401 Archives - Quest Trust Company

Searching for a New Self-Directed IRA Custodian? Consider the Following Factors

Posted on September 24, 2015December 6, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

As individuals search for new ways to get the most out of their retirement savings, financial services providers are engaging in increasingly competitive practices in order to bring in new business. In fact, you may notice that every year, particularly around tax time, you’re bombarded with promotions from traditional IRA custodians (such as banks and discount brokers) looking to offer financial incentives to entice you to open new accounts with them. Even in the self-directed IRA marketplace, you may find that you have multiple options for custodial services.

In addition, if you already have a self-directed IRA you still may find yourself in the market for a new custodian — perhaps your account has grown to a level where you want a higher level of service, or you’re simply looking for something new. Here are some factors to consider when you find yourself searching for a new self-directed IRA custodian.

Experience. As self-directed IRAs become more prevalent and better understood by retirement savers, a number of financial institutions have entered the fray to offer custodial services. Not all of these companies have the same degree of expertise, however. As you search for a new custodian for your self-directed IRA, look to those that can point to a proven track record of providing custodial services.

Self-Directed IRA Specialization. In fact, you may wish to limit your search to companies that specialize in self-directed IRA custodial services. If a custodian is not distracted (and isn’t tempted to try to upsell you) with an overly-broad range of financial services, you can be more confident that you are receiving the best degree of service. In addition, verify that any custodian you are considering offers a full range of self-directed IRA services, including the opportunity to provide precious metals safekeeping and real estate related transactional services.

Pricing. Of course, with specialization and expertise comes cost. Don’t be tempted to compare the prices of different custodians without being sure that you’re comparing similar levels of service. After all, the idea that “you get what you pay for” often holds true with respect the self-directed IRA custodial services.

Opportunity to Learn. It’s important to understand exactly what types of services you can expect from a self-directed IRA custodian. For example, as part of their custodial services, no self-directed IRA custodian should be providing you with specific investment advice with regards to your individual account. Still, there are other ways that you can get assistance with your account. Look for a custodian that provides learning resources and other materials, perhaps something akin to a knowledge base.

Chances are you’ve developed some skills as a consumer, and know how to comparison shop. Rather than buy the first product you see, you take the time to compare the various pluses and minuses of the various options you have, before choosing the product that provides you the overall best deal. You can apply these skills with great effect the next time you’re looking for a new self-directed IRA custodian.

Take Full Advantage of These Valuable Tax Benefits in Your Self-Directed IRA

Posted on August 22, 2014April 13, 2021 by questadmin

Estimated reading time: 2 minutes

If you are new to individual retirement accounts, you may not be familiar with all of the key tax breaks that they can provide.

Current Year Deductions for Contributions.

The tax benefit that most taxpayers (even those who haven’t yet set up an IRA for themselves) are familiar with is the possibility that the annual contributions they make to their account can be deducted from their tax return for the year of contribution.

There are some limitations and requirements in order to receive this deduction. Depending on your modified adjusted gross income (MAGI), the contributions you make to a traditional IRA may be tax deductible.

Individuals who are not covered by a workplace retirement plan are eligible for full tax deductibility of their contributions, regardless of their MAGI.
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).
For married couples filing jointly, where the contributing spouse is covered by a workplace plan, full deductibility is available for a MAGI of $105,000 (with a deductibility phase out between $105,000 and $125,000).

Tax Deferred Investment Growth

Perhaps the bigger tax benefit of a self-directed IRA is that your investments are not subject to taxation while they grow within your account. In contrast, consider what happens when you sell a stock or mutual fund that you hold a taxable investment account. If the investment gained in value, you’ll be subject to tax on the gain in that tax year, even if you don’t withdraw the investment proceeds from your account. The situation is similar for investment interest or stock dividends. Even if you immediately reinvest the money you receive, you are still subject to taxation on those amounts.

In contrast, the balance in your self-directed IRA can grow inside the account without tax liability. If your self-directed IRA is structured as a traditional account, you’ll only be subject to taxation when you take a distribution of funds from that account. This taxation may only be after several decades of growth, so the benefit can be quite significant.

Tax Free Investment Growth

The benefits of a Roth self-directed IRA are even greater. You won’t ever be eligible to adopt the contributions you make to that account, but the withdrawals you make during retirement will be tax free. That’s right – the rules on Roth IRAs mean that you won’t ever have to pay taxes on the investment growth and income within your account.

Because the long-term tax advantages of a self-directed Roth IRA are so significant, many individuals choose to convert their traditional accounts into Roth accounts (and pay the tax bill that comes with such a conversion) in order to receive that benefit.

