What Common Mistakes Can I Avoid When Setting up a Self-Directed IRA?

Do you want to take more control over your retirement investment accounts? Have you been considering a self-directed IRA but worried about the rules?

You want to diversify your portfolio – outside of the traditional investment markets such as stocks and bonds. That’s where a self-directed IRA comes into play. It allows you to diversify while also keeping control of your investments yourself.

However, you need to make sure to avoid some common mistakes and pitfalls that plague many investors.

Read on to make sure that you don’t fall into these common pitfall traps.

A self-directed IRA allows you to invest in alternative financial investments. These can include real estate, promissory notes, oil, and gas, tax lien certificates and more.

However, instead of being administered by a bank or brokerage you instead manage the fund yourself.

Take Control Yourself

You know you need to save your money for your retirement. But it can be daunting, to say the least when you are responsible for it yourself. 

When it comes to your retirement, the only person most invested in your success is yourself. Therefore, it stands to reason that you should be the one to make the final decisions regarding your investments. However, without the correct information, you can make some unfortunate mistakes in your choices

Take control of your financial future and get started with a self-directed IRA today. Contact a Quest IRA specialist and find out how we can help you take control of your retirement.

Avoid the Pitfalls of a Self-directed IRA

When you take control of your financial future with a self-directed IRA, you need to ensure to avoid these common pitfalls.

  1. Prohibited transactions – these can be tricky to navigate so it’s important to know the rules.
  2. Due diligence – As mentioned, the rules can be tricky, and it’s imperative that with a self-directed IRA you make the decisions yourself. Always ensure you do proper due diligence before getting into any investment.
  3. Lack of liquidity – with a self-directed IRA minimum distributions are required at 72, however, the alternative investments allowed can be hard to sell. This lack of liquidity can be a common pitfall if you find yourself in an emergency and can’t get your money out of your self-directed IRA.
  4. Lack of transparency – when it comes to your exit strategy for selling your alternative investments all parties involved must be in agreement. You also must be fully transparent as to the valuation of your investments. Without this full transparency, you can fall into another common pitfall of self-directed IRAs.
  5. Lack of diversity – as most successful investors will tell you: diversity is key to successful investment accounts. However, with self-directed IRA funds, sometimes investors forget to ensure that it is fully diversified.

With a self-directed IRA, you need a trustee or custodian that specializes in these non-traditional investments. However, remember one of the common mistakes with self-directed IRA funds is the self-directed IRA owner not performing proper due diligence on investments.

So this trustee is simply a custodian of your account, not your adviser. You need to work with a company that understands the IRA rules and you can trust.

Stay Educated and Stay out of Trouble

We set up self-directed IRAs to help you prepare for your retirement. The most prepared people for retirement are those that are best educated.Keep continuing your education so you can fully prepare for the best retirement possible. For answers to your questions, contact us today. We can help you open a Quest account to get you started.

Important criteria to consider when hiring an IRA custodian

If you are considering setting up an IRA, it is essential that you discuss significant criteria with an IRA specialist to determine whether a potential custodian is right for you. 

Here is some advice to help you have the most productive discussion:

Qualification status 

  • To set up an IRA, you are required by law to use a qualified custodian. 
  • It is therefore essential to check that the potential IRA custodian is certified, and you should ask to see some evidence of this status.

Experience 

  • You may have determined that the potential IRA custodian has the correct qualifications, but you should also find out how much experience they have. 
  • Newly qualified custodians will not have the same expertise as custodians who have dealt with numerous clients over a long-term period. 
  • Ask the potential custodian about their previous work to help decide whether they are the best fit for you.

Options for investment 

  • Custodians will offer different options for investment, so you must decide whether you want to invest using stocks and bonds or use alternative assets. 
  • This decision will affect the IRA custodian that you can choose, as not all will be confident with alternative investments.

Insurance 

  • Any financial account which you open must be insured to protect your money. 
  • Every company has a different threshold for insurance, so you should make sure to ask how much money their insurance covers. 
  • This insurance should at least cover the value of money that you expect to have in your account, but for optimum security, it is preferable for this to be exceeded. 

Cost 

  • You must use a custodian that meets your budget. 
  • The initial quote that custodians provide can quickly escalate in the event of hidden fees, so you should try to use a custodian with an honest and reliable reputation. 
  • This decision can help to avoid receiving a bill that you are unable to repay. 

