Everything You Need to Know about Excess Contributions

Estimated reading time: 2 minutes

Making contributions to your IRA is one of the most definite ways to ensure your account is growing each year, but with almost all self-directed accounts having different contribution limits, it can be hard to keep up with how much you are putting into your accounts. 

What happens if you accidentally put too much money into your IRA or contribute more than your earned income? As great as it would be to dump as much money as you’d like into your retirement accounts, there are rules surrounding these limits that can penalize you if not followed or corrected. 

What Is an Excess Contribution?

Generally, an excess contribution is a contribution that exceeds the stated IRA contribution limit, though there are many other ways an excess contribution can occur in an IRA. Reasons they can occur include:

  • Making a contribution that exceeds to annual contribution limit
  • Making a contribution to a traditional IRA after age 72
  • Making a contribution to a Roth IRA when your MAGI exceeds the income limit
  • Making a contribution that is more than your earned income
  • Making a contribution on behalf of an individual after date of death
  • Making ineligible or improper rollover contributions
  • Rolling over required minimum distributions 

Understanding when excess contributions occur is important, because contributions that are not corrected are taxed at 6% per year for each year the excess amount stays in the account. That means if you don’t fix the contribution, you’ll owe the penalty each year when you file your yearly income tax return. 

Correcting Excess Contributions to IRAs

The good news is there are solutions if you find you’ve made a mistake! If you discover that you’ve contributed too much, you can remove the contribution and any income it has earned before filing your tax return (including extensions) to avoid the 6% penalty. Or, if you find that you’ve contributed too much after the October 15 extended deadline, you can typically carry the excess contributions forward as an IRA or Roth IRA contribution for that subsequent year. Just be sure to reduce your contribution by the amount you carried forward, or you might exceed the limit again for the next year!

If you think you’ve made a contribution that exceeds your annual limit and need help correcting it, or you’d simply like to get more information about excess contributions, we can help! Schedule your free consultation with an IRA Specialist today by clicking HERE.

URGENT SDIRA News that Could Affect YOU!

Estimated reading time: 3 minutes

A New Proposed Tax Bill Could Mean Big Changes for YOUR SDIRA and Private Investments

Recently, a new proposed tax bill that could have significant effects on Self-Directed IRA accounts has been circulating in the news. If you haven’t heard, this new tax legislation proposes several big restrictions on Self-Directed IRAs (SDIRAs) and private investing freedoms. With the announcement of the House Ways and Means Committee proposal (specifically Sections 138312 and 138314) and the many changes it includes, it has countless Self-Directed account holders wondering how it will affect them. 

What’s The Risk?

Certain provisions that are in this bill could create dramatic issues and obstacles for investors, and could dramatically change the way you’re used to investing forever.  Changes like limiting your IRA investment choices, eliminating certain Roth Conversions abilities, capping the maximum values of IRAs, limiting IRA ownership in LLCs and other private entities, and in some cases, forcing distributions for some.

Limitations on Investment Options

The biggest change in this bill that affects Self-Directed IRA holders is the proposed limitation on investment choices. “The bill prohibits an IRA from holding any security if the issuer of the security requires the IRA owner to have a certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential”. This will cause a major problem for those looking to invest in LLCs and other private entities, as this will not be allowed.  This directly affects accredited investors.

The IRS posted the following definition of an accredited investor includes anyone who:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, OR
  • has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence).

Forced Distributions

Directly following the previous change, if these certain private investments are held in the account, those assets will have to be distributed by December 31, 2023. Although the President says taxes will not be rising for individuals making under $400,000, yet this bill could force liquidation of assets no matter who you are or how old you are. 

No More Backdoor Roth Conversions

With this proposed new bill, there will also be an elimination of backdoor Roth conversions. Currently, you can convert a Traditional IRA contribution to a Roth IRA in order to have the ability to create tax-free profits. There will no longer be this option for those over a certain income limit if the bill passes. 

Capping IRA Values

Another main proposal in this bill will directly punish those who have successfully grown their IRAs. For those that have managed to build their IRAs up to $10M will receive a cap. What we have seen in our years of self-direction, many of the IRA accounts are under this cap and this cap is aimed at only a handful of investors. Yet, hundreds of thousands of other investors will suffer from these new changes, too. 

What Can You Do To Help?