Top Five End-of-the-Year Tax Moves

Posted on July 24, 2014April 13, 2021 by questadmin

Estimated reading time: 3 minutes

While you generally have until the tax filing deadline to make tax your contributions to your individual retirement accounts, nearly all other tax moves you make must be accomplished prior to December 31 of this year. With that in mind, here are the top five end of the year tax moves you may wish to consider.

Contribute to Your IRA. Maximizing your contributions each year to your self-directed IRA is one of the most valuable things you can do each and every year from a tax perspective. Even if the contributions to your IRA are not deductible, the long-term tax savings can be quite significant. Make this a priority.
Match Investment Losses With Gains. As you know, the tax burden arising from investment gains will depend on how long you held the investment as well as your level of income. Individuals who are facing relatively high tax bills from short-term investment gains can offset (either in part or entirely) those gains by realizing a corresponding investment loss. If you are already considering selling a losing investment, you may therefore want to close the sale prior to December 31, 2013, in order to reduce your tax bill.
Consider All Available Deductions. Be sure you are considering all available tax reductions before you file your return. You are likely to already be familiar with most or all of the deductions, but consulting with a tax advisor (or even using a trustworthy piece of tax filing software) may reveal a valuable deduction or two that you didn’t previously know about. In some cases the availability of a tax break – such as a Federal Renewable Energy Tax Credit – may require you to spend additional money, but if it’s a purchase you would likely be making in the near future anyway, the effective cost will be reduced when you can receive a tax deduction in connection with that expenditure.
Consider Deferring Income. If you own your own business or are self-employed as a consultant, you may be able to save money on your 2020 taxes by deferring income into 2021. Your ability to do this will depend upon the method of accounting you use for your business (i.e., cash basis accounting versus accrual). By delaying sending out invoices, or even pushing forward the due dates of those invoices, you may be able to shrink your 2020 tax bill. (Of course, you’ll still have to pay the appropriate tax as part of your 2021 return.)
Start Planning for 2021. There’s no reason to wait until January 1 to begin planning your 2021 tax strategy. A starting point may be considering the areas in which you fell short during the past year. For example, if you aren’t going to be able to make the maximum allowable contribution to your self-directed IRA this year, be sure to readjust your budget so that you’ll be able to do so next year.

Finally, pay attention to changes to the tax laws that occur or are likely to occur at the end of the year (or in 2014, but are made retroactive in effect) and verify that the assumptions on which you’ve based your 2020 tax planning remain valid.

Consider This Lesser Known Investment for Your Self-Directed IRA

Posted on July 15, 2014April 13, 2021 by questadmin

Estimated reading time: 2 minutes

Making the best choices for your financial future means that you need to choose the investments that are best suited for your investment goals, tolerance for risk, and other factors unique to your individual situation. Choosing the most appropriate investments is particularly important when it comes to your self-directed IRA. After all, most retirement savers build their nest eggs over many decades, so there’s a lot of time for their investment choices to do the most benefit.

But seasoned investors may find that the types of investments that they currently hold in their taxable investment accounts, or even their other retirement accounts (such as a 401(k) at work) don’t provide them with exactly what they’re looking for. These individuals may want to consider some of the lesser known investments that are available in their self-directed IRAs.

Private Mortgages. One of the biggest consequences of the significant decline in the broader housing market that occurred a few years ago is that lending standards for home mortgages have tightened. This means that it’s become increasingly difficult for many potential homeowners to get a loan. This is true for first time homebuyers as well as homeowners looking to trade up to their next home.

You can use your self-directed IRA to make private mortgages to potential homebuyers. It’s important that you document these loans properly, so you’ll need to get professional help in drawing up all the paperwork.

The scope of potential investments within a self-directed IRA is broad. It’s important to look beyond what you might already be familiar with, and look to take advantage of some of the lesser known investment types that are available to you.

Consider These Top Income Streams For Your Self-Directed IRA

Posted on July 10, 2014 by questadmin

Estimated reading time: 3 minutes

It’s certainly natural to think of investing your self-directed IRA in long-term growth investments. After all, most retirement savers have medium to long term investment horizons, and knowing that these investments have decades to grow certainly makes that type of focus very attractive.

But income generating investments also have a place in your self-directed IRA. For example, when you move from the workplace to retirement, you may need to be able to live off the income that’s generated by your self-directed IRA. You may also want to include income generating investments in your self-directed IRA simply as a matter of diversification. And remember that income or dividends that are generated inside the account don’t incur any tax liability when they hit your account.

Here are some of the top income streams for you to consider within your self-directed IRA.