Quest Trust Company is an innovative financial institution that offers IRAs, 401Ks, and other investment savings accounts. If you are looking for a reliable IRA custodian, contact one of our IRA specialists today!  Our expertise enables us to offer several investment options, all for a minimal fee.

Tips For Managing A Large Real Estate Portfolio In Your Self-Directed IRA

Real estate is a perennially popular investment type for individuals to pursue within their self-directed IRAs. The ability to invest in real estate – both developed and undeveloped properties – can provide an investment and risk profile that generally can’t be mirrored with traditional stock market investments.

But holding real estate within a self-directed IRA can also require a greater level of investment involvement as compared to those other asset classes.

With stocks or mutual funds, the only investor decision is generally just whether to buy or sell. But with real estate, you’ll need to take a much more active role in your investment. And as your real estate portfolio grows ever larger (as is often the case, because many investors view real estate as the ultimate “buy and hold” asset, and therefore tend to add to their positions more than they sell existing investments), you will want to make sure you’re managing your portfolio as efficiently and effectively as possible.

1. Have a Plan.
One of the biggest differences between real estate investments and other investment types is simply the transaction costs associated with making the investments. You can buy stocks, for example, and pay a relatively small commission – and if you quickly change your mind about the suitability of that investment you can sell it the next day and similarly pay a similarly small commission. That’s not the case when it comes to real estate. You need to do your research and planning ahead of time to be comfortable that you’re making the right decision.
You may also wish to consider how subsequent additions to your real estate portfolio in terms of risk and exposure to particular market downturns will affect you. For example, if you own multiple units in a single neighborhood or very small geographic area, then you’re bearing risks (both to the upside and downside) associated with that area’s growth.

2. Stay Active.
By “staying active” we mean that you’ll want to stay on top of your investments and frequently monitor the local market conditions, the condition of the property, and that your tenants are meeting all of their tenant obligations. The value of your investment can erode over time if you’re not paying close enough attention. When you monitor your investments you may also be able to identify opportunities or efficiencies to be gained across multiple real estate investments in your account.

3. Seek Out Professional Assistance.
The larger your real estate portfolio, the more you stand to gain by using a professional property management service. While you’re permitted to perform repair and management related tasks on your own investments, you can’t compensate yourself for your time or effort – doing so would constitute a prohibited “self-dealing” transaction. This is true even if you’re in the business of providing these services to other clients.

But you can hire an outside company or individual (provided they’re not related to you) to perform these services. Not only might that just bring a higher level of professionalism and service to your investments, it can also save you time and energy by not having to manage a growing portfolio yourself.

Selecting Your First Real Estate Investment For Your Self-Directed IRA

Let’s say that like many individuals who are setting up their first self-directed IRA, perhaps drawn to the offerings of custodians such as Quest Trust Company because of the investment flexibility that such an account gives, you’re interested in using your new account to invest in real estate.

What are the next steps? How do you go about choosing your first real estate investment for your self-directed IRA?
What’s Your Prior Experience? When it comes to any new investment, there’s always some degree of learning as you go. But if you have very little or no experience with owning or managing real estate, then you may want to consider a more straightforward property for your first self-directed IRA investment.

What’s Your Investment Budget? Another key consideration is going to be the size of the investment budget for your first property. The more money you have available, the more options you’ll have.

As you formulate your budget, be sure to take into account the fact that any expenses for maintaining the property you buy must also come from within your self-directed IRA. This might be new contributions you are able to make each tax year, but these are subject to the annual contribution limits. Plan to either have your real estate generate enough income to pay for these expenses, or to incorporate other assets into your account in order to cover the real estate carrying costs.

What’s Your Current Portfolio Composition? Regardless of your preferred investment type, you always need to take care to avoid having too much of your portfolio committed to a single asset class. If you already have exposure to real estate in your portfolio (perhaps through banking stocks or REITs), then you want to factor that into your new investment considerations.

What’s the Purpose of the Real Estate Investment? Are you considering this real estate investment solely for potential gains, or do you have other goals in mind? For example, some people use their self-directed IRAs to purchase vacation or other properties that they intend to use themselves once they reach retirement age.

