesn’t offer a retirement benefit package or you’re now self-employed, you’re probably considering rolling over your funds into an IRA. Take a look at some of the pros and cons regarding this decision listed below.

    1.  Fees. IRA fees are usually lower than 401(k) fees, but this all depends on the size of the company offering the 401(k) and how hands-on or hands-off you choose to be with your IRA. A 401(k) most often includes free investment advice and financial assistance, but you may no longer qualify for this benefit if you aren’t a current employee. You will have to compare all of the costs, benefits, and fees between the two accounts you’re considering to know for sure which one is more cost effective.
    1.  Investment Options. Typically an IRA will provide you with more investment options than an employer 401(k) will. If you have expertise in a certain niche you’d like to invest in or would like to diversify your investments through bonds and mutual funds, an IRA may be the right option for you. However, some investment options can only be found in a 401(k). If you like your current investment, you may not be able to find it outside of your 401(k).
    1.  Distribution Age. If you are currently still working for the employer your 401(k) is through, you may take penalty-free distributions once you retire no earlier than age 55. If you are working for a different employer, you may take distributions at age 55 from an old employer 401(k) if you still have an account with them. If you retire before age 55 or are still working for the same company at 55, you may have to wait until 59 ½ to take distributions on your 401(k). Some plans even prohibit distributions from a 401(k) if you’re still working at 59 ½. The earliest you can take a penalty free distribution from an IRA is 59 ½. Once you turn 70 ½, you will be required to take minimum required distributions from a traditional IRA. Most people won’t have to take distributions on a 401(k) until April 1st of the year after they officially retire, whenever that may be.
  1.  Borrowing from the Account. Some 401(k) accounts allow owners to borrow up to 50% (or a maximum of $50,000) from the account without penalty, unlike an IRA. The loan provision benefit from a 401(k) usually only applies to current employees since the repayment, plus a low interest, is taken directly from each paycheck. Loans from an IRA are prohibited, although there are some circumstances that allow owners to use funds on special expenses, such as college tuition or a down payment on a first home, without incurring the 10% early withdrawal penalty. However, it is difficult to replace those funds once withdrawn since the annual contribution limits are so low.

Three Benefits to Self-Directed IRAs

Whether you are new to the world of IRAs or have been saving with one for decades, you may have never heard of a self-directed IRA and are wondering what exactly it means. In short, self-directed IRAs function just like regular IRAs in terms of the standard rules and regulations, but they offer quite a bit more investment options. Most brokerage firms stick to ordinary investments, so the key to saving with a self-directed IRA is first finding a reputable company that specializes in them. Even with a self-directed IRA, you will still have an administrator over the account that will ensure you’re following all proper laws and procedures regarding paperwork and valuations. Explained below are a few benefits to self-directed IRAs.

  1. More flexibility with investments. Self-directed IRAs exists to give investors more options for asset growth besides a typical stock, bond, mutual fund, or CD. Some companies offer very select options that limit what the investors can do with their money. A stock that an investor likes may only be available through a mutual fund or the investor may know about a start-up business that they would like to invest in but isn’t included on their list of available options. With self-directed IRAs, investors have more control over what they invest their money in, even if they want to invest it in gold, real estate, promissory notes, or other commodities such as horses. Collectibles such as artwork, coins, and stamps, however, are a no go.
  2. Can use your expertise. If you work in a particular field or participate in a unique hobby, you can use your expert knowledge to make smarter investments. For instance, a realtor has greater knowledge about real estate than the average person and can easily spot a good deal when they see one. Typical IRA options won’t include real estate as an investment option, but the realtor can use a self-directed IRA to jump on the particular opportunity. Using a self-directed IRA provides more investment choices to a person whose niche isn’t included within average IRA options. Investing in what you know can lead to more informed retirement decisions.
  3. Greater earning potential. Because investors who utilize self-directed IRAs are usually more knowledgeable investors, they have the potential to earn big time with particular investments. They can spot trends in their market and know when to jump in the game. A savvier investor can take advantage of the more open choices available to them and invest in a business, niche, or commodity otherwise not accessible to them or anyone else through a standard IRA.

While self-directed IRAs can prove a useful tool for certain people, novice investors may want to educate themselves in a particular field and gain more experience within the market before utilizing this option. Just as these accounts can have greater earning potential, they tend to be a higher risk option for investors who don’t know what they’re doing. Self-directed IRAs may include higher fees depending on the investment, so it’s important to read the fine print before signing up.

A few rules to keep in mind before investing with a self-directed IRA are that you can’t invest in anything that directly benefits you as a person, such as buying a vacation home with your IRA money, and you can’t mix personal funds with IRA funds to finance an investment. There are several nuances to self-directed IRAs that are important to understand before investing, and not following proper procedure can have devastating effects on your retirement goals. As long as you follow the rules and do your homework on the investment, with a self-directed IRA you don’t have to miss out on the perfect opportunity.