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Category: Accounts Can Be Self-Directed, Not Just Roth IRAs.

Top Ten Things You Need to Know When Investing in Real Estate Notes with Your IRA

Posted on by questadmin
Estimated reading time: 6 minutes

 

Investing in real estate notes with your IRA is one of the most popular self-directed IRA investment options available. With it becoming more and more difficult to qualify for a loan with a traditional lender, the need for private lenders is increasing. Private lending can be a great source of passive income and is accessible to everyone. But with this popularity comes common mistakes that investors make when lending their IRA (and non-IRA) money out secured by liens on real estate. Follow these 10 tips to avoid potentially costly mistakes when choosing a real estate investment note.

1) Never loan on an investment property you wouldn’t want your IRA to own. Many passive investors loan so they do not have to deal with all of the issues of owning a property, but remember that you may end up owning this physical property if your borrower defaults. While the potential risk of loaning your IRA investments toward real estate notes is matched by the reward (I routinely see yields from these loans at 12% and higher making it an attractive investment), borrowers can default and you may be left with the property in foreclosure. If you would be upset by the potential of taking over this property in foreclosure, you probably should not make the loan.

2) Do not advance IRA money for home repairs until the repairs are finished and inspected. This is one of the biggest mistakes that I see clients make with their IRAs. They fund the full loan amount expecting that the repairs will be done on the property, but the borrower will actually need a little more money on another. If the loan goes bad, the IRA could end up with a property that hasn’t had the necessary repairs.

3) Do not loan money to someone you would feel uncomfortable foreclosing on. William Shakespeare wrote in Hamlet, “Neither a borrower nor a lender be/ For loan oft loses both itself and friend/ And borrowing dulls the edge of husbandry.” For the most part, I cannot agree with this advice, because lending and borrowing money drives our economy and increases economic activity. However, the part about a loan losing a friend is absolutely correct, in my opinion. If foreclosing on your borrower would cause you heartache, it is better not to make the loan. I have seen friendships destroyed over a loan gone bad.

4) If the loan goes into default, take action immediately. No one wants to admit that he or she has made a mistake in an investment deal, but delaying action can be costly. You can always stop the foreclosure process once it has begun, but you cannot complete the process unless you start it. Always get good legal counsel to assist you with loan terms and documentation. Because the borrower traditionally pays for all expenses including legal fees, there is no reason not to have an attorney draw up loan documents, and you will be better protected if the loan defaults.

5) Collect interest monthly so you will know if the borrower is getting into trouble. Many borrowers, especially investors, would prefer to pay interest at the end of the loan. But this exposes the lender to additional risk. While it’s nice to have a passive monthly income, the main purpose of collecting payments monthly is to:

  • Make sure the borrower remembers that he or she has to do something with that property in order to avoid the pain of the payment.
  • Let you know if the borrower is in trouble because he or she starts missing payments.

Keep in mind that unless you have contracted for monthly payments, you may not be able to foreclose, even if you do discover that the borrower is in financial trouble, because the loan may not be in default. This has actually happened to some of my clients.

6) If you are unsure about how to evaluate the loan, hire a professional to help you. Although a hallmark of the self-directed IRA is that it is “self-directed” meaning that you make your own decisions and find your own investments most IRA owners either do not possess sufficient knowledge or, in my case, sufficient time, to properly evaluate a loan transaction. My solution is to hire a professional to help me with the deals. He checks out the borrower, coordinates with the title company, orders the appraisal and usually a survey, makes sure insurance is in place and generally evaluates the loan. Naturally, he charges a fee for this service, which is passed through to the borrower on top of any interest and fees that my retirement plan may charge. This increases the cost of the loan; but in this case, the non-Biblical version of the golden rule applies, which is “He who has the gold makes the rules.”

7) Get title insurance for the loan. The purpose of title insurance is to shift risk away from you and to the title company. In Texas, where my office is, the incremental cost of title insurance is very small when issued in conjunction with an owner’s title policy. Regardless of the cost, making sure that your IRA is protected from title flaws is important.

8) Verify that hazard and, if necessary, flood insurance is in place, naming your IRA as an additional insured. It is very easy to miss this issue when you are trying to get everything completed right before a closing. Borrowers may get insurance at the last moment and simply forget to add your IRA as an insured. But if something goes wrong, you will want to make sure your IRA is named on the check.

9) Insist that the borrower provides you with evidence of payment when property taxes and homeowners association fees become due. The same thing would apply to hazard and flood insurance premiums, although normally you would receive notice of cancellation for non-payment of those bills. Depending on where you live, property tax bills can increase quickly due to penalties and court costs, which reduces your equity position in the property.

