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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.

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.

Will This Be The First Year You’re Subject To Required Minimum Distributions On Your Self-Directed IRA?

Posted on June 15, 2015April 13, 2021 by questadmin

Estimated reading time: 3 minutes

While the U.S. government wants to encourage individuals to save for retirement by providing tax incentives for using the IRA structure, they don’t want to forego the tax revenue entirely. For example, you’ll potentially be able to take a tax deduction for contributions you make to a traditional self-directed IRA, and won’t have to pay taxes on any investment growth or gains that occur and remain within your account, but you will have to pay taxes when you make withdrawals from your account.

One important way that the IRS rules manage the balance between allowing tax breaks for retirement savings, but requiring that the account holder pays taxes at some point, is the set of rules on required minimum distributions (“RMDs”).

RMD Basics. Once a traditional IRA account owner reaches age 72, they must begin taking distributions from their account, and those distributions must meet certain minimum amounts that are calculated based on the account balance and the account holder’s age. The account holder must withdraw the calculated minimum amount from their account every year.

It’s important to note that because the required minimum distribution amounts are only minimums, the account holder is always free to take larger or more frequent distributions from their account.

It’s perhaps even more important to understand that the RMD amount will almost certainly change from year to year. Because the calculation is made on the basis of the value of your account at the end of the year, your investment performance over the year will change the amount upon which the amortization calculation operates.

Special Considerations for Some Investments. Your RMD obligations do not take into account the composition of your traditional self-directed IRA. If you happen to have an account that is comprised of illiquid investments, you’ll still need to take an appropriate distribution, even if you don’t have the free cash available to do so. You can do this by taking a distribution of illiquid investments that have a fair market value that’s at least as much as your RMD amount, or you can distribute the asset itself. This might be desirable if the asset is a vacation property or some other asset you’d like to make personal use of during retirement.

But taking a large distribution in one year won’t get you a credit against any future RMDs in future years.

Roth Self-Directed IRAs are Not Subject to RMD Rules. Note that we’ve only been talking about traditional self-directed IRAs with respect to the rules on required minimum distributions. That’s because the Roth account is not subject to the same rules.

Given the value that this feature has to many individuals, one common way to maximize retirement flexibility is to convert a traditional account to a Roth account. This triggers a tax bill in the year of conversion, but many account holders find the change to be worth the cost.

Three Key Diversification Principles For Self-Directed IRAs

Posted on April 10, 2015August 12, 2019 by questadmin

Estimated reading time: 3 minutes

Most investors are at least somewhat familiar with the concept of diversification, even if they don’t give it much thought or put the notion into practice within their own accounts. And while some investment commentators might occasionally proclaim that the idea of diversification is outdated, most experts recognize its importance even today.

The basic theory of investment portfolio diversification holds that by investing in more than just a single asset, the investor can reduce their risk of losing a significant portion of their portfolio if that one asset were to decline in value. Diversification is one reason that mutual funds and exchange traded funds are a more popular choice than individual stocks for many investors.

Diversification can become particularly important with an account such as a self-directed IRA, because there are so many more investment choices available to self-directed IRA account holders and those who have their retirement funds with a traditional custodian. Here are three key diversification principles to keep in mind.

Diversify Not Just For Your Age, But For Your Investing Profile. Discussions of diversification often start with your age. The argument is something along the lines of taking a more aggressive diversification stance younger in life so that you have the best opportunity to maximize your nest egg, while keeping in mind that you’ll have more time before retirement to recoup any losses that may result from such a stance.

But you also need to take into account your individual investing personality. How risk averse are you, generally speaking? Does the prospect of losing money, even if it comes with the opportunity to gain more, keep you up at night? These types of questions should give you some idea of your starting approach for retirement account diversification.

Don’t Over-Diversify. By this we simply mean that while diversification should be an important principle to incorporate into your retirement investment decisions, it shouldn’t be the sole driver of your actions.

For example, if you have a large investment in your self-directed IRA that has performed very well and now represents a significant part of your portfolio, your diversification principles may suggest that you sell the investment in order to maintain a “proper” investment mix. However, if you still have significant confidence in that investment, you may not wish to get rid of that quite yet.

Furthermore, if you’re faced with significant transaction costs in connection with trying to meet some diversification goal (such as selling real estate holdings or private investments), then this may impact your decision.

Different Considerations During Retirement. How will you be using your self-directed IRA during retirement? Will it be your principal source of retirement income, or do you have other adequate sources of income (such as employer-sponsored 401(k) plans, employer pensions, and Social Security) and want to use your self-directed IRA as more of an investment and/or estate planning tool?

In addition, if you plan to use your self-directed IRA to make pre-retirement withdrawals in order to help your children or grandchildren with educational expenses, medical expenses or even down payment assistance for their first homes, then you’ll want to be sure that you have appropriate liquid assets available in order to withdraw on the appropriate schedule.

Should You Set Up A Separate Self-Directed IRA For Your Real Estate Investments?

Posted on April 4, 2015December 6, 2018 by questadmin

Estimated reading time: 3 minutes

Real estate is a popular investment choice for people who have a self-directed IRA, but it’s a much different asset class than investments like stocks or bonds. Real estate requires a much greater level of planning and monitoring throughout the holding period of the investment, and for this reason some individuals choose to create separate self-directed IRAs for each of their real estate investments. Here are some factors to take into account when you’re faced with that decision.

