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.

Making The Maximum Contributions To Your Self-Directed IRA In 2015

One of the keys to successful long-term retirement saving is to save as much as you are able, year in and year out. Consistent saving helps to insure that you’re not investing solely at market high points, and there’s simply no substitute for steady investing over time.

For the tax year 2015, individuals can contribute up to $5,500 per year to their IRAs, with a $6,500 limit for individual age 50 and over. Being able to make these annual contributions puts you in the best possible position to reach your retirement goals, in large measure because once you miss the opportunity to make an IRA contribution for a given tax year, you can’t go back later and make up for it. Your annual IRA contributions are the ultimate “use it or lose it” situation.

Here are some tips for helping you make the maximum contributions to your self-directed IRA in 2015.

1. Plan Ahead. Of course, the best way to put yourself in a position to make the maximum allowable contributions to your self-directed IRA in 2015 is to plan ahead. This means incorporating your IRA contributions into your budget.

One of the most common reasons that individuals come up short with their annual contributions is that they take the approach of waiting until the end of the year to begin thinking about how to come up with their contributions or, worse yet, simply taking the approach that they’ll contribute whatever money they have “left over” at the end of the year. You’ll rarely be successful with this type of a passive savings approach.

2. Prioritize. Sometimes retirement savers are intimidated at the prospect of making a one-time contribution of $5,500 (or $6,500 if you’re age 50 or over). But these amounts are simply the annual caps on contributions to your account. If it’s a better fit for your budget and cash flow, you can choose to make smaller quarterly or monthly contributions, or even allocate a small portion of each paycheck to your self-directed IRA.
Note that these limits are cumulative annual amounts, so an individual with multiple IRAs can contribute a total of $5,500 to their accounts, not $5,500 to each account. If you choose to have multiple self-directed IRAs (and there are some very good reasons you may wish to do so), then plan accordingly.

3. Get Creative. You may be familiar with the concept of strategically selling certain losing investments from your taxable accounts in order to offset the gains you’ve realized from other investments, thereby reducing your overall tax bill. By the same token, this type of strategy may be able to get your taxable income low enough for you to be able to make a deductible contribution to a traditional self-directed IRA, thereby reducing your tax bill even more.

Remember that with a self-directed IRA, you’re not cut off from making contributions for a particular tax bill on December 31 of that year. So, you actually have up to April 15, 2016 (or the date on which you file your 2015 return, if you do so before April 15) in order to contribute.

Do Mutual Funds Have a Place in Your Self-Directed IRA?

Self-directed IRAs are an extremely valuable way for investors to reach their retirement goals. Custodians who offer self-directed IRAs, such as Quest Trust Company, enable account holders to invest in the full range of asset and investment types authorized by the IRS for individual retirement accounts. In addition to stocks, bonds and mutual funds, self-directed IRAs can be used to invest in real estate, foreign currency, precious metals and private equity and loan investments.

But self-directed IRAs offer the best of both worlds in that you’re still free to invest in those more traditional asset classes. In light of the multitude of investment choices available within a self-directed IRA, some account owners ask whether mutual funds have a place within their accounts.

Consider the Different Mutual Fund Types

Considering “mutual funds” as a potential investment is a very broad analysis – there are simply so many mutual fund choices available. In fact, it’s estimated that there are somewhere around 10,000 mutual funds that are currently available and accepting new investments. So it’s important to narrow your research to those funds that meet your investment goals and objectives. Of course, this means you need to have a good grasp of what your goals and objectives actually are.

For example, if you’re approximately 5 to 10 years away from your planned retirement date, then you may be considering reducing your exposure to highly speculative investments, and weighting more of your portfolio towards less volatile investments. In this regard, many large mutual fund companies offer “target date” mutual funds that you can match to your anticipated retirement date. Target date mutual funds look to balance exposure to different asset types in a way that matches income generation and preservation of capital with an eye towards the investor’s target retirement date.

Active vs. Passive Management

Many investors evaluate different mutual funds based on whether they are “actively” or “passively” managed. Actively managed funds tend to have a particular, often quite narrow, focus on a particular industry, investment philosophy or geographic area. These funds invest based on the research, experience and opinion of the fund managers, and the investment methodology is generally proprietary.

On the other hand, passively managed funds generally follow a predetermined investment path, such as seeking to mirror the performance of the S&P 500 or other broad index.

Make Sure the Fees are Reasonable

As you research various mutual fund options, you’re sure to see a broad range of fee structures. But keep in mind that high mutual fund fees aren’t necessarily a bad thing. It really depends more on what you’re getting for your money. For example, a 1% annual fee might be extremely low for an actively managed international fund, but that same fee would be considered quite high for a stock index mutual fund.