10) Get a personal guarantee if lending to an entity or to an individual with some weakness. When things are going well, you might be tempted not to insist on a personal guarantee, and indeed many borrowers will resist this. However, as we all have discovered recently, circumstances do change, and a personal guarantee may be helpful in collecting the debt. I collected on a note once where the property had decreased substantially in value due to vandalism and market conditions. Instead of foreclosing, I had my lawyer send a letter explaining to the guarantor, who had a significant amount of assets, that he was personally liable on the debt and that if he were unable to satisfy the note, I would pursue legal action against him and the borrower. A week later, a cashier’s check showed up that satisfied the lien.

There’s more to know when considering real estate for your self-directed IRA. This list of suggestions is not meant to be exhaustive. Other issues you will need to understand include:

  • Your lien position, which determines which lender gets paid first if the borrower defaults. (Personally, I only invest in 1st position liens.)
  • State usury laws that might apply to the loan.
  • A general idea of the foreclosure process is in your state, in case the loan goes into default.

Real estate note investing can be an excellent investment strategy with your retirement funds. It is relatively easy to do and, if done correctly, has a comparatively low risk. Getting to know successful real estate entrepreneurs who borrow your IRA money may also lead to other, intangible benefits as well. But before you take any action, be sure to educate yourself on the process of investing with your self-directed IRA. Quest provides two to three in-person and online educational events per week, and you can review our upcoming schedule and register at the link provided. If you would like more information about how to invest in real estate, promissory notes, or other alternative investments with your self-directed IRA, schedule a direct 1 on 1 consultation with a Quest IRA Specialist.

 

Growing Your Retirement by Investing in What You Know Best: Getting Back to the Basics

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

Building wealth and saving enough for retirement can get overwhelming, but it doesn’t have to be. Most people think that they can only invest in publicly traded investments like stock, bonds, mutual funds, and CDs… but that isn’t true at all. With self-directed IRAs, you can diversify your investment portfolio into private assets like real estate, notes, land, oil and gas, and other private entities. The best part? It’s all on your terms. Self-directed IRAs truly allow people to take back control of their retirement savings and invest in assets that make sense to them. 

What is a Self-Directed IRA?

Self-directed IRA custodians make investing fun while putting the control back in your hands. A self-directed IRA is like any other IRA account; the term “self-directed” is just used to describe the type of account it is. The difference between a regular traditional IRA and a truly “self-directed” IRA is the types of assets they hold. With a self-directed IRA, you have the ability to choose from the broadest possible spectrum of investments, including those not traded on a stock exchange. You get to make all the decisions about your financial future. Most people find that they make more money and feel more confident when they are able to invest into things they know and understand. 

What Can an IRA Invest Into?

A self-directed IRA can be used to purchase almost any private asset. Common investments include single family real estate, rehab properties, commercial and multifamily real estate, private loans, performing and non-performing notes, oil and gas, land, startup companies, LLCs, and other private businesses. The list goes on! The rules say that as long as you do not invest into collectibles, like art or cars, and life insurance you are safe. 

What types of accounts can be self-directed?

Every custodian will offer different accounts. At Quest, we offer seven different types of retirement accounts that can be self-directed:

  • Traditional IRA – With the Traditional IRA, your earnings grow tax-deferred. Only pay taxes on your gains when you make withdrawals in retirement.
  • Roth IRA – The Roth IRA is a special retirement account where you have the ability to grow your profits completely tax-free.
  • SEP IRA – This self-directed tax-deferred account can be great for self-employed individuals, allowing a tax deduction for contributions made to a SEP IRA.
  • Simple IRA – A SIMPLE IRA is an employer-sponsored retirement plan designed specifically for small businesses, giving employees and employers a simple way to contribute and grow this account.
  • HSA – Get the best of both worlds with an HSA, with the ability to get tax-deductions on contributions and tax-free distributions for qualified medical expenses.
  • ESA – Education isn’t cheap, but with a Coverdell ESA you can earn tax-free distributions on countless qualified educational expenses as you self-directed this account.
  • Solo 401k – With the extra benefits that come with this account, like checkbook control and more freedoms, many people are eager to learn how to get started – just make sure you qualify.

Self-direction can be a great option for those looking to take more control of their financial future. If you are interested in learning more about self-directed IRAs or would like to get started, schedule a free consultation with an IRA specialist today by clicking here!

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

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

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.

How to Set Up a Self Directed IRA: A 5 Step Guide

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

Investing for retirement is something worth beginning as early as possible.

Current annual costs for someone over the age of 65 are approximately $50,000. So you’ll need a significant amount in your retirement account in order to live comfortably during this time.

One of the best ways to begin saving is a self-directed IRA, but not everyone knows how to go about it.

Not sure where to start? Don’t worry, we’ve got you covered.