Real Estate. This is the classic income generating investment, and the ways to invest are varied. You can purchase real estate directly with your self-directed IRA, and this is one of the big advantages of a self-directed IRA over a retirement account with a traditional custodian. Your investment can be in a single family unit, a multi-family dwelling, commercial real estate, farmland, as all of these properties can potentially have a tenant or user who is willing to pay you for the right to use that property.

Real Estate Partnerships or Funds. If the prospect of managing and maintaining individual pieces of real estate within your self-directed IRA is too daunting, your account can also invest in real estate partnerships, investment trusts (“REITs”), or other collective investment funds that focus on real estate. These investments often pay out an income stream that far exceeds the return that is available from other income generating investments.

Dividend Paying Stocks. Just because your self-directed IRA allows you great investment flexibility doesn’t mean that you shouldn’t consider investing some of your account assets in more traditional investments such as dividend paying stocks. The key is not just to evaluate what a given stock is paying in dividends now, but what your original investment could eventually yield during retirement if you reinvest those dividends.

For example, let’s consider a hypothetical purchase of $100,000 worth of stock that pays a 3% dividend, and has historically increased its dividend 8% each year. Let’s further assume the stock is currently priced at $100 per share (which means you purchase 1,000 shares), and the price of the stock increases approximately 4% each year. Your first quarterly dividend payment will be $750.

But let’s consider what happens if you reinvest dividends you receive each month. At the end of 20 years, you will own nearly 1,800 shares of stock that will be worth nearly $390,000. And your quarterly dividend payment will have grown to over $2,700.

There are other income generating investments, of course, and they may also be a good fit for your self-directed IRA. The key is to evaluate not just what an income stream can do for you now, but how it can serve you in the future as well.

Five Steps for Using Your Self-Directed IRA to Buy Your Future Retirement Home Today

Posted on July 8, 2014October 31, 2018 by questadmin

Estimated reading time: 3 minutes

One reason self-directed IRAs are becoming more common is that individuals are using them as a way to buy their future retirement homes. This lets them have a productive investment now, and also have a place to live in once they enter retirement. Here are five steps for turning that into a reality.

1. Evaluate Your Current Self-Directed IRA. The first step is to take a look at what your self-directed IRA currently looks like. How much do you have available to invest in a piece of real estate? What would owning real estate in your account do to your overall diversification and investment mix? Evaluate not just what your account looks like today, but what you think it’s going to look like in the near future.

2. Prepare Your Purchase Plan. The next step is to prepare your plan for purchasing your future retirement home. With the information you collected in step one, decide how much you can afford. Unless you are able to pay for the property and cash, you may find that having to take out a loan can reduce some of the tax benefits you’d otherwise receive. Also be sure to plan for whatever maintenance or carrying costs the property will incur. All expenses relating to the property need to come from your self-directed IRA. Paying those expenses with personal funds is not permitted.

3. Find an Appropriate Home. Only after you have a plan drawn up is it time to go shopping for a home. Consider not only the place you think you want to retire to, but also the type of lifestyle you want to lead. Your ideal retirement home might not even be something that’s currently built – you may want to purchase land that you’ll use to build your dream retirement home on later.

4. Have a Contingency Plan. As part of your planning and home shopping, it’s always important to have a contingency plan. If your retirement plans change and you decide to live in a different part of the country, or your retirement budget changes, what will you do with the property you now hold? Will you be able to sell it or use it as an income property?

5. Don’t Use it Before You Retire. The last step is actually an ongoing one. The IRS rules on Individual Retirement Accounts clearly prohibit self-dealing. This means that an IRA owner and his or her family members may not benefit in any way from their account until the account owner retires. When it comes to retirement real estate, this means that you can’t use the property yourself, even for a single day, and even if you pay your IRA whatever amount you were charging to other renters.

If you violate this rule the IRS can potential in force you to take a distribution of this property from your account right away, which would mean you’d have to pay taxes on the fair market value as well as a 10% penalty because of the early distribution.

Three Uncommon Ideas for Growing Your Self-Directed Roth IRA

Posted on July 1, 2014April 13, 2021 by questadmin

Estimated reading time: 2 minutes

Investors who don’t feel comfortable with the current valuations that are available in the stock and bond markets (or perhaps who just don’t trust those markets) need to look for other investment opportunities. This might also be true for individuals who hold a self-directed Roth IRA, and are looking to diversify beyond the types of assets they already hold in their taxable investment accounts.

Here are four less common ideas for growing your self-directed IRA

Farmland. We’ve all heard the folksy justification for owning real estate – and specifically land – as an investment, namely that “they’re not making it anymore.” The scarcity considerations that usually make residential real estate a good long-term investment apply even more strongly to farmland.

