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

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! If you ever have questions or what to learn more about starting a self-directed IRA, contact an IRA specialist by email today at IRASpecialists@QuestTrust.com or call us at 855-FUN-IRAS.

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

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

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

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

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

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

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

Take Control Yourself

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

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

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

Avoid the Pitfalls of a Self-directed IRA

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

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

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

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

Stay Educated and Stay out of Trouble

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

Understanding The Self-Directed IRA Annual Contribution Deadlines

The individual retirement account structure – and self-directed IRAs in particular – can be a solid foundation for a successful retirement plan. But in order to build the largest possible retirement nest egg, it’s important to make regular contributions to your account. The rules on IRAs specify limits for how much you can contribute each year, so it’s important to make sure your savings plan and budget are synchronized with the annual limits.

The Annual Contribution Period can be up to 15 Months. The period in which you can make a contribution to your self directed IRA for a given tax year is from January 1 of that year until you file your tax return. But in no case can such contribution be made after your filing deadline (i.e., April 15 of the following year).

You May Need to Specify. Even if you only have a single IRA, it’s important to pay attention to how you designate each contribution. Recognize that if you are making a contribution early in a calendar year, before you file your tax return for the prior year, you need to specify the tax year for which your contribution applies.

For example, if you send a contribution to your IRA custodian on January 10, it won’t be clear whether you intend for those funds to apply to the tax year that’s just ended, or to the tax year that’s just beginning. You can clear up any potential confusion by making the appropriate designation in the “memo” line of the check you sent. Or if you make the deposit or transfer of electronically, indicate the applicable tax year in any “note” or “other instructions” field of the submission form. (For electronic transfers, your custodian may even ask you to specify the applicable tax year).

Easing Your Administrative Burden. But note that this contribution calendar overlap also provides you the opportunity to address two years’ worth of IRA contributions in a single sitting. Simply write two checks to your IRA custodian, specifying which check applies to which tax year. Of course, if those two contributions do not meet the contribution limits for either or both years, you can make additional contributions later, provided you are still within the applicable time period.

Use it or Lose it. With a generous contribution period that extends beyond December 31 of each tax year, it’s easy for some individuals to take the contribution opportunity lightly. But because IRA contributions are a “use it or lose it” proposition (meaning that if you don’t make a contribution in a given year – or don’t make the maximum contribution – you can’t make up for it later), it’s important to put yourself in a position to be able to make that maximum contribution year in and year out.

Consider a $5,500 contribution made by a 30-year-old to their self-directed IRA. Assuming an 8% return, that single contribution will be worth well over $80,000 by the time that person reaches age 65. Don’t miss out on this opportunity, and make sure you meet the annual contribution deadlines to the greatest extent possible.

Top Beginning Of The Year Tax Moves For Your Self-Directed IRA

Successful retirement planning is a combination of short-term and long-term decisions and actions. In the short term, you need to decide how to invest your money and how much to contribute to your account each year.

Your long-term focus will touch upon a number of different factors, including how your account will impact your overall tax situation. As you begin to prepare your tax returns for the year, here are some of the top tax moves related to your self-directed IRA.

1. Identify Your RMD Obligations (if any).
Traditional IRAs, including self-directed IRAs that are set up as traditional accounts, are subject to the IRS rules on required minimum distributions. These rules are designed to prevent account holders from letting their funds continue to grow without the holder ever having to pay taxes on that money during their lifetime (remember that deposits to traditional accounts are often made with “pre-tax” income of the depositor).

These rules on required distributions apply to individuals above age 72, regardless of their other income. Therefore, in order to minimize your tax bill, you may wish to plan ahead for the upcoming year’s required minimum distribution and adjust your other income as appropriate. For example, you might wish to delay selling an asset or investment you hold in a taxable account if it would raise your taxable income too high, or perhaps even subject your Social Security benefit to a greater level of tax.

It’s important to note that Roth self-directed IRAs are not subject to the same rules on RMDs. Converting a traditional self-directed IRA to a Roth account – provided that you are able to bear the one-time tax hit with funds from outside the account – could give you a much greater level of flexibility (and tax savings) going forward.

2. Consider a Roth IRA Conversion.
Being able to avoid certain rules on required minimum distributions is only one reason that many individuals find a Roth self-directed IRA to be preferable to a traditional account. The Roth IRA structure also provides you with additional benefits when it comes to estate planning and other financial planning issues.

Therefore, it’s a good idea at the beginning of each year to explore whether converting your traditional self-directed IRA into a Roth account would be a good long-term financial move from a tax perspective.

3. Plan to Maximize the Value of Your Contributions.
If you have both a Roth self-directed IRA and a traditional self-directed IRA, you’ll need to decide how much to contribute to each account, subject to the annual contribution. Some individuals elect to make contributions to their Roth account only when they have a minimal tax deduction from a traditional account contribution, or perhaps aren’t eligible to contribute to the traditional account at all.

Understanding the various contribution options available to you, and weighing them against one another, is an important element to minimizing your tax bill in the coming year.

Traditional or Roth – Which type of self-directed IRA is for you

Traditional or Roth – this is a question every investor asks at least once in his life. Most investors ask this question several times over the course of the lifetime – traditional or Roth -which type of investment is the best? Figuring out whether a traditional or Roth IRA structure is best suited to your goals and needs is fundamental to your retirement. Here are some tips for how to decide whether a traditional or Roth IRA is best for you.

Tax Rates – Current vs. Future. A significant factor in your decision between a traditional or Roth IRA will certainly be your current income tax rate, in relation to what you expect that rate to be during your retirement. Contributions to a traditional IRA are sometimes tax deductible in the year you make them (more on that later), while contributions to a Roth IRA are never tax-deductible. Conversely, withdrawals from a Roth IRA are tax-free, while withdrawals from a traditional IRA are subject to current year income tax. In general, the more your current income tax rate exceeds your expected rate during retirement, the more advantageous it may be to choose a traditional IRA

When making this determination, it’s important to note that if you are also covered by a retirement plan (such as a 401(k)) at work, and your income exceeds a certain level, then you will not be eligible to take the above mentioned current year deduction for a traditional IRA – and in such case a Roth IRA will likely be preferable.

Other Retirement Savings and Assets. Another deciding factor between traditional or Roth IRAs is determining the aggregate retirement savings you have in other non-IRA accounts. The longer you can wait before withdrawing money from your IRA, the longer it will have to grow, and a longer time frame generally favors the Roth IRA structure.

Required Minimum Distributions. In addition, Roth IRAs are not subject to the rules on required minimum distributions (RMDs). With a traditional IRA, once you reach age 72, you need to begin withdrawing a specified percentage of your account value each and every year. Individuals with Roth IRAs and who have other retirement assets to draw upon can allow their IRAs to grow significantly larger because they don’t have to take RMDs.

Estate Planning. Estate planning can play a huge role in your decision of choosing a traditional or Roth IRA. It’s important to note that the rules on RMDs can flow down to certain heirs of your IRA after you pass away. If you anticipate your IRA being a significant portion of your estate, then you may wish to investigate whether the additional flexibility that comes with a Roth IRA can better help you meet your estate planning goals.

Conversion. If you decide that a Roth IRA is a better fit for your situation, but your account is currently set up as a traditional IRA, don’t worry. You are permitted to convert your account from a traditional IRA to a Roth IRA, provided that you pay taxes on the amount of the conversion. Even if that tax bill is sizable, conversion could still be the best financial decision for you.

 —

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.