No matter which side of the political spectrum you may be on, this proposed bill could affect all retirement account holders. We encourage you to start the discussion by contacting your representatives in Congress and the Senate, regardless of party, to share your opinions and express how this could affect everyone. 

IT TAKES LESS THAN 5 MINUTES. By clicking HERE, you can submit an email to your representatives in Congress and the US Senate that has already been drafted for you. All you have to do is put your name and email, and then hit send! Your voice can help make a difference, but it’s critical that you take action to contact your legislators.  

If you have any questions about the new proposed tax bill and how it could affect your account, give us a call. Our IRA Specialists are here to help answer any questions you have. 

Watch an interview style video with Quest Trust President and Founder, Quincy Long, about the new proposed bill:

How to Make a Contribution to Your Account

Estimated reading time: 3 minutes

One of the easiest ways to help your account grow is by making yearly contributions. Putting in a set, allowable amount every year can propel your account forward without the funds ever touching an investment. Of course, doing investments in the account will help you make the most of your self-directed IRA and the compound interest from investments, but remaining diligent with your contributions is always one sure-fire way to know your account is growing each year no matter what. 

With half of the calendar year gone, the amount of time you have to contribute for the 2021 tax year is creeping closer than it might feel like! Rather than waiting until the last minute to get your contributions in, decide if it makes sense to send your yearly contributions in now. The last thing you want is to be left scrambling at the last minute, so make sure you’ve done all you can to maximize your accounts for the year and plan accordingly for your yearly contributions. 

How Much Can I Contribute to My Self-Directed IRA

Every year, the IRS sets certain limitations on the amount you are able to contribute to your IRA per year and there are specific requirements and rules that must be met in order to contribute to certain account type. Contributions aren’t required, though, so you don’t have to make a deposit every year. If you do choose to maximize your IRA contribution for the year, make sure you’re aware of how much you can put in each account.

Find the amounts below by clicking on the account for more information:

How do I Make a Contribution to My Self-Directed IRA

When preparing to make your contribution, it’s important to remember that all IRA contributions must be made via check, wire transfer, or ACH. Quest Trust Company cannot accept cash or 3rd party services, such as Paypal. We also ask that you always note which tax year the contributions are for. 

When sending in your contributions, all funding methods should have the correct vesting (Quest Trust Company FBO [Client Name] IRA [Client Account #]. If you plan to send your contributions electronically, you can find the Delivery Instructions in your Client Portal.

If you prefer to send in a check, you can send those to: 17171 Park Row Drive, Suite #100, Houston Texas 77084

As always, if you have questions, feel free to call in to our office at 281.492.3434 or schedule a consultation with an IRA Specialist HERE.

Your Top 10 Most Common Self-Directed IRA Questions Answered!

Estimated reading time: 6 minutes

Understanding how self-directed IRAs work can be some of the most lucrative and useful knowledge to have. When you know even just the SDIRA basics, you’ll find that there are many ways this information can help not only yourself and others around you as you continue to invest. So, what are some of the most common questions people ask about self directed IRAs? Below are the top 10 most common questions surrounding SDIRAs:

  1. What is the difference between a Self-directed IRA and a regular IRA? This is a great question and probably the most common question asked. The answer is actually simpler than it may seem. There is no legal distinction between a self-directed IRA and any other IRA. The difference is that with a truly self-directed IRA, the account agreement allows the broadest spectrum of investments. Legally, there is no difference between the two; self-directed is simply a term used to help describe that the account allows for the investor to have full control over their investment choices and the type of alternative assets than can be held. 
  2. What is the benefit of having a self-directed IRA? There are many benefits of using self-directed IRAs. Not only can you diversify your portfolio, moving beyond stocks, CDs, and mutual funds, but you can also have more control on the investments you choose. Unlike having a financial advisor that will trade and sell your stocks for you, when you have a self-directed IRA, you are truly getting to find the investment of your choosing. Everything is on your terms when you self-direct your account at a non-traditional custodian, because you choose the investment. This allows you to invest in the things you know and understand, as opposed to things you may not be as familiar with. Not everyone understands the stock market – or is comfortable with its current state, anyway – so, having the opportunity to invest in private assets like real estate, is a much better option.
  3. What type of accounts can be self-directed? There are many different accounts that can be self-directed. At Quest, we offer seven different types of accounts, all which can be self-directed. Because each account works a little bit different, it is beneficial to speak with someone like an IRA Specialist who can provide education about specific accounts.
  4. Can I have multiple IRA accounts? One of the great features of self-directed IRAs is that they don’t have to be used only on their own. Self-directed IRAs can work together by using a beneficial strategy called “partnering”. This term is used when one entity (or more) and an IRA come together to put up the funds for an investment. In this strategy, all parties have a vested percentage of ownership in the deal. When doing this, the percentage of ownership is decided at the beginning of the investment and must remain the same throughout the life of the investment. This means that any profit the investment receives is returned based on this percentage of ownership. Additionally, the IRA would be responsible for its percentage of any expense associated with the investment, too.
  5. Can I move a 401(k) to a self-directed IRA if I am currently still employed with my company? Typically, you cannot move your IRA until you have left your company or have some separation from the company that could allow you to move a portion of those 401(k) funds. This is not to say that you cannot have both an IRA and a company 401(k) at the same time. Many people have an IRA and make personal contributions to the account, you just may not be able to receive a deduction for your IRA contributions. In some cases, companies will allow for an “in service” rollover, meaning that some of the funds may be eligible to move to an IRA while still employed. 
  6. Is it possible to have a Roth IRA if I make too much money? One of the most common questions surrounds a certain type of IRA account – the Roth IRA. Many people believe that if you make too much money that you cannot have a Roth IRA, but this would be incorrect. Although it is true that if your modified adjusted gross income is over a certain limit you still cannot directly contribute, it would be false to assume this means you cannot have one at all. Check out our other articles about Roth conversions to learn more. 
  7. Is it possible to own real estate in an IRA? This is a very common question, and it is true that one can purchase and own real estate in an IRA. Due to the potential predictability and security of the asset, many people are making the decision to diversify their retirement accounts into tangible assets like real estate. With self-directed IRAs, you are able to invest in all types of real estate such as land, single family, multifamily properties, commercial properties, mobile homes and much more. When using an IRA to purchase real estate, your IRA is the purchaser and you make all the decisions about your investment and the profits grow in your IRA!
  8. What happens if I don’t have enough money in my IRA to purchase my investment? If you don’t have enough money in your IRA, don’t worry! There are other options available to you that can allow you to still use your self-directed IRA for the investment. You can:
  • Make your annual contribution if you haven’t made one for the year already.
  • Partner your IRA with another IRA or personal funds to make up the total cost of the investment
  • Utilize getting a loan from a private lender to help make up the remainder of the funds
  • Get a non-recourse loan from a qualified lender
  1. Can I live in or work on a house that my IRA owns? This is one of the most important common questions that involves IRAs. When you are using a self-directed IRA to invest, there are certain people that your IRA cannot participate in deal with. Certain disqualified people (you, your spouse, your lineal ascendants and descendants and any companies owned or controlled by those people) cannot do business with your IRA or else it will be seen as a prohibited transaction. If you are using your IRA to do business with a 3rd party, this can be done all day long! But this mean, you would not be able to work on or live in a house that your IRA owns. More about that here!
  2. Do I need an LLC to purchase investments in a self-directed IRA? No! You actually do not need to create any LLC when using an IRA to invest. When using your IRA to purchase alternative investments, you simply let your custodian know what you would like to invest in, and then your custodian will purchase the investment in the name of the IRA. 

Self-directed IRAs aren’t the easiest thing to understand, but once you’ve taken the time to ask yourself some of the most common questions, you’ll be able to understand them a little better. It’s important to have a knowledgeable investment professional or a certified IRA custodian/specialist that can help answer questions when needed! 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.

2021 Contribution Limits: IRAs and Beyond

Estimated reading time: 5 minutes

Self-Directed IRAs (SDIRAs) are some of the best vehicles when it comes to receiving tax benefits when we use them to invest. Common ways to fund an IRA are by using methods such as rollovers from previous employers or transfers from other IRA accounts, but personal contributions may also be another way to help these accounts grow. 

Although it would be nice to contribute as much as we wanted, every year specific limitations are set by the IRS on how much money individuals can contribute to their IRAs and other tax advantaged retirement accounts. Now that the 2021 contribution limits have been announced, we’ve listed those limits here for you.  

Personal Plans

Traditional and Roth IRAs are both considered personal plans, and often follow similar guidelines on their limits. For 2021, the contribution limits for Traditional and Roth IRAs remained the same as 2020, but some other accounts did see an increase. 