In fact, with a growing population and their housing needs, farmland may actually be becoming scarcer as time passes. So with increasing food demand across the globe, many believe that prime farmland is one of the strongest investments available when considering long-term growth opportunities. Furthermore, you don’t need to actually farm the land yourself – in growing regions it shouldn’t be too difficult to find an operation to use your land each year.

If you’re interested in a greater measure of control over the farming operations, you can either use your self-directed IRA to put out those operations – or you can consider buying an existing working farm. Farms that have a particular market focus, such as specializing in organic crops or a particular specialty item – may have a tremendous upside.

A Small Business. You can use your self-directed Roth IRA to purchase a small local business and own it outright. This can be attractive if you believe the market will soon grow, or is being underserved by the way the business is currently run. Just understand that when your self-directed IRA is the business owner you cannot draw a salary from the business operations.

A Franchise. At the other end of the spectrum for owning a business, you can use your account to buy into a well-known franchise that’s new to your area. Obviously buying a larger franchise will require that you have a sizable nest egg, and you’ll need to account for all other expenses in the first few years while you are franchise takes root.

Of course, there may also be some investment opportunities between the “purely local” and large national chain extremes. There are many attractive regional franchise business opportunities in virtually every part of the country.

As with any investment, make sure you fully appreciate the potential risks and losses that come with it, and that virtually every investment comes with a risk of loss.

How to Pay Emergency Family Medical Expenses With Your Self-Directed IRA

Posted on June 19, 2014November 29, 2018 by questadmin

Estimated reading time: 3 minutes

For many Americans, being able to manage their family’s medical expenses is a significant financial concern. And this has been a growing issue for many years. In inflation-adjusted terms, total national health care expenditures have grown 818% since 1960, while inflation-adjusted wages have only grown 16%.

Adding to these financial challenges is the fact that our medical expenses are largely unpredictable. Medical emergencies and unexpected injuries and illnesses occur, and they often cause big financial problems. In some cases, families will turn to their single biggest asset for financial help – their retirement nest egg. Here are some steps for using your self-directed IRA to pay for those emergency family medical expenses.

Avoid Early Withdrawal Expenses. Depending on your financial situation, you may be able to use funds from your self-directed IRA without having to pay early withdrawal penalties. Recall that any time you take money out of a self-directed IRA prior to reaching age 59½ the amount of withdrawal will be subject to a 10% penalty (in addition to any taxes that may be due), unless an exception applies. The most relevant exception here is for certain qualified medical expenses. (If your self-directed Roth IRA is old enough, you may also be able to withdraw your original contributions, but not any earnings, on a tax-free basis as well.)

In order to qualify, the withdrawal can only cover that portion of the medical expenses that exceed 10% of the account holder’s adjusted gross income for that year (or 7.5% for account holders age 65 and older).

Disability. If the injury or illness that results in significant family medical expenses also results in a permanent mental or physical disability, you may be eligible for penalty free withdrawals from your account. A physician must determine that the disability exists, that it prevents you from engaging in gainful employment, and it must be one that is either likely to result in death or continue on for an indefinite period.

Stay Adequately Insured. One key way to stay financially healthy in the case of large medical expenses is to maintain adequate health insurance. Obviously the insurance markets are always changing (and even more so over the past few years), but having health insurance provides you with a strong measure of financial security. If you lose your job and receive unemployment compensation for 12 consecutive weeks as a result, then you are eligible to make penalty-free withdrawals from your self-directed IRA in order to pay for health insurance for yourself and your family.

The decision to withdraw funds early from your self directed IRA should not be undertaken lightly. Even if you can do so without incurring the 10% penalty, the withdrawal can still end up costing you. Once the money is out of your account you will be able to pay it back in, so you will forever lose out on the tax-advantaged growth opportunities that they self-directed IRA provides. It can be a comfort to know that you have those funds available if you truly need them, but they should be thought of as your last financial resort for emergency medical expenses.

Three Early Withdrawal Penalty Traps to Avoid With Your Self-Directed IRA

Posted on June 3, 2014November 29, 2018 by questadmin

Estimated reading time: 3 minutes

Used properly, the self-directed IRA is one of the most powerful tools you have to build a strong financial position for your retirement.

But there are also ways that you can tap into those funds prior to retirement without having to pay an early withdrawal penalty. Recall that the general rule for all IRAs is that any withdrawals you take before age 59½ will be subject to a 10% penalty (plus any taxes that may be due, depending on whether your IRA is a traditional or Roth account), unless your withdrawal meets one of several different exceptions.

