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Three Key Investments You Can Make in Your Self-Directed IRA, But Not in Your 401(k)

Posted on December 14, 2015April 13, 2021 by Ingrid Chavez

Estimated reading time: 2 minutes

Despite the larger annual contribution limits that are available to participants of a 401(k) plan, there’s one essential aspect in which 401(k) plans fail to measure up to self-directed IRAs, and that’s in the area of investment options. Even if you consider participating in your employer’s plan in order to receive matching contributions from them, you’re likely to find yourself faced with a handful of investment options, likely in the form of mutual funds that come with above-market fees.

But even if you have the best 401(k) plan on the market, and have a wide range of options to choose from, you still aren’t likely to be able to invest in publicly traded stocks. Furthermore, there are going to be three key investment classes that certainly won’t be available in your employer’s plan.

Real Estate.

Real estate investments are one of the most popular types of investments for self-directed IRAs. These types of assets allow investors to purchase virtually any type of investment property, including single family homes, condominiums, multi-family units, commercial properties, farm land, industrial property, and even undeveloped properties.

With a self-directed IRA you have freedom in your investment goals and approach with real estate as well. You can rent the property in order to generate an income stream, invest for capital gains, invest for speculative purposes, or some combination of these considerations. Note that you cannot use any of these properties yourself, nor can any members of your family use the properties. Doing so could subject you to financial penalties and taxes.

There are additional financial burdens if you seek to borrow money with your self-directed IRA in order to purchase the property, so many investors choose to limit themselves to properties or property interests for which they can pay cash from their account.

Private Loans.

Finally, you can use your self-directed IRA to make private loans to third parties. These loans can take the form of mortgages to prospective homebuyers, or to businesses looking to expand their operations. The basic concept of making private loans is easy to grasp, but preparing the necessary documentation and making sure the transaction is properly structured is essential.

While you may only choose to devote a part of your overall retirement nest egg to these retirement classes, it can be a great advantage to have access through them through a self-directed IRA.

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.

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

Posted on September 10, 2015April 13, 2021 by Ingrid Chavez

Estimated reading time: 2 minutes

While you might have been initially drawn to a self-directed IRA because of the investment flexibility that this account type offers when compared to IRAs with traditional custodians (e.g., being able to invest in precious metals, and real estate, and private companies), it’s true in all areas of investing that not every investment option is suitable for every investor.

Make the Maximum 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 2021 filing period is $6,000, with an additional $1,000 allowed for taxpayers age 50 and over), you won’t be able to make up for that lost opportunity in later years. Once the chance to make the maximum deposit has passed, it’s gone forever.

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 as well as a Roth self-directed IRA, 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.

Does Small Mean Little Investment Experience? 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 investments, you’re still free to choose investments that you have more experience and familiarity with.

Use 401(k) Rollovers. Finally, 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 401(k) to an IRA. Because many individuals are permitted to contribute to both 401(k)s and IRAs, this can be a great technique for building as large of a nest egg as possible.

Why the Type of Self-Directed IRA You Have Can Impact Your Retirement Timeframe

Posted on September 2, 2015December 6, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

The type or types of retirement accounts you use can impact many different aspects of your overall retirement planning. Different accounts have different contributions, different features, different limitations, and different types of tax advantages. In fact, the type of self-directed IRA you choose can even impact your timeframe for retirement.

The two types of self-directed IRAs are traditional accounts and Roth accounts, and they differ in a few key respects. First, a traditional self-directed IRA is subject to the IRS rules on required minimum distributions. This means that once you reach age 70½, you’ll need to begin making withdrawals from your account.

The amount of the required minimum withdrawal each year is calculated based on the balance in your account and your age. The annual minimum withdrawal amount can change significantly from year to year, for example, if your account experiences particularly large investment gains or losses. Roth IRAs, on the other hand, are not subject to this set of rules.