In short, mutual funds may have a place in your self-directed IRA, provided that you don’t have similar holdings in your other retirement and investment accounts, and we choose a mutual fund that best suits your investing needs.

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.

What Should My Retirement Portfolio Look Like? The Process of Evaluating Your Retirement Portfolio

The shift that’s occurred over the past few decades – from employer-sponsored pension plans where a retiree had very little input on how that pension operated to individually managed accounts such as IRAs and 401(k)s – has given individual investors more power in deciding how much they want to save for retirement and how their retirement funds are invested.

But along with this control has come a much greater responsibility. We’re not guaranteed any level of income when we retire, and even if we manage to accumulate a large account balance we’ve got to be confident that we’re investing properly. You might wonder: what should my retirement portfolio look like? Here are some tips for evaluating your retirement portfolio.

Consider All of Your Retirement Accounts and Assets Together. One mistake that some investors make is to evaluate each of their various accounts in isolation from one another. In other words, a person might look at one of their accounts and decide that it is dangerously overweighted in a particular asset class, and take steps to change their investments to a different mix. But a highly focused account shouldn’t necessarily be alarming if that person’s overall retirement portfolio is properly diversified.

For example, you may wish to use your self-directed IRA to invest in a single piece of real estate. On its face, this is not at all diversified. But if you have multiple other retirement accounts, then your overall retirement portfolio could very well be diversified in whatever way you see fit.

You need to have some idea of how you are evaluating your accounts before you do the actual analysis. Are you looking at the underlying volatility of the assets? Are you analyzing how much current income is generated? The criteria by which you evaluate a retirement account will vary depending on your needs. One common way to evaluate your portfolio will be to look to whether your investments are properly diversified.

But even with an eye towards diversification there is no single best investment model you’ll automatically use. For example, you may wish to evaluate your account on the basis of its overall performance over the past few years, how much income it’s currently generating, and how it compares to hypothetical portfolios or other broad market benchmarks.

Even within the realm of just your retirement accounts, you may have different goals. For example, in a self-directed Roth IRA, you may wish to make your more aggressive investments in that account (because your eventual withdrawals will be tax-free), while you may decide to use a traditional IRA account to invest in somewhat more predictable, perhaps income generating investments. Furthermore, if you intend to use one of your IRAs as an estate planning tool, then you may have particular investment goals and targets that are otherwise outside of your overall retirement portfolio planning.

If you have an IRA, the first place to go for guidance when you begin evaluating your retirement portfolio is your custodian.

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.

Retirement Benefits and Divorce Agreements:

Divorces can be one of the worst experiences of a person’s life. Even if divorce presents the best path forward, the process can be time-consuming, expensive and filled with uncertainty and stress. One of the more stressful aspects of divorce is the division of marital assets. Sometimes couples will seek to do planning ahead of time to lessen the potential issues later, and to make things as easy as possible if they ever do split. One way that an increasing number of couples are factoring in retirement benefits and divorce is through a prenuptial agreement.

Prenuptial Agreement Basics. You might already have a general idea of what a prenuptial agreement is – an agreement that two individuals make before getting married which specifies how certain financial matters will be handled if they ever divorce (or if they divorce under specific sets of circumstances). Most prenuptial agreements specify that whatever property and assets a spouse brings into the marriage will remain solely the property of that individual in the event of divorce. The agreement will also specify how new assets – that is, property that’s acquired by the couple during marriage – will be divided in the event of a divorce.

IRAs are Generally Subject to Divorce Settlements. One mistake that people often make when contemplating a prenuptial agreement is to assume that an IRA that they set up before marriage will remain outside of any property distributions that happen in connection with a later divorced. Unfortunately, that’s not necessarily the case. Depending on which state’s law governs a divorce proceeding, an individual may find that at least a significant portion of their IRA could be subject to division. A prenuptial agreement can help reduce the uncertainty by specifying how the individuals getting married want that to be divided.

Prenuptial Agreement Uncertainty. Just because two individuals have signed a prenuptial agreement, that doesn’t mean that a court will necessarily enforce it. The majority of the states in the U.S. have adopted some version of Uniform Premarital Agreement Act, which sets forth certain requirements that must be met before a court will enforce a prenuptial agreement. Before entering into any prenuptial agreement, check the laws of your state.

Contributions After Separation but Before Divorce. Without a prenuptial agreement, a couple who separates but does not legally divorce may still be able to make claims against the other’s IRA, even if a new account was started after the separation, if any “marital property” was used to fund the account.

If you’re prenuptial agreement specifies for a particular division of IRA assets, be sure to effectuate that decision only after your divorce is final. Any division of IRA assets must still conform to the general rules on IRA distributions, regardless of what the parties have agreed. Current IRS rules require that any separation agreement must be approved by a court before the division can be made without incurring penalties.

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.