The 2021 contribution limit for Traditional and Roth IRAs is $6,000, with a catch –up contribution of $1,000 ($7,000 total) if you’re age 50 or older. In order to make a contribution to these two accounts, one must have “earned income”. Earned income includes money such as wages, salaries, bonuses, commissions and self-employment income. Disability retirement benefits can also be considered earned income in some cases. 

Anyone can contribute to a Traditional IRA if they have earned income, but in some cases, you may not be able to directly contribute to a Roth IRA if you make too much money. Certain limitations have been placed on Roth IRAs that state if your income exceeds a specific amount, you are ineligible to directly contribute. 

2021 Traditional IRA Deduction Limits
2021 Roth IRA Income Limits

If you find that you do make too much money in 2021 to contribute to a Roth IRA directly, there’s always another option. A “Back Door Roth Conversion” could allow you to fund a Traditional IRA by making a non-deductible contribution and then convert it to a Roth account afterward, allowing you the benefits of a Roth IRA. If you have questions on Roth Conversions, don’t hesitate to contact one of our Certified IRA Specialists.

Remember. You are never required to contribute the maximum amount allowed, but in order to contribute up to the contribution limit, you must have enough earned income to cover the contribution you make. 

Employer Plans

Traditional and Roth IRAs are not the only plans with contribution limits. Self-employment plans are also subject to potential income changes. Retirement accounts such as the SEP IRA, SIMPLE IRA, and Solo 401(k) contribution limits were also reviewed for 2021. 

For SEP IRAs, the IRS increased the limit from $57,000 in 2020 to $58,000 for 2021. Like the SEP IRA, Solo 401(k)s followed the same pattern. The Solo 401(k) salary deferral amount stayed the same at $19,500 but the defined contribution maximum limit increased from $57,000 to $58,000, with an additional $6,500 catch-up contribution ($64,500 total) for those 50 or older. 

The Savings Incentive Match Plan for Employees, also known as the SIMPLE IRA, is the final employer plan offered at Quest. This account, often used by small businesses, did not see a change for 2021. The contribution limits for SIMPLE IRAs remained the same for 2021, which means employees under 50 can contribute up to $13,500, while those 50 and over get a $3,000 catch-up ($16,500 total). 

SIMPLE plans typically require the employer to match each employee’s salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee’s compensation, also. For more information about employer matching contributions and any 2021 changes, visit the IRS website on SIMPLE IRAs. 

Special Plans

Health Savings Accounts (HSAs) and Coverdell Education Savings Accounts (ESAs) are the two final tax-advantaged accounts that Quest offers, both which follow the IRS contribution rules and guidelines. For these accounts, when you take the funds out for qualified medical or educational expenses, the distributions are tax-free! So, how much can you put contribute to them in 2021?

The annual limit on HSA contributions for 2021 saw a minimal increase. It will be $3,600 for self-only and $7,200 for family coverage, which comes out to be right around a 1.5% increase from limit in 2020. For those over the age of 55 or older, there is an additional $1,000 that can be contributed to the account. 

Minimum deductibles for HSAs saw no change for 2021, yet maximum out-of-pocket amounts did increase by $100 for individuals with self-coverage. It increased by $200 for those who have family coverage.

Lastly, the Coverdell ESA has a contribution limit of $2,000 per year per child. This means, each child in one household could each receive a $2,000 contribution to their ESA per year. There was no change from 2020 to 2021. 

Key Takeaways

Although each plan works a little bit different, the existence of a contribution limit remains a similarity. Understanding contribution limits will not only allow you to maximize your retirement account each year, it will also help you grow you future wealth faster! For more contribution questions, check out the helpful chart below or call an IRA Specialist at 855-FUN-IRAs (386.4727) and start preparing for your 2021 contributions!  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.

2021 IRA Contribution Limits

Quest Against the Rest: A Self-Directed IRA Custodian Comparison

Estimated reading time: 3 minutes

When choosing to open your self-directed IRA, there will be many things to consider before selecting the best custodian. Alongside service and experience, one of the main considerations will most likely be the fees. Some custodians boast minimal fees, and although that may seem enticing at first, this usually comes with a less positive overall experience. 