Having to follow the rules on required minimum distributions could impact a person’s investment timeframe in that it forces a person to take taxable withdrawals from their traditional self-directed IRA regardless of their actual income needs, regardless of whether they desire to continue working, and irrespective of their other retirement assets.

The type of self-directed IRA you choose can also impact the income you’re able to draw from your account each year.

With a traditional self-directed IRA, you’ll be subject to income tax on the distributions you take from your account. This means that when you’re planning your strategy for when and how much you’ll withdraw from your account in order to fund your living expenses during retirement, you’ll need to do some additional calculations to account for your tax liability.

For example, let’s say your annual budget for all your expenses is $50,000 per year. If your self-directed IRA is set up as a traditional account, then taking a $50,000 distribution is likely to yield perhaps only $40,000 or less. So in order to wind up with $50,000 you might need to take a distribution of perhaps $60,000 or $65,000 or more, depending on your individual tax situation. Once you take these factors into account, you may determine that your traditional self-directed IRA won’t last you as long as you assumed it would just by looking at your account balance, particularly when your tax situation can change from year to year.

Distributions from a Roth self-directed IRA during retirement are not subject to income tax, so the amount you have in your account is the amount you can use for planning your distributions in whatever way you see fit.

It’s true that when you make contributions to a Roth self-directed IRA you can’t deduct those contributions for your income tax return. But choosing a Roth account over a traditional account can give you greater retirement planning flexibility going forward.

Three Key Ways Marriage Can Impact Your Retirement Planning

Posted on August 28, 2015August 14, 2019 by Ingrid Chavez

Estimated reading time: 3 minutes

Getting married is one of the biggest steps two people can take in their lives. There are a number of major changes that both people will need to address — both personally as well as financially — as a result of getting married. For example, the new couple will need to decide whether and to what extent to intermingle their finances going forward, and how to deal with assets that each individual may bring into the marriage (such as real estate and investments).

Retirement planning can also be significantly impacted by marriage. The process of planning for your own retirement when you are single is vastly different than having to plan for two. Let’s take a look at three key ways that marriage can impact retirement planning.

Maximizing Contributions.

Depending on your and your new spouse’s work status, being married can increase the maximum contributions you can collectively make to your self-directed IRAs. It works like this: normally an individual must have earned income at least as great as the contribution they want to make in any given tax year. But when a married couple files a joint tax return, then they effectively have access to each claim a portion of that joint income as a basis for making a contribution to an IRA. This is a great outcome if one spouse works, but the other doesn’t.

Estate Planning Considerations.

Retirement planning and estate planning are often treated as wholly separate considerations, but in most cases they probably shouldn’t be. Think of it this way, if you’ve done a reasonably good job in saving for retirement, then the most valuable asset you have when you reach age 65 or 70 (apart from your home, perhaps) is likely to be your retirement nest egg.

As a result, the choices you make with your retirement savings — not just the investments you make and the asset types you hold within your account, but also the type of account you use in the first place — can make it easier (or harder) for you to reach your estate planning goals.

For example, a Roth self-directed IRA has certain advantages over a traditional account when it comes to passing your account to your spouse in the event you predecease them. While it’s possible to convert a traditional self-directed IRA into a Roth account, doing so can trigger current year tax liabilities, so there may be advantages for many young couples to simply start out within the Roth structure.

Strategic Distributions.

Each new spouse will likely have their own Social Security benefits to manage when it comes time to retire. Even an individual who doesn’t earn enough income to receive benefits based on their own income can be eligible for a spousal benefit based on their spouse’s work record.

Since a person’s monthly Social Security benefit check can vary significantly, depending on whether they take benefits as early as possible (age 62), or delay taking their benefits until age 70. This leads to a number of different benefit maximization strategies, which will depend greatly on the couple’s particular situation and circumstances, in which one spouse begins taking social security, and the couple lives off that income (as well as income from one or both of their IRAs), while the other spouse delays taking Social Security in order to maximize their monthly benefit.