As you consider these types of investments, remember that the IRS regulations prohibiting self-dealing, meaning that you cannot use (nor can anyone in your family use) the property you buy until you take a distribution of it from your account during retirement (or face significant penalties if you take that distribution prior to retirement).

Start Small. Many first-time investors find that the best way to become more familiar with investing in real estate is to start small. This might be a single-family home, or even a condominium. Having a small investment in real estate can give you the opportunity to learn more first-hand, without over-committing your retirement portfolio to this type of asset.

Even though real estate is a fairly unique investment asset, it’s still subject to traditional financial analysis. Make sure you familiarize yourself with the local and broader real estate environment before making your first investment with your self-directed IRA.

Minimizing Investment Expenses In Your Self-Directed IRA

Self-directed IRAs are much more powerful than traditional retirement accounts. They allow the account holder to invest in the full range of investments permitted by the IRS (which include real estate, private companies, private debt, and even precious metals), rather than being limited to the standard range of “stocks, bonds and mutual funds” that would be permitted by a traditional custodian.

As you might expect, this additional opportunity and flexibility sometimes comes at a price. Think about two different types of investments you might hold outside of a retirement account; shares of stock in a publically traded company, and a piece of rental real estate. The only costs you’re likely to face with owning the shares of stock are the commissions when you buy and sell shares. Simply holding the stock won’t likely incur any expenses or fees, except perhaps for taxes on dividends you receive, and an account maintenance fee that you may already be subject to.

But holding a piece of real estate for investment purposes is a much different scenario. The property itself is likely to need physical maintenance and upkeep, and there are certain to be expenses connected with finding tenants. And you’ll face a property tax bill every year, even if you aren’t bringing in any rental income.

It’s the same case with different types of investments that you hold within a self-directed IRA. Here are a few important concepts to consider to minimize the investment expenses within your self-directed IRA.

Understand Your Costs Before Investing. You’ll do a much better job of minimizing your investing expenses if you have a better understanding of what they’re likely to be before you invest. If you’re considering a particular type of investment within your self-directed IRA, and you’ve previously made similar investments in non-retirement accounts, then use that experience to estimate what your expenses might be, and to help you identify ways to reduce them.

Shop Around. Even if you’ve determined that you want to make a specific type of investment (let’s say real estate), it can pay to shop around for another specific asset in the same class that might carry lower expenses. For example, rather than purchasing a single-family home that comes with sizable repair costs, you might instead look to buy a property with a similar investment profile but that’s likely to require fewer repairs.

Use a Professional. Believe it or not, managing certain types of investments within your self-directed IRA yourself might be more expensive than hiring someone to do it for you. This is especially the case where you’re unfamiliar with the particular type of investment. When you’re considering bringing in outside help, remember to take into account the fact that you cannot compensate yourself for any time you spend managing investments within your self-directed IRA, whereas you can use funds from within your account to pay for professional management services.

Finally, don’t get so focused on reducing expenses that you fail to consider promising investment opportunities. Ultimately you want to maximize the total return in your portfolio, so if you have to spend a little more in order to make a lot more, that should be a trade-off you’re willing to make.

Investing In Oil And Gas With Your Self-Directed IRA

When people think of the “alternative” investment types they can purchase with a self-directed IRA, they generally think of precious metals, real estate, private equity and private debt. (And let’s be clear, it’s probably unfair to think of these as “alternative” investments because they are fully authorized by the IRS regulations relating to IRAs.) Another asset class, and one that perhaps comes to mind as often, relates to the oil and gas industries.

Because oil and gas investments are less common, let’s discuss some of the basics for making those investments with a self-directed IRA.

Don’t Ignore the Learning Curve. Oil and gas investments are arguably one of the most complicated types of investment that you can make. Concepts of mineral interests, surface rights, working interests and royalty streams are not generally encountered with other investments.

Because many oil and gas investments are relatively illiquid, it’s absolutely essential that you do your due diligence on any potential investment, and fully understand the nature of the arrangement you may be participating in. As with any other investment, don’t rush into an oil and gas opportunity if you don’t fully understand all the relevant terms, provisions and risks.

Types of Oil and Gas Investments. There are a number of different ways to make investments in the oil and gas industries, including not only the commodities and futures contracts, but interests in the refining and drilling companies, as well as investing in land or mineral interests where drilling is taking place (or likely to take place in the future).