Let’s take a look at everything you need to know about how to set up a self-directed IRA.

1. Select a Provider

In order to get started, you’ll need to work with a financial institution or firm that facilitates the opening of IRA accounts. When searching, though, there are some things you’ll want to keep in mind.

A provider with plenty of experience in this area that also offers a large range of investment opportunities is one you should prioritize. Additionally, your provider should also have experts willing to help you make the right investment decisions for your situation.

2. Choose What Type of IRA You Want to Open

Although you’ll be opening a self-directed IRA, you’ll still need to decide between a Roth IRA or traditional IRA.

Both allow you to invest in your retirement, but they have fairly different attributes. The best one for you will depend on your current finances and how much you plan to have invested by retirement.

You can learn more about the differences here.

3. Understand Your Investment Options

The main benefit that a self-directed IRA provides is the increased flexibility you’ll have when creating your investment portfolio. So, you’ll be able to fine-tune your investments to meet your long-term goals while remaining within your tolerated level of risk.

Working with a reputable provider will help you optimize your portfolio even further.

4. Apply For an Account

After you’ve decided who to work with and what type of IRA account you want to open, you’ll be required to complete an application.

You’ll need the following on hand in order for everything to go as quickly as possible:

  • Government ID
  • Social security number
  • Account information used for funding
  • Fee payment method
  • Info regarding your beneficiary

Depending on your provider, you may need to provide additional information.

5. Start Saving

After everything’s up and running, you can decide how you’d like to fund your account.

These come in three categories:

  1. Transfers: Funding your newly created IRA account from another IRA account
  2. Contributions: Sending money to your IRA account from a non-retirement account, such as from a checking or savings account
  3. Rollover: Transferring money to your IRA account from a different type of investment account, such as a 401K

Once you have money in your account, you can change how you’d like to contribute in the future if you need to. 

Understanding How to Set Up a Self-Directed IRA Can Seem Difficult

But it doesn’t have to be.

With the above information about how to set up a self-directed IRA in mind, you’ll be well on your way to financing your future as early as possible.

Want to learn more about how we can help? Feel free to get in touch with the team at Quest today to see what we can do.

Know the Difference: IRA Transfer vs. Rollover

Posted on by Quest Trust Company
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.

How does a Solo 401k Work?

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

Solo 401k plans are employer-sponsored retirement accounts that offer self employed individuals with no common law employees other than a spouse the opportunity to establish a Profit Sharing Plan. 

Many companies offer solo 401k accounts to their employees, but not many people understand exactly how they work. 

Here’s what you need to know about your solo 401k before you get started:

You are the Employer and Employee of the Account

Although your solo 401k is an employer plan, it allows the business owner to be the Trustee of the plan, granting them access to make fiduciary decisions.

The Trustee will work with a financial institution to set up the account, and they will determine where to hold the funds, how much you contribute to the plan, and what investment to partake in. 

Rollover of previous accounts into the Solo 401k

You may have pre-existing 401k plans or IRA’s that you may want to consolidate inside of your Solo 401k. As long as those funds are pre-tax they can be rolled into the plan.  

If you are looking for a Roth Solo 401k, you may conduct “in plan Roth conversions” to convert your pre-tax funds to Roth. 

You are not able to move Roth IRA’s or previous Roth 401k’s into your solo 401k. However, You are able to contribute to a separate Roth IRA if you have one while continuing to make contributions to your Solo 401k. 

Taxes Advantages

By Contributing to your solo 401k and possibly to another Traditional IRA, you may be eligible to receive a tax deduction. This all depends on your modified AGI (adjusted gross income) in determining if you are eligible or not. 

Keep in mind that Solo 401k accounts are retirement accounts and non-qualified distributions are subject to penalty and taxation. The Solo 401k does have an option to take a loan out but it is limited to 50% of the account balance.

If you’re looking to set up a retirement account, contact the experts at Quest Trust Company today. We offer Self-Directed IRAs and Solo 401k plans for individuals looking to invest into alternative assets. Our financial experts can help you find an account that makes sense for your financial needs.

Characteristics of the best IRA custodian

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

The internal revenue service (IRS) decree holds that Individual Retirement Accounts (IRAs) should have a custodian. The custodian is a financial institution that holds the account’s investments just for preservation. The custodian also ensures that all the government and IRS regulations are honored accordingly. While custodians are very easy to find, the problem is how to make the best choice. First, you have to decide the type of IRA you need and the type of investments you need to make with it. 

Traditional vs. Roth IRA 

Both accounts allow the money to grow free of income tax. The difference between the two is: 

  • In Traditional IRA, a tax deduction is made on the contributions from that year; this defers any tax payments until withdrawals are made years later. 
  • Whereas for Roth IRA, there is no tax break on the amount of money invested. In a nutshell, there are no taxes owed on the amount earned. 