These exceptions include withdrawing funds to buy your first home, to pay certain medical expenses or educational expenses, as well as a few others. As you might expect, each of these exceptions to the early withdrawal penalty come with a number of important requirements. If you’re considering making an early withdrawal pursuant to the terms of one of these exceptions, beware of the following traps.

Qualified Medical Expenses and Insurance. The early withdrawal penalty exception for medical expenses requires that your expenses (including medical expenses for someone in your immediate family) exceed 10% of your adjusted gross income for that year (or 7.5% if you or your spouse is 65 or older). But you cannot take an early withdrawal from your self-directed IRA for the full amount – only for the amount that exceeds the 10% (or 7.5%) amount. If you take an early withdrawal for the full amount of your medical expenses, you’ll be hit with an early withdrawal penalty.

A similar provision allows you to use funds from your self-directed IRA to pay for medical insurance premiums when you’re unemployed. But “unemployment” is defined to mean that you are actively receiving federal or state unemployment compensation for at least 12 consecutive weeks. If you don’t meet that definition, then using your account to pay for insurance can subject you to penalties.

Qualified Educational Expenses. One common penalty-free situation for early withdrawals is to pay for qualified educational expenses for yourself or a member of your family. But the educational expenses need to be “qualified,” which means that they’re related to the cost of attendance at an institution that is eligible for federal financial aid programs. In addition, funds withdrawn early from your account can be used for tuition, room and board, books and other required fees, but no other costs of living for the student.

Self-Dealing. The third early withdrawal penalty that’s important to be aware of is a bit broader in scope than the ones we’ve previously discussed. One of the fundamental prohibitions on any type of IRA is that there can be no “self-dealing.” This means that the account holder and their family cannot benefit from any funds or assets when they are held within the account.

So, for example, someone who holds real estate in their self-directed IRA cannot occupy it or in any way use that property before taking a distribution of it from their account. This means that if your self-directed IRA is invested in a vacation condominium, you can’t use that property before you retire.

Because the early withdrawal penalty can be significant, it’s vital that you stay clear of the traps discussed above.

Risks to Watch Out for With Self-Directed IRA

Posted on March 20, 2014 by questadmin

Estimated reading time: 3 minutes

Self-directed IRAs can be a very powerful tool to help you reach your retirement goals., But along with this powerful account structure come certain risks that you need to be on guard against……..

Borrowing Money or Using Leverage. Self-directed IRAs are so valuable largely because they can be used to purchase various types of investments that traditional IRA custodians would not allow. A retirement saver with a self-directed IRA at a custodian such as Quest Trust Company can use their account to purchase private equity investments, precious metals and real estate. It’s even possible in some circumstances (and subject to certain conditions) to take out a mortgage with a self-directed IRA in order to borrow money to purchase larger pieces of real estate.

While this type of borrowing or leverage activity is permissible, it also comes with certain tax consequences. Specifically, any investment income is generated using borrowed money or leverage within a self-directed IRA will generate a current year tax liability for the account holder. This can come as a surprise to some retirement savers, since most other investment activities and the gains within an IRA did not give rise to similar liabilities.

Self-Dealing. The laws and regulations regarding IRAs are very clear and strict when it comes to the prohibitions on self-dealing. “Self-dealing” is receiving a benefit from your IRA before you take any formal distribution of assets from the account. And the notion of “benefit” is construed very broadly.

For example, you might choose to use your self-directed IRA to purchase a vacation cabin near a ski resort, with the idea of renting it out now to generate income for your IRA, eventually living in the cabin when you retire. This is a perfectly valid investment within a self-directed IRA, but you cannot personally use that cabin (nor can any family members or “related persons”) before you retire – even if you pay the same rental fees that an unrelated person would. Engaging in this type of self-dealing could result in significant financial penalties.

Investment Risks. Sometimes the funds in an IRA can seem a little removed from an individual’s other assets, particularly when that individual might not have penalty-free access to those funds for decades. This can sometimes lead the account holder to take investment risks with those funds that they wouldn’t feel comfortable taking with their non-retirement accounts.

This can go too far in the other direction as well. Given the importance of a retirement savings account, some individuals are overly conservative in their investment choices within a self-directed IRA. It’s true that capital preservation is important, but that shouldn’t be your only consideration, and it shouldn’t necessarily come at the expense of investment growth. For example, you could be very confident that your account balance would never decline, even temporarily, by investing all of your retirement assets and bank CDs. However, if this is your only investment type for 30 years, you may find it difficult to reach your retirement savings goals.

By understanding all of the rules that apply to self-directed IRAs, you’ll be in a much better position to reach your retirement goals