Early Withdrawal from IRA: When You Want to Benefit Your Grandchildren

If you’ve done particularly well over the years with your self-directed IRA, then you may start looking closer at its potential to help you accomplish things beyond just funding your retirement. Retirees who have multiple sources to pay their retirement expenses – various IRAs, employer pensions, Social Security, savings and investments in non-retirement accounts, real estate holdings, etc. – can pick and choose how they use the funds from their different accounts.

Even though IRAs were created for the sole purpose of allowing individuals to save for their own retirements, there are our various exceptions that let these individuals withdraw funds for other purposes. In some cases, meeting the requirements of specific exceptions will allow an individual to withdraw funds early without having to pay the early withdrawal penalty that would otherwise be due.

Taxes Still Due With an Early Withdrawal. As a threshold matter, it’s important to understand that permitted early withdrawals are still subject to whatever tax would otherwise be owed on the withdrawal. So, for example, taking permitted early withdrawals from your self-directed traditional IRA would still cause you to incur a tax liability for that year. (A permitted early withdrawal from a self-directed Roth IRA would not be subject to tax because withdrawals from Roth IRAs are generally tax-free.)

Qualified Educational Expenses. One significant exception to the penalty for early withdrawals is being able to take money out in order to pay for qualified educational expenses at an eligible educational institution. Just about any school costs and fees will be eligible, including tuition, books and supplies, and fees and equipment that the school requires. The student must be attending an eligible educational institution, which simply means that the institution is eligible to participate in federal student aid programs. This will include not only accredited two and four year institutions, but many online and vocational schools as well.

There is no limitation on the amount that can be permissibly withdrawn early, so this is a very powerful tool you have available to help your grandchildren. In addition, because some parents may be shortchanging their own retirements in order to pay for their children’s educations, helping your grandchild may also allow your adult child to save more for their own retirement.

Down Payment on Starter Home or Condo. Another way to help your grandchild using your self-directed IRA is to take an early withdrawal in order to help them buy their first home. With a properly sized starter home or condominium, your grandchild can build equity and use their financial stability to take control of their own financial future.

There is a restriction that the homebuyer not have owned their own home for the past two years, and the penalty free withdrawal amount is limited to $10,000. But note that if multiple parents and grandparents each withdraw the maximum permitted amount, the child can have a significant head start on putting together a down payment. Another important limitation is that the $10,000 amount is a lifetime limit, so if you want to help multiple grandchildren then you’ll need to divide up that $10,000 amount as you see appropriate.

Even though self-directed IRAs were created to help individuals save for retirement, there are provisions that let you withdraw money early to help your grandchildren in various ways.

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.

Analysis Conducting Your Self-Directed IRA.

The most important principle of managing your retirement future is to save and contribute the maximum amount each year to the tax advantaged retirement accounts you have. But one important aspect of retirement savings that’s occasionally overlooked is how you actually invest those retirement funds. Similarly, an investment decision isn’t an isolated or one-time process. You should periodically review your current investments to make sure that the reasons you have for investing haven’t changed, and that the assumptions you made about the investment are still true. The process of looking at your current investments with a critical eye is known as a portfolio analysis.

Before deciding how to conduct your portfolio analysis, you need to identify where you are on the retirement spectrum. A 20-year-old and a 60-year-old are not going to approach a portfolio analysis in quite the same way.

Let’s say you’re close to the date of your planned retirement, or that you’ve already begun retirement. At this stage, you’re going to need to balance two very important factors: your ability to fund your current retirement expenses now, and your ability to continue doing so for the rest of your life. This might sound obvious, but the upshot is that your focus is likely to be more on stable investments that put your investment capital at less risk, while your portfolio should have less of a focus on capital growth.

Look at how your investments have performed over the past one, three and five year periods. During a portfolio analysis, take into account any income those investments may have generated, as well as the underlying change in asset value. Compare these numbers against reasonable benchmarks in order to determine whether your investments have outperformed, underperformed or are on par with similar investments

This isn’t to say that you need to invest all the funds in your self-directed IRA in the safest possible investments. Since those investments often provide the lowest levels of current income, at some point during retirement you run the risk of having to liquidate some of your underlying investments just to pay your monthly expenses.

Note that if your self-directed IRA is set up as a traditional IRA, then you become subject to the rules on required minimum distributions once you reach age 70½. As you analyze your self-directed IRA, make sure that your assets are such that you will be able to make the required withdrawals each and every year without having to liquidate a particular asset under less than ideal circumstances. For example, if you own an apartment building or other multi-family residential real estate in a traditional self-directed IRA, you want to avoid a situation where you must sell the underlying property simply to meet your required minimum distribution obligations.

Contact Quest Trust Company for additional information on how the flexibility of a self-directed IRA can help you choose the best possible investments for your desired portfolio composition.

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.