Techniques for Making the Maximum Contributions to Your Self-Directed IRA

Posted on August 17, 2015April 13, 2021 by questadmin

Estimated reading time: 3 minutes

Appropriate and suitable investing is certainly one key to accumulating a large enough nest egg by the time you’re ready to retire. But at least as important as your investment approach is you making regular contributions to your account (as in, doing so every single year), and contributing as much as possible (that is, up to the permitted contribution limits for your retirement account).

Giving your account contributions the greatest amount of time to grow is something that you can’t make up in later years. Since your annual contributions to a self-directed IRA are capped, if you miss the opportunity to make a maximum contribution to your account in any given year, you’ll never be able to recapture that opportunity later.

For the 2021 tax year, the maximum annual contribution to a self-directed IRA is $6,000 (or $7,000 if you’re age 50 or over). Here are some techniques for making that maximum contribution to your account this year, as well as in all future years before retirement.

Use Your Tax Refund.

While the most financially prudent situation is to neither owe taxes nor be due a refund at the end of the year (since no refund means that you haven’t given the government an interest free loan of the excessive withholdings that were made from your paychecks), many people still like the “forced saving” element of getting a refund check after they file their returns.

Receiving a refund that may amount to several thousand dollars, or more, these taxpayers now have access to a lump sum of money that they perhaps wouldn’t have been able to accumulate otherwise. While many individual choose to use their refunds as an opportunity to splurge, or treat themselves to something nice, consider this: using your refund check to make some or all of your annual self-directed IRA contribution will free up your budget later and provide you with greater financial flexibility.

In fact, if you file early enough in the year, you may be able to receive back your refund check in plenty of time (that is, before tax filing deadline) in order to make some or all of your self-directed IRA contribution for that same tax year.

Incorporate Your Contributions into Your Monthly Budget.

Because the key to success in retirement saving is consistency, you can meet your annual contribution goal by taking steps toward that goal each and every month. Determine how much you need to contribute each month to make the maximum contribution, and work that amount into your budget.

Auto-Debit or Direct Deposit.

Even if you don’t have a formal budget set out for your family, you can still meet your monthly savings target by utilizing tools such as direct deposit (have an appropriate amount taken out of your paycheck each month and deposited directly into your self-directed IRA), or automating monthly transfers from your checking or savings account to your self-directed IRA.

Don’t Count on Working For the Rest of Your Life (and Why Your Self-Directed IRA is Therefore So Important)

Posted on August 6, 2015December 7, 2018 by questadmin

Estimated reading time: 3 minutes

We’re all aware of the fact that many (if not most) Americans haven’t saved enough money toward their retirements. One common response to the anticipated gap between anticipated living expenses during retirement and the amount a person has saved is for that person to delay the date upon which they anticipate being able to retire.

The reasoning is certainly clear; by working longer a person will be able to both save more money for retirement, and to delay the date upon which they’ll have to begin living off the funds in their nest egg. Unfortunately, the statistics indicate that this isn’t always possible.

A recent study by the Employee Benefit Research Institute found that while a full one third of workers planned to retire after the reached age 65, less than half of those individuals actually remained in the workforce that long. On the flip side of the coin, while less than 10% of workers indicated that they planned to retire before they reached age 60, approximately 35% of individuals had actually left the workforce by the time they turned 60.

While some of these individuals may simply have been fortunate enough to accumulate much more than they originally planned to, that same report makes clear what’s driving these numbers. Nearly half of all retirees indicated that they left the workforce earlier than anticipated in order to deal with health issues, either their own issues or those of a spouse or family member.

In addition, a significant number of individuals who left the workforce earlier than they planned did so because of an employer downsizing or closure, or because they no longer had the skills to remain employed in a changing marketplace.

In short, just because a person hopes or plans to stay in the workforce for a longer period of time in order to make up a shortfall in their retirement savings, that doesn’t mean it will be possible to do so.

