Getting Started with a Self-Directed IRA When Your Nest Egg is Small

Estimated reading time: 5 minutes

Investing can be a tough proposition for many, especially those who are just starting out and only have a small amount of money. It can feel like investing such a tiny amount of money will never help us meet our investment goals or have enough in our retirement fund. However, investing small amounts of money now can lead to healthy returns later on down the road. You might have initially been drawn to a self-directed individual retirement account (IRA) because of the flexibility that this account type offers by allowing you to invest in alternative investments like real estate, promissory notes, and private entities. However, it can be hard to know how to get started, so we are offering a few tips to help you get on your way to successful investing.

Does Small Mean Less Experienced?

If your nest egg is relatively small because you’re just starting out with your retirement savings and don’t have a lot of investing experience, then don’t feel pressured to start investing in the most complicated and advanced investment types right away. Even though the self-directed IRA structure permits investments in a wide range of alternative assets, you’re still free to choose ones that you have more experience and familiarity and are comfortable with the level of risk.

Maximize Your Contributions Every Year

When your self-directed IRA balance is relatively small, it’s vital that you make the maximum contributions to your account each and every year. If you fail to make the maximum contribution in any given tax year (the contribution limit for the 2023 filing period is $6,500, with an additional $1,000 allowed for taxpayers ages 50 and over), you won’t be able to make up for that lost opportunity in later years. If you can maximize your contribution every year, it will help your nest egg grow that much faster.

Consider Maintaining Two Accounts

It’s a common misconception, but taxpayers are not limited to having a single IRA. In fact, it can be good practice to maintain both a traditional self-directed IRA (which grows tax deferred) as well as a Roth (which grows tax free), and then decide where to make your deposits each year based on the tax deduction advantages you might be able to get from contributing to the traditional account. The key is to deposit the maximum each year, regardless of the self-directed IRA you choose, and remember that it’s always possible to convert a traditional self-directed IRA to a Roth account whenever you decide that you only want or need a single account.

Rollover Your 401k

Another way to grow your self-directed IRA is through the use of rollovers. Whenever you leave an employer, you’re permitted to roll over the funds you’ve accumulated in your 401k to an IRA, and there is no limit to the amount you can rollover. This can be a great technique to increase the amount of money in your IRA and open you up to more investment options. Another benefit of a rollover is you can maintain tax-deferred status of your retirement assets without having to pay current taxes or early withdrawal penalties.

Invest in a Real Estate Investment Trust (REIT)

REITs can be a great option because they allow investors to invest a small amount of capital in pooled real estate projects and housing developments. REITs provide an attractive alternative for those looking to diversify their investments without directly investing in real estate. Also, because they distribute a large portion of its rental income to shareholders in the form of dividends, they can provide a steady cash flow to investors as a source of passive income. Since REITs are professionally managed by experienced real estate professionals, they are responsible for acquiring, managing, and disposing of properties in the portfolio, which help provide comfort to you knowing that you are minimizing risk with a more secure investment opportunity.

Partner with Other Accounts or Investors

Another great option when you don’t have a lot of funds to invest on your own is partnering. Self-directed IRAs can be used in partnership with other entities for investment opportunities. This strategy involves splitting ownership percentages between the IRA and the other party/parties involved. Each party has a percentage of ownership in the investments which is set at the beginning and remains the same throughout the investment. Profits are distributed based on the ownership percentage, and expenses are split accordingly. We go into more detail on the topic in our article Maximize Your Investments Funds With Partnering – Quest Trust (questtrustcompany.com)

Learn the Power of Real Estate Options

This is one of the most powerful tools for real estate investors. An option is basically a contract between the buyer and seller giving the buyer the option to purchase the property for a fixed price within a certain timeframe. The buyer has the right, but not the obligation, to buy. Property owners agree to options for several reasons, including timing income for tax purposes, obtaining non-repayable money, and negotiating flexible options. This is especially true for owners in pre-foreclosure situations.

Quest Founder H. Quincy Long goes into much more detail about real estate options in this video Real Estate Options: Learn About This Creative Investment “Option” for Small IRAs – YouTube.

There are so many choices available that it can be overwhelming when you are getting started developing your investment strategy. That’s why at Quest, we believe in providing free education to encourage more investors to take control of their retirement and achieve their financial goals. We offer 2-3 educational events per week to help investors learn more about their options with self-directed accounts. For more information about our events and how to register, go to Self Directed IRA Live Events & Webinars | Quest Trust Company. If you have any questions about your options, you can schedule a free 1 on 1 consultation with one of our IRA specialists.

 

 

 

How Much Retirement Income Can You Generate With Real Estate Investments?

Estimated reading time: 3 minutes

Why do you save for retirement? At the most basic level, you probably save so that you’ll be able to pay for your living expenses once you reach your desired retirement age (whatever that age may be). One of the best ways to plan for your retirement finances is to have the goal of putting together a nest egg that generates enough income every year to cover some or all of those living expenses. This will often be preferable to having to liquidate your investments in order to pay your living expenses, and be at risk of depleting your account too quickly, and effectively outliving the usefulness and value of your retirement savings.

Unfortunately, individuals who aren’t familiar with self-directed IRAs, and the additional investment opportunities that those accounts can provide as compared to IRAs with traditional custodians, might take an overly narrow view of the types of investments that can generate meaningful income.

More specifically, many would consider an “income investment” to be something like a municipal bond or U.S. government bond, or a corporate debenture, or perhaps even publicly traded stocks that pay quarterly dividends. While these are certainly income generating investments, they only scratch the surface of what’s available to a retirement saver who has a self-directed IRA.

Private Debt Investments. Self-directed IRAs are authorized to invest in private debt instruments. This can include not only personally guaranteed notes (lending money directly to an individual), but also borrowings from businesses, and even private mortgages. That’s right, with a self-directed IRA you can make loans to people who are looking to buy a home, and use the home as your security for repayment — just like a traditional mortgage lender would do.

These types of investments have the potential to generate a significant income stream, and the more risk you’re willing to take with respect to repayment, the greater that income can be.

Real Estate. Speaking of home buyers, you can use a self-directed IRA to invest in real estate directly, and generate income from renting the properties you buy. In the residential marketplace, stagnant incomes have combined with increasing real estate prices and tighter lending standards to create a huge demand for rentals. In some areas the growth in prevailing rents has actually exceeded the rate of growth for home prices.

And you’re not limited to residential properties when you invest with a self-directed IRA. You can use your account to purchase commercial properties, including office, retail, and industrial properties. These types of investments can provide exposure to a different type of risk if you’re looking to diversify your retirement investment portfolio, but they can still generate a healthy level of periodic income.

Obviously, making these types of investments is a significantly more complicated process than simply buying a corporate bond. When considering these types of investments with your self-directed IRA, be sure to seek out qualified professional assistance to help you as necessary.