How a Change of Career Can Impact Your Self-Directed IRA

Estimated reading time: 3 minutes

The process of building up a retirement nest egg doesn’t occur in a vacuum. You can come up with a savings plan and investment plan, but if the other financial elements of your life undergo significant changes, you might have to adjust those plans. One thing that can impact your self-directed IRA in several important ways is changing your job or career.

New Income Levels

As you are likely already aware, your ability to contribute to a traditional self-directed IRA or a Roth self-directed will depend on your modified adjusted gross income, as well as whether you’re participating in an employer-sponsored retirement plan such as a 401(k).

For 2021, for example, if you’re a single taxpayer and you’re covered by a retirement plan at work, you can only deduct the full amount of any contributions you make to a traditional self-directed IRA if your modified gross income is $66,000 or less. With respect to a Roth self-directed IRA it is irrelevant whether or not you participate in an employer-sponsored retirement plan, but you can only make the maximum contribution to your Roth account if your modified adjusted gross income is less than $125,000.

Clearly there are several moving parts here, but the bottom line is that whenever you switch to a new career or job, the optimal contribution strategy you used in past years may not be the best one in your new position. You may find that you’re much better off making contributions to a traditional account than a Roth account, or vice versa. (And some individuals maintain both Roth and traditional IRAs throughout their saving years for just this reason.)

Ability to Rollover Your 401(k) Account

Whenever you change jobs, you have the ability to roll over your account balance to your new 401(k) account at your new employer (assuming that your new employer offers such a plan). That has certainly been a common approach among many individuals who find themselves moving to a new job or new career.

But that change in job or career gives an opportunity to rollover the balance that’s in your 401(k) account into your self-directed IRA. Not only will this give you the opportunity to reduce your administrative burden by having fewer accounts to manage, but you’ll also have a larger pool of capital that you can use to make some of the less common retirement investments that you can only do with a self-directed IRA.

It’s true that you can generally leave your 401(k) account with your old employer, but if you choose that path you won’t be able to make new contributions to your account, and you’ll be stuck with whatever limited investment options that particular plan happens to offer.

Make sure that you structure this as a direct rollover, not as a distribution and contribution of funds. The negative tax implications of taking a distribution from your 401(k) could be significant.

Do You Have a New Child on the Way? Here are Some Changes to Consider for Your Self-Directed IRA

Estimated reading time: 3 minutes

Big life changes often bring about big changes to your financial plans as well. Finding a new job, losing your job, getting married, getting divorced, or having a parent or family member suddenly require long-term medical care can all introduce a significant need to reevaluate your long-term plans. Having a child is another instance in which you may wish to consider making some changes to your retirement accounts, including your self-directed IRA.

Prioritize Your Contributions

You should be working to prioritize and maximize the effectiveness of your IRA contributions each year, but it will become even more important when you have a new child. You’ll be faced with many new expenses relating to your becoming a parent, and these financial challenges can sometimes have the unfortunate effect of causing individuals to forego or reduce their annual retirement contributions.

But when you know you have another person counting on you – now and into the future – it’s even more important that you continue executing your long term financial plan. And a big part of this is making sure that you contribute to your self-directed IRA every single year.

Updating Your Beneficiaries

As you work to integrate your new child into your life, you’ll likely be doing things like updating your will, adding your child to your health insurance, and perhaps naming them as a beneficiary of your life insurance policy.

This is also a good time to revisit the beneficiary designations you might have made for each of your financial accounts, including your self-directed IRA. Depending on how they are phrased, these types of beneficiary designations can supersede the terms of your will your will, so you never want to just assume that your assets will be distributed in accordance with what you may have written in your will. The beneficiary designations in your IRA documentation must be up to date.

Converting to a Roth IRA

Also on the subject of beneficiaries, it’s important to note that a self-directed Roth IRA contains a number of different estate planning advantages over a self-directed IRA that’s set up as a traditional account.

Converting an existing self-directed IRA from a traditional account to a Roth account will cause a tax hit in the year of conversion, but if you still have a decade or two before retirement, or you have significant other retirement assets, then performing such a conversion can be a big boost to your overall wealth. And if you haven’t yet set up your self-directed IRA, then consider all of the long-term advantages that a Roth account can provide over a traditional account.

Under ideal circumstances, you should be reviewing all of your financial accounts on a fairly regular basis, including long-term accounts such as your self directed IRA. It’s certainly not uncommon for people to neglect those regular evaluations. But when you have a new child on the way, it’s absolutely essential that you give your accounts another look.

Advice for Managing Multiple Investment Properties Within Your Self-Directed IRA

Estimated reading time: 2 minutes

Real estate investing, despite the housing meltdown that occurred a few years back, remains quite popular. In fact, in many respects real estate investing has become more popular over the past few years, as more families are unable to meet the stricter mortgage requirements, or simply aren’t interested in owning a home. These factors drive up the demand for rental properties.

This has made real estate a very popular investment class, particularly for individuals who have chosen the flexibility of a self-directed IRA with a custodian such as Quest Trust Company. But investment real estate generally requires a level of involvement far greater than investments in stocks or bonds. Here are some tips for managing multiple investment properties within your self-directed IRA.

Know When It’s Time to Get Help

Perhaps the most important piece of advice when it comes to investing in real estate is that you should know when it’s time to get professional help. Managing a single piece of investment real estate can be challenging enough, but when your obligations are multiplied by numerous properties – particularly when those properties are not located close to one another or are not to the same investment type (e.g., residential vs. commercial vs. farmland) – they can quickly become overwhelming.

If you currently own investment real estate, take a look at how much time you’re spending in the management of your properties. Then research how much you would have to spend on professional help for those same services. You won’t be able to deduct those costs as you would if those investments were held outside of a tax-preferred account, but you may find that expense to be worth it.