Self-directed IRA

Whether Traditional or Roth, as an investor, you can choose to have your custodian manage the investments for you entirely or be self-directed. 

A self-directed IRA allows for expanded investment options. Although the name self-directed makes it seem like the owner has all the control, that’s not how it is. A Self-directed IRA will allow you to move away from the traditional publicly traded assets and utilize your money for alternative assets: Real Estate, Private companies. 

With this in mind, an investor, whether self-directed or not, would want to get the best custodian. 

The following are characteristics of the best IRA custodian. 

An Experienced Custodian – The best custodian for your self-directed IRA is a financial institution with significant experience in offering that service. Also, a custodian that focuses its efforts on providing self-directed IRA custodial services is more likely to serve your needs.  

Smooth Account Set-up – The process of setting up an IRA with a traditional custodian should be as brief and quick as setting up a self-directed IRA. Quest Trust Company, for example, provides easy downloads for new account information packages and forms on its website. 

Low-fees – Cost is one of the essential factors in business because it determines the total amount of profit expected. The most common fees for a custodian are the annual account maintenance fees, commissions, and loads for the mutual funds. All custodians do not charge the same. For example, maintenance fees are not a must. And if you are thinking of investing in mutual funds, it would be better to look for a custodian offering no-loads. 

Wide Selection – It would be best to have a more excellent variety of investment options, especially the individual stocks and bonds. 

Customer Service – It is imperative to have a knowledgeable person answering your calls and emails. It is very frustrating to receive incomplete or confusing information about your accounts. Therefore, while looking for a custodian, always vet the customer service. 

No Restrictions – As an investor, you must get a custodian that doesn’t limit your investment options. 

Education – Even if you are an experienced investor, you can benefit from an IRA custodian who provides you with educational opportunities. It would be wise to look for custodians who have relevant educational materials on their websites, such as in-person courses, live webinars, and overall educational resources.

Consolidation Savvy – For people having multiple IRA accounts, most custodians advise consolidation of the accounts into one single fund. Therefore it will be advisable to get a custodian who thoroughly understands the rules regarding consolidation.

After considering all of these characteristics, you should be able to make an informed decision about choosing the best custodian to help you set up and maintain your Self-directed IRA. 

At Quest Trust Company, we offer self-directed IRA accounts that place the customer at the heart of the decision-making process. Contact us today to discover how our expert staff can ease the administrative burden and help you to make the investment that is right for you.

Important criteria to consider when hiring an IRA custodian

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

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.

How to Decide Between a Traditional Account or Roth Account For Your Self-Directed IRA

Posted on by questadmin

Estimated reading time: 3 minutesSelf-Directed IRADeciding to open a self-directed IRA with a custodian such as Quest Trust Company is a prudent financial choice. With the expanded range of investment choices that you have with a self-directed IRA (as compared to an IRA with a traditional custodian or a 401(k) at work), you’ll have the greatest opportunity to invest in the precise asset types you desire.

But even after you’ve decided to open a self-directed account, you still have another choice to make – whether to form that account as a traditional IRA or as a Roth IRA.

It’s a bit of an oversimplification, but essentially you’re faced with a choice. You can choose to save taxes now, or potentially save much more money later.

With respect to traditional IRAs, many retirement savers are initially drawn to them because they can provide a current year tax deduction for the contributions you make, depending on your income level and whether you’re covered by a retirement plan at work.

For single individuals who are covered by a plan at work for 2021, IRA contributions are fully deductible for a MAGI of up to $66,000 (with a gradual deductibility phase out between $66,000 and $76,000).

While the current year tax deduction might seem irresistible, it is important to weigh it against the value you could derive from a self-directed IRA that’s set up as a Roth account. Roth IRAs allow you to take distributions from your account during retirement on a completely tax-free basis. With a traditional IRA, all distributions are taxable. It can be hard to give up a financial benefit this year for one that you might not realize for several decades, but the difference can be significant, and many retirement savers choose Roth accounts precisely for this reason.

In addition, it’s important to take a look at what you would do with the funds you save from a current year tax deduction to a traditional self-directed IRA. For example, if you invest your tax savings wisely, particularly if it’s in an investment that doesn’t throw off dividends or income or otherwise create a new ongoing tax burden, then that’s a good thing. Similarly, if you use that additional current cash flow to help pay for your child’s college expenses so that you don’t have to take out any funds to do so, then that might be a good financial decision.

But if you instead use the money for entertainment or something else that doesn’t provide you or your family with any lasting economic value, then you may wish to reconsider the true value of that tax deduction, and make your contribution to a Roth self-directed IRA instead.