Our mission at Quest Trust Company has always been to provide the best experience for our clients and the highest quality of customer service, or as we like to call it “world famous customer service.” At Quest, we make sure our clients’ needs are always at the forefront of every choice we make, from day to day decisions to companywide implementations like systems and procedures. 

So, how do those fees compare to other Self-Directed IRA custodians?

Quest Fees Compared to Others

Our rates remain competitive compared to other self-directed IRA providers. While their administrative fees may appear lower, transaction and miscellaneous fees may be substantially higher. Additionally, services like closing an account, 24-48 hour turn-around time, or doing Roth conversions remain free at Quest when other companies charge hidden fees for similar accounts tasks. 

Quest Trust Company: 3 Administrative Fee Options, NO Account Termination Fee, 24-48 hour funding time with NO Expedited Fees, NO Minimum Cash Balance Required, NO charge on incoming wires/checks and more!

Quest was determined to rank in the top half compared to other custodians, taking the spot of 3rd place overall when compared to 12 others. The level of customer service received when you have an account at Quest surpasses that of custodians with cheaper fees, allowing us to still be one of the custodians to provide the best value!

Education to Set Us Apart

While other custodians may be able to provide the ability to self-direct your IRA, not every custodian will provide quality education to help the client make the best investment decisions. Quincy Long, our CEO, has always said, “the best clients are the most educated clients,” and this is why we have always provided the free, quality educational material to our clients and to the public. 

We also believe the same holds true with our staff. At Quest, we believe that an educated and qualified staff is necessary in order to provide the level of service our clients deserve and set us apart from other custodians, regardless of fees.  

Features with your Quest Accounts

Quest is always working to enhance the education programs we have in place, but also develop new training programs centered on providing better and faster service. Continuous advances to our systems allow Quest to be one of the self-directed IRA custodians on the forefront of investing technology. Whether we are giving clients more access to take control of their investment all throughout the process in the improved Client Portal or implementing new features, we’re focused on being able to put the control in the hands of the client.

Fees will always be a consideration when choosing to open a self-directed IRA, but remember- cheaper isn’t always better. We hope that our clients continue to find our services valuable as we strive to be the best Self-Directed IRA custodian in helping new and old investors to create their wealth for tomorrow!

We would love to share the many benefits of being with Quest Trust Company. To get more free education or information about starting your self-directed IRA, give a friendly Quest Certified IRA Specialist a call at 855-FUN-IRAS (855.386.4727). 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.

Can I Move My 401k Into a Self Directed IRA?

Estimated reading time: 3 minutes

Did you know 45% of Americans fear they will run out of money during retirement?

If you have started taking more steps towards planning for retirement, then you are already ahead of the game. Those who want to be more in control of their money typically like to explore the options available, like a self-directed IRA.

What Is a Self-Directed IRA?

In short, a self-directed IRA has many similarities with other traditional IRAs. With a self-directed IRA, you can get tax advantages that will help you save for retirement. 

However, it’s essential to keep in mind the IRS will limit the types of investments you make. The IRS will allow your self-directed IRA to make investments in real estate, developmental land, mineral rights, cryptocurrency, and livestock. 

How Does a Self-Directed IRA Work?

If you plan to switch to a self-directed IRA, the first step is to pick a custodian from a brokerage or investment firm. The custodian’s job is to manage the IRA assets and coordinate the sale and purchase of the investments. 

Keep in mind the same rules of a traditional IRA apply to self-directed IRAs. For 2020, the maximum IRA contribution is capped at $6,000. However, those over the age of 50 can make an additional contribution of $1000 to catch up. 

Who Should Switch to a Self-Directed IRA?

If you’re wondering about switching to a self-directed IRA, it’s important to learn if it’s the right move for you. Those who decide to switch to a self-directed IRA do it for several reasons. 

You want to diversify your portfolio and plan to split your savings between a conventional IRA and a self-directed IRA.

You’re worried about your retirement investments after the 2008 financial crisis and want a safer investment. 

You’re an experienced investor in a specific type of investment, such as real estate. 

How to Set Up a Self-Directed IRA?

To qualify to set up a self-directed IRA, you need to fulfill specific requirements. For starters, you need to prove you earned taxable income during the current financial year. 

Some employers might offer their employees the option of enrolling in a self-directed IRA.

To set up a self-directed IRA, you can start by requesting the transferring of funds from the traditional IRA to the new one. Some people choose to transfer any profits they make into a self-directed IRA. Another way to do it is by deferring income directly to the account.