As an alternative, a person could also make up this shortfall by adjusting their anticipated retirement lifestyle, thereby reducing their retirement expenses. While there is likely to be a minimum amount that an individual or couple will need to retire with reasonably stability and security, chances are this amount is less than what they were hoping to live off of.

If you’re not willing to downsize your retirement plan, then you’re only left with one real alternative, and that’s to maximize your rate of retirement savings every single year, and to begin doing so immediately. You might also investigate the advantages that a Roth self-directed IRA could provide you, in terms of the tax-free distributions you can take, as well as the fact that you could let a Roth account continue to grow even after you reach age 70, such that you’re not subject to the rules on required minimum distributions.

Contact Quest Trust Company to learn more about how you can open a self-directed IRA and strengthen your financial future.

Why It’s Important To Coordinate Your Taxable Investments With Your Self-Directed IRA Investments

Posted on July 20, 2015December 6, 2018 by questadmin

Estimated reading time: 3 minutes

Your self-directed IRA can save you a lot of money in taxes, both in the short term as well as in the long run. If your IRA is set up as a traditional account, then (depending on certain aspects of your financial position) you may be able to take a tax deduction for those contributions. And contributions in traditional IRAs will grow on a tax-deferred basis, while the investment gains within a Roth IRA will never be subject to taxation. Many individuals are well-versed with the various tax implications on this level.

But there’s another perspective from which you may want to consider your self-directed IRA tax analysis, and this is the way that your taxable investment accounts, and investment decisions, can impact your self-directed IRA investments.

Let’s first examine just how valuable your self-directed IRA can be. Consider two hypothetical portfolios of $100,000, one a taxable account and the other a self-directed IRA. Let’s further assume that each portfolio is comprised of stock that pays dividends at a 3% rate annually (with those dividends being reinvested), and that the stock price appreciates 5% annually.

At the end of 25 years, the value of the taxable account would be approximately $525,000, while the self-directed IRA is worth over $630,000. This difference in value is attributable solely to the fact that the owner of the taxable account has to pay taxes on the dividends they receive, even if they choose to reinvest those dividends.

If the self-directed IRA is a traditional account, then you will have to pay taxes on those gains, but they’re likely to be at a lower tax rate (because you’re in retirement and perhaps no longer working full time), and they’ll only be taxed when you take the distribution. If your account is a Roth IRA, then you’ll realize the full value of the investment gains.

So one common tax optimization strategy is for an individual to place income-generating investments that would otherwise incur a tax liability into an IRA in order to avoid that liability.

On the other side of the equation, it’s important to note that there are certain tax advantages that are actually disallowed within an IRA. For example, investment interest (such as borrowing funds to purchase a stock investment, or taking out a mortgage to buy a piece of real estate) can be used to offset gains in a traditional account. But borrowing funds is considered to be outside the scope of permissible activities for self-directed IRAs, and the tax benefit of those expenses will be lost inside the retirement account.

It’s the same situation for investments that have tax advantages built in, such as municipal bonds. Because these investments would already be tax-advantaged outside of an IRA, there’s no reason (and it’s actually a missed financial opportunity) to keep these types of assets inside a retirement account.

Understanding the interplay between your taxable investment accounts and your self-directed IRA will put you in the best position to make the optimal investment decisions.

Why Family Changes Can Affect Your Self-Directed IRA Investment Planning And Strategy

Posted on April 20, 2015December 6, 2018 by questadmin

Estimated reading time: 3 minutes

It should be apparent that any significant change to your financial situation – such as getting a new job with a significantly higher salary, getting hit with significant long-term expenses, or receiving a large inheritance – can impact your retirement investment planning and strategy.

But changes to your personal life, particularly your family status and composition, can have a significant impact on your self-directed IRA investment planning as well. Let’s take a look at a few of the most common situations.