Other Energy Projects. Even though we’re focusing here on oil and gas investments, understand that other energy industry projects may provide you with similar opportunities. If you don’t find any suitable oil or gas projects to invest in, consider solar energy projects, wind energy, biofuel, or water energy projects as well.
The developments of just the past few years solidly demonstrate just how much potential there is for oil and gas activity within the United States. But you may also wish to consider other projects that may exist outside the United States.

Tax Considerations. Depending on the type of investment you’re considering, you should check whether there are tax incentives available for investments made with non-taxable funds. If so, and you have enough funds available in your taxable investment account, then you may wish to make the investment outside of your self-directed IRA in order to maximize your benefits. However, many of these tax breaks have expired as domestic development has boomed, so most potential investments may still be suitable for your self-directed IRA.

Also consult with an expert to understand how UBTI (Unrelated Business Taxable Income) might impact your investment. This concept (which can be an issue for self-directed IRA owners when they seek to use debt financing to make an investment – such as getting a mortgage for a real estate purchase) can result in an immediate tax bill for certain types of investments.

The key in all aspects of an oil or gas investment within your self-directed IRA is to do your homework.

Want to buy a foreclosed home with your self-directed IRA? Learn more

Do you want to buy a foreclosed home with your self-directed IRA? While many local real estate markets have improved significantly over the past several years, there are still many opportunities for investors who want to buy a foreclosed home or bank-owned property. As you might expect, the process for buying foreclosed properties is slightly different than that for buying properties from the open market. In addition, the process for buying any type of property with your self-directed IRA is also different. Here’s an overview of what you can expect if you’ve answered yes to the question: should I buy a foreclosed home with my self-directed IRA.

1. Set Up a Self-Directed IRA and Fund Your Account. The first step to buy a foreclosed home with your self-directed IRA is, of course, to set up and fund a self-directed IRA. Choose a custodian such as Quest Trust Company, which can provide comprehensive custodial services for a self-directed account, and for which you fully understand the fee structure.

2. Identify Your Real Estate Investment Goals. In order to buy a foreclosed home with your self-directed IRA, you need to identify the types of foreclosed home investments you are interested in. What are your goals when you decide to buy a foreclosed home? Are you investing in real estate in order to gain an income stream, in order to achieve long term capital gains, or both? Are you looking to take a distribution of the property once you retire, and live in it yourself? Determining your goals can help you narrow down your potential list, making it easier for you to buy a foreclosed home that meets your investment goals.

3. Identify Your Budget. How much do you currently have in your IRA, and how much do you plan to invest when you buy a foreclosed home? As you identify your budget, keep in mind that a foreclosed home will likely come with operating expenses that your self-directed IRA will be responsible for. These expenses must be met with assets from within your account, which can be either income generated from the foreclosed home itself (or from other assets within your account), liquidated assets from the account, or your annual account contributions. If you decide to buy a foreclosed home that has operating expenses, you cannot pay these expenses with your own personal funds outside of the IRA.

4. Secure Financing (if necessary). If your account balance is not large enough that you can’t pay cash when you buy a foreclosed home, your account will need to obtain financing for the purchase. Note that some banks that sell foreclosed homes may prefer (or perhaps require) a cash sale over one that’s financed. In addition, obtaining financing of this type could have adverse tax implications for your account. In general, an all-cash purchase is often the better choice when you buy a foreclosed home with your self-directed IRA.

5. Conduct Your Property Search. Only after the prior steps have been completed should you begin your quest to buy a foreclosed home. During this process, realize that foreclosed homes are often subject to a higher level of damage or disrepair due to the circumstances that brought the property back onto the market. It’s often helpful to obtain professional assistance in evaluating properties.

When you buy a foreclosed home with your self-directed IRA, you’ll often discover a very rewarding undertaking. Follow the guidelines above to put yourself in the best position to succeed.

Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.

Checkbook IRA LLC Pros and Cons with Quincy Long Hosted by Cash Flow Depot (Teleconference)

A very popular idea in the self-directed IRA industry is to have what some have termed a “checkbook control” IRA. These have been under attack by the IRS. Click the link below to listen to Quest Trust Company President H. Quincy Long talk about the dangers of Checkbook Control IRA LLCs
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