Can You Move Your Managed 401k?

The short answer is yes. However, you need to consider if it’s the right move for you. Remember to learn how a self-directed IRA works, who can benefit from one, and all pertinent details. 

A self-directed IRA could be a great move for you. 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 to roll over your 401k plan into a Self Directed IRA

Estimated reading time: 5 minutes

If there is one thing that 2020 has taught us, it is that nothing is as certain as it was before.  One of the biggest fears for many Americans right now is their job security.  Many people have already lost their jobs and are wondering what comes next for them.  A major effect of leaving a job, whether it be through retirement, layoffs or simply moving to a new company, is that your 401(k) from your previous employer becomes eligible to be rolled over to an IRA.  

There are a variety of different options that become available to you with your previous employer 401(k) and we have listed the 3 most common options:

1) Moving the funds into an IRA 

If you were a part of a 401(k) plan at your previous employer, one of the most common options available to you on what to do with the funds is being able to move the funds into an IRA at a new custodian. When you leave your job, you have the ability to continue investing those funds on your own in an IRA or Self-Directed IRA, and when moving those funds to another qualified retirement account, you don’t experience any tax hits. 

One thing you would want to consider is what type of investment you plan on doing because this will help you determine the perfect custodian for your needs. Some Americans choose to put their money in a regular IRA and hand their money to a financial advisor at a public custodian to make all the decisions about their account for them. Others choose to take control and invest with a Self-Directed IRA at a non-traditional custodian that will hold private assets. 

You may be thinking about what the difference is between those two types of IRAs. A Self-Directed IRA is simply an IRA in which the IRA owner directs all investments in the account. There is no legal distinction between a “Self-Directed IRA” and any other IRA except with a truly self-directed IRA the account agreement allows the broadest possible spectrum of investments, which could include real estate and private or start-up companies. Understanding the difference between these two accounts shows that there are many options available just within the first category!

A great reason why many people choose to move their funds to an IRA rather than pulling out their 401(k) money is the magic of compound interest when you continue to reinvest. To put it simply, compound interest is “interest on interest”. It may be easy to think that taking a distribution from your retirement account is a quick way to get a big portion of money, and although you may not be wrong, the amount of money you COULD have if you left it inside of your account is exponential. When you take a distribution, your IRA is no longer growing, but when you continue to do deals inside of your account and reinvest those funds, your self-directed IRA is still making money for you. 

The most important part about moving your funds to another custodian is making sure you find your fit. Not all custodians focus on the same thing. Where some custodians like Quest have a focus in free, expedited funding times and IRA education, others boast flashy software or new automated phone lines. Being comfortable with your custodian will make you more comfortable and confident as you take the next step for your financial future. 

2) Leave the funds in a 401(k) 

If the thought of dealing with your 401k is too overwhelming, you may have the option to leave the funds in a 401(k), whether that be with the employer you just left or with your new job. Some employers allow you to keep your plan with them even if you no longer work for them. Even though you’re unable to contribute to the account, your money can still be invested and grow tax-deferred, but contacting the HR department of your previous employer to learn more about the restrictions and opportunities your plan has is recommended. You may also have the option to take your 401(k) plan with you to a new job if you find one.

3) Take a distribution 

During this time, if you need funds to help cover costs like a mortgage payment and immediate expenses, you may be considering taking money from a 401k account. Using 401k funds now to pay for expenses could mean that later when facing retirement, you don’t have that same amount available. The funds in the account also won’t be given a chance to grow during the next decades to build up for your future retirement.

Usually, taking money from your 401k leads to penalties and taxes, but the good news is that the recently passed CARES Act may help with some of these costs. Before the act, rules stated that those who were not 55 years old yet would face a 10% penalty on the amount taken out of a 401k after being relieved from/leaving your job. The CARES Act addresses the COVID-19 crisis and offers temporary adjustments to 401k withdrawals. This allows withdrawals up to $100,000 from your 401k account without paying the 10% penalty provided your distribution meets the criteria. The CARES Act also allows you to spread out the taxes on the withdrawal over the next three years. If the money is paid back within three years, you can avoid being taxed on the distribution that was taken out. This could be a good option for those who need money now.