Marriage. Getting married can change virtually every aspect of your life, and your retirement strategy is no exception. Doing your long-term retirement planning as a couple, you may decide upon a vastly different investment strategy than you had when you were single. For example, if your income is significantly higher than that of your spouse, or can make larger contributions to your self-directed IRA and other retirement accounts, then you’ll need to come up with an appropriate joint investing strategy to maximize your collective nest egg.

Divorce. On the other side of the coin, a divorce can also be a personal change that requires you to re-evaluate your retirement planning.Not only will a divorce likely cause you to name new beneficiaries for your account, depending on the nature of your divorce, you may need to go through the process of dividing up the assets within your account, and doing so in the most tax-advantaged manner.

A court-approved divorce settlement can divide one spouse’s IRA between the two individuals, but the tax consequences can be significant, depending on how the division is made.Under federal law, this type of transfer can be performed on a tax-free basis provided that (1) the division is formally included in the property settlement agreement or divorce decree, and (2) the funds are transferred directly from one spouse’s IRA directly to the other spouse’s account. Not meeting these two requirements could subject the original account holder to an immediate year tax liability.

Having Children. The birth of your first child is certain to be one of the most memorable days of your life. Among everything else that will change, you’ll need to plan for their financial security, and this might impact your investment allocation within your self-directed IRA, and you may even wish to name your children as beneficiaries of your account.

And when your children grow up and move away from home, either to go to college or to enter the workforce, you may be able to use your self-directed IRA to provide them with an extra measure of support. You can make penalty-free withdrawals from your account before reaching retirement age if you’re paying their qualified educational expenses, or contributing up to $10,000 to help them buy their first home.

As your family grows and changes over time, you’ll put yourself in the best position to reach your retirement goals if you understand how family changes can impact your investment and planning strategy.

How To Save On Investment And Management Expenses Next Year With Your Self-Directed IRA

Posted on March 16, 2015April 21, 2021 by questadmin

Estimated reading time: 2 minutes

There’s no such thing as a free lunch, or so goes the saying. Even in the context of saving money for retirement, you’re going to have to pay for the various services provided by your account custodian. Even if you have a “free” account at a discount brokerage, you’ll still pay transaction based fees for buying and selling investments.

All other things being equal, the more you spend on fees, the smaller your retirement nest egg will be. With that in mind, here are some suggestions for saving on investment and management expenses next year in your self-directed IRA.

Understand Your Baseline. The first step to reducing the fees you pay is to understand what you are paying now. Take a look at your prior account statements and identify all the fees and expenses you paid. It may be helpful to separate them out by investment type, so that you can compare appropriate categories going forward.

It’s important to acknowledge and understand that when it comes to fees and expenses, you’ll need to pay more in order to get a higher level of involvement and service. The fees and commissions applicable to buying a few hundred shares of a publicly traded stock are always going to be significantly less than those for purchasing a piece of real estate or for other custodial services..

Leverage Your Own Investment Experience. The next step is to examine those areas in which you have substantive investing experience, and consider cutting back on the professional management. For example, if you’ve accumulated years of experience investing in real estate with your taxable accounts, then you may be able to use that knowledge and expertise to make real estate investments with your self-directed IRA.

Professional Management. On the other side of the equation (and this might seem a bit counterintuitive), bringing in outside help in the form of professional active management might end up being a positive for your account. A professional may be able to identify areas in which your investment is underperforming and thereby increase your overall net return even once their fees are taken into account.

Evaluate Your Options. You may have more options available to you when it comes to structuring the fees you pay than you realize. For example, some custodians let you choose how your annual account maintenance fee is structured, whether that’s based on a percentage of your total account value, an asset by asset calculation, or even a flat fee that covers your account as well as the accounts of your immediate family members. You may be able to save a significant amount of money next year simply by going back to your custodian’s fee schedule and taking another look.

Maximizing Contributions.

Estate Planning Considerations.

Strategic Distributions.

Use Your Tax Refund.

Incorporate Your Contributions into Your Monthly Budget.

Auto-Debit or Direct Deposit.