Evaluate Each Property Individually

One element of property management in the context of investing within your self-directed IRA is confirming that a particular property is suitable for your investment portfolio. Just as you periodically evaluate other types of investments (stocks, mutual funds, etc.) to make sure that they’re still a good fit for your goals and needs, you need to do the same thing with each piece of real estate you hold.

Set up a schedule to evaluate each individual piece of property in your portfolio

Ask yourself if it is performing as you had anticipated when you acquired it (or in the time period since your last review). If not, determine whether or not there is anything you can do to improve its performance. If the property is no longer suitable as an investment, then determine whether there’s a sensible way to get that property out of your portfolio.

Have an Exit Strategy

In fact, it’s important to have an exit strategy for each and every property in your portfolio. Understand when it makes sense to no longer hold a particular property, or when it makes sense to have your funds invested in something else.

Tips for Navigating the IRA Rules on Required Minimum Distributions

Estimated reading time: 3 minutes

In general, the concept of an individual retirement account is relatively easy to understand, even for individuals who haven’t yet opened an account for themselves. The IRA lets you save money for retirement by making investments of your choosing (and self-directed IRAs provide even more options in this regard) and you’ll receive certain tax benefits as part of owning an account.

But some aspects of the IRA are fairly new to some people in the first open an account. One of the most potentially confusing concepts is the IRS rules on required minimum distributions (or “RMDs”). Here are some tips for navigating and staying on the right side of the rules.

What is the General Rule for Required Minimum Distributions?

The IRS requires that once the owner of a traditional IRA reaches age 70½, that individual must begin taking distributions from their account. These distributions are subject to a required minimum (which is calculated on the basis of the individual’s life expectancy and account balance), and must be made each and every year. There are several important points to recognize when it comes to this rule.

Roth IRAs Aren’t Covered.

Perhaps most significant rule is that the RMDs only apply to traditional accounts. Roth IRAs are not subject to the RMD rules. This means that an account holder can continue to let their Roth IRA grow for many years into retirement. For retirees who have multiple sources of retirement income (Social Security, 401(k)s, other IRAs, etc.), this can be a great way to maximize their overall nest egg.

In addition, since different types of IRAs – particularly Roth accounts – can be used to achieve various estate planning goals, the fact that Roth accounts are not subject to the rules for RMDs makes them especially attractive savings vehicles.

The RMD Amounts are Only Minimums.

The rules on RMDs don’t exist for the purpose of creating a withdrawal schedule that you must follow during retirement. The amount that is calculated as the required minimum for any given year is just that; a minimum. You are always free to take out more than the RMD amount from your account each year.

The RMD Amounts Change.

Furthermore, because the RMD amount is based in part upon the balance in your account, your investment performance can significantly change the RMD amount from one year to the next. As your account grows, for example, the amount might actually increase significantly from one year to the next.

Self-Directed IRA Considerations.

Special considerations must be given to these rules if you choose to structure your self-directed IRA as a traditional account. Consider how you will satisfy the RMD rules each year once you enter retirement. For example, if your account investment portfolio is comprised largely of real estate, will you need to liquidate any of your holdings in order to meet your obligations?

If you find that satisfying the rules for RMDs from a traditional self-directed IRA may be too onerous, remember you can always evaluate the possibility of converting to a Roth account.

Does My Level of Retirement Savings Justify a Self-Directed IRA?

Estimated reading time: 2 minutes

A self-directed IRA can form the foundation of anyone’s long-term retirement savings plan. With a self-directed IRA at a custodian such as Quest Trust Company you can invest in a far wider range of asset types and classes than you could with a traditional IRA.

But because some individuals use their self-directed IRAs to purchase investments such as real estate, it leads some to wonder whether having that particular type of account only makes sense for retirement savers who have high levels of savings. In short, the answer is “no.” Just about anyone can benefit from a self-directed IRA – let’s examine the reasons why.

Self-Directed IRAs are Flexible.

As noted above, self-directed IRAs provide you with the greatest number of options in terms of the kinds of investments you can make for retirement. Savers with relatively small account balances can still benefit from this flexibility. It’s true that you can use a self-directed IRA to make large-scale investments in real estate, such as apartment buildings or commercial developments.

But you can also make investments in much smaller properties, including those in the lower price ranges. Furthermore, you can use your funds within a self-directed IRA to gain exposure to the real estate market in other ways as well, including by issuing mortgages or loans to home buyers.

In addition, the fact that there are a wider range of investment options available in a self-directed IRA doesn’t mean that you can only make those types of investments. If your account balance is still relatively small and hasn’t yet grown to the point where you can comfortably make investments in real estate or private equity, you can still invest in stocks, mutual funds, and more traditional asset classes.

Self-Directed IRAs Can Grow With You

Over time, with maximum annual contributions and good investment decisions, the balance in your self-directed IRA will grow. This will open up new investment opportunities to you over time.

A Self-Directed IRA Can Focus Your Saving Strategy

In fact, having a self-directed IRA can give you a focal point for your retirement investing. Rather than allowing your retirement nest egg to be spread out over multiple IRAs, 401(k)s and other accounts, you can make your self-directed IRA the primary account in your retirement savings strategy. You can roll other accounts into your self-directed IRA, and prioritize making maximum annual contributions to it. This helps your account balance grow much more quickly.

Remember that your self-directed IRA exists to help you pay for a retirement that still may be several decades down the road. By its very nature, your account is always looking forward. You should have that same attitude when it comes to your investment strategy and choice of IRA custodian. Small account balances are still appropriate for a self-directed IRA, and they keep you the greatest flexibility as your account balance grows.