Being aware that there are many different options, especially with a Self-Directed IRA, may be able to provide some peace of mind in knowing that not all is lost and that you can take control. If you need an IRA specialist, at Quest we are here to provide education no matter what option sounds the best for you. With our weekly webinars featuring investing education or our certified IRA specialist just a call away, rest assured knowing that your money is safe!

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.

Know the Difference: IRA Transfer vs. Rollover

Estimated reading time: 4 minutes

If you want to live comfortably during retirement, the time to start contributing is now. The younger you start saving for your retirement, the better chance you have to reach your goals and maintain your desired lifestyle. A great way to get started is to open an Individual Retirement Account (IRA). The next step is to fund your account, and there are three ways to do it: make a contribution, or transfer or rollover from another retirement fund. While most people understand how to make a contribution, not everyone understands the difference between a transfer and rollover, and often use the words interchangeably. So let’s delve a little deeper into transfers and rollovers to see what makes them different.  

What is a Transfer?

When you move money between two separate checking accounts at different banks, you are transferring funds, and this is basically the same concept of what you can do between IRAs. A transfer is when you move money from the same type of IRA account to another.

Transferring funds between the same type of accounts is easy and can be done as often as you would like. For example, if you have a traditional IRA with one financial institution, but found a better option with another, transferring is a good idea. Maybe you are interested in diversifying your retirement portfolio by investing in real estate. If so, you may want to transfer to a self-directed IRA which allows you to invest in alternative assets, like real estate, promissory notes, or private placements. As long as you are moving between like accounts (i.e. traditional to traditional or Roth to Roth) it’s considered a transfer. 

Also, when you move funds from an IRA at one firm to an IRA account managed by another firm, the transfer isn’t reported to the IRS and no taxes are incurred. This is due to the fact that the money in the original IRA account never actually reached the account owner and the funds were transferred between like accounts. If the owner were to instead withdraw the funds and then reinvest them into another account, they would incur taxes upon withdrawal. There may even be tax penalties depending on why the money was taken out of the account.

What is a Rollover?

A rollover occurs when money is moved from a retirement plan (usually a 401K or other employer plan) to an IRA account. This type of rollover differs from a conventional transfer because it involves two different types of plans.

Making the decision to roll over your previous employment retirement plan into an IRA is an important one, and there are some advantages to doing so. Rolling over to an IRA allows you to move your funds from a 401K or similar account into a more flexible and potentially more beneficial IRA. When you rollover these funds into an IRA, you can maintain tax-deferred status of your retirement assets without having to pay current taxes or early withdrawal penalties.  

Direct Rollover

When the money goes directly between accounts and never reaches the account holder, this is known as a direct rollover. While this sounds a lot like a transfer, direct rollovers are different because they are reported to the IRS with two forms: the 1099R to show there was a distribution, and the 5498 to show there was a contribution back to a retirement account. They generally aren’t taxable since the money was never made payable to the account holder.

Indirect Rollover

During an indirect rollover, the money is distributed to the account holder, and they have 60 days to reinvest the money into another retirement account. As long as the money is reinvested, there are no tax consequences, and the account funds will remain tax deferred, however, it will still be reportable to the IRS with the same forms as the direct rollover. When deciding between a direct or indirect rollover, the account holder should also take into consideration that indirect rollovers are limited to one per 12-month period. 

How Do I Get Started?

If you would like to initiate a transfer between like accounts, just complete the transfer paperwork with the receiving custodian and they will take it from there. For a rollover, you must contact your former employer, or their custodian, to initiate the process.

It’s important to understand that the speed at which a transfer or rollover is made is dependent upon the sending custodian. This is crucial for those handling indirect rollovers to keep in mind, as penalties occur after 60 days from when the funds are distributed to the account holder. Some providers may also have specific requirements regarding rollovers that may become a factor when reallocating your funds, so make sure to factor in enough time to complete the 60-day rollover.

How Do I Know Which One to Choose?

Deciding between a transfer and rollover depends on the answers to the following questions. What’s your current plan? What kind of account do you want to open? And what type of investment are you doing with the funds once they arrive? It’s up to you to make the choice that’s right for you. Understanding the differences between the two options will help you make an informed decision about your retirement savings, and you’ll be well on your way to reach your retirement goals. Talking with a financial advisor is recommended to get investment advice and help with tax questions.

Interested in opening a self-directed IRA, or want to learn more about how we can help? Schedule a 1-on-1 consultation with a Quest Trust Company IRA Specialist by clicking HERE.