Carrying Costs. As you consider whether to set up a separate self-directed IRA for a particular piece of real estate, you will need to plan for how you’re going to cover the maintenance and upkeep of that piece of real estate. These expenses and fees will include annual property taxes, physical upkeep and repairs of the property, insurance premiums, plus any other expenses that you’ve agreed to bear on behalf of your tenant.

You can cover these costs with whatever income the property itself generates, or with your permitted annual contributions to an account, or some combination of both. But you are not allowed to use any outside or personal funds to pay any expenses or fees related to your real estate investment.

Distribution Matters. It’s also worth considering that, depending on whether your self-directed IRA is set up as a traditional account or not, you may be responsible for a significant tax liability upon taking a distribution of the property in retirement. If your self-directed IRA is set up as a traditional account, you’ll have to pay taxes on the full amount of the distribution – i.e., fair market value of the property. If your account is set up as a Roth self-directed IRA, then you’ll have no tax liability upon distribution once you reach retirement age.

Furthermore, a traditional IRA will be subject to the IRS rules on required minimum distributions, and this can be particularly difficult to comply with if the only asset in the account is a single piece of real estate.

Prohibitions on Self-Dealing. But even if you set up a separate self-directed IRA to hold a piece of real estate, you still need to be aware of and have respect for the IRS prohibitions on self-dealing. This means you cannot engage in any personal use of your investment property while it’s still in your account, nor can any of your family members or other related parties make use of the property. You can only use the property after you take a distribution of it from your account.

There is no minimum threshold for this rule, and even a single day of personal use can open you up to a risk that the IRS would consider you to have taken an early distribution of property.

Think about the entire time-frame of your real estate investment, from acquisition to holding, to eventual disposition. You don’t necessarily need to have a detailed or inflexible plan for this type of investment, but it’s important to consider the issues that you’re likely to face along the way.

Now Is The Time To Investigate Oil And Gas Investments With Your Self-Directed IRA

Posted on April 1, 2015December 5, 2018 by questadmin

Estimated reading time: 2 minutes

From a consumer perspective, one of the biggest stories from the latter parts of 2014 and early parts of 2015 is the drop in gasoline prices. While this seems to suggest that making investments now in the oil or natural gas industries would be poorly timed, in fact the current state of the market might actually indicate that this is precisely the time to start investigating further.

Low Prices for Some Assets. The sharp decline in oil and gas prices has resulted in what may be a good buying opportunity for related investments. You may wish to consider not only stock in publicly traded oil and gas exploration companies, but also private investments as well.

Having a self-directed IRA with a company such as Quest Trust Company gives you the opportunity to use your retirement funds to make these types of investments. Because the laws relating to the exploration and development of natural resources are sometimes arcane and complicated, these investments can take many different forms – forms that may not be familiar to even relatively experienced investors.

Seek Professional Assistance. If you don’t have familiarity investing in oil and gas companies, particularly private investments, you may wish to seek professional assistance before committing any funds from your self-directed IRA. Certain types of investments in the industry may carry additional tax benefits – benefits that would be lost or redundant if done within a retirement account. You may wish to leave these investments to your taxable accounts, and use your self-directed IRA for those oil and gas investments that would otherwise generate a significant tax bill (and which you’d therefore avoid by having the investment in a tax-advantaged account).

Local Legislation and Politics. One way to come up with new investment opportunities in the oil and gas industry is to pay attention to your local legislative and political scene. Hydraulic fracturing (or “fracking”) has become a hot button issue in many jurisdictions, for example, so the direction that your city, county, or state takes with respect to allowing fracking – and under what circumstances or regulatory restrictions – could significantly change the investing landscape.

Volatile Markets Create Opportunities. The recent price volatility for oil and gasoline has demonstrated that even as consumer demand remains relatively steady, the underlying commodity markets themselves often move in unexpected and sometimes hard to explain ways. However, generally speaking, volatile markets create more investment opportunities. Remember that for practically every bullish investment opportunity there is someone on the other side of the coin willing to take a bearish position.

Your self-directed IRA can be a great opportunity for you to invest in assets and investment types that you’d never be able to make with your 401(k) at work or a traditional IRA. Now just might be a great time to take a closer look at oil and gas investments.

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.

Deciding When It’s Time To Seek Outside Help With Your Self-Directed IRA

Posted on March 7, 2015October 31, 2018 by questadmin

Estimated reading time: 3 minutes

When considered broadly, perhaps the most powerful aspect of a self-directed IRA is that you have the greatest degree of control over your financial future. Unlike traditional employer pension plans (which give you no opportunity to invest wisely and maximize your retirement nest egg based on your individual choices) or 401(k)s (which generally limit your investment options to a very small number of choices), a self-directed IRA puts you in complete control.

But sometimes handling all this control can be a heavy burden. You may be comfortable using your self-directed IRA to invest in assets that you’ve had prior experience with, but what if you’re looking to invest in something new? That’s the time when you may have to decide to seek professional assistance with your self-directed IRA investments.

When You’re Spending Too Much Time on Your Portfolio. It’s obviously important to spend time doing the financial planning for retirement, including making investment choices, deciding on a withdrawal schedule, and even planning your annual contributions. But if you find yourself spending too much time administering your account, whether it’s because your account has grown too large or contains too many different assets, or because your portfolio includes assets with which you have little experience, then hiring an outside expert may be a good use of your funds.

When You Aren’t Confident in Your Investment Choices. If you find it difficult to commit to making particular investments with your account, or aren’t confident in the investments you’ve already made, then seeking outside help can help you get over the “analysis paralysis”.

When Your Investments Require Management Expertise. As you are likely already aware, different types of assets require different levels of involvement. Consider, for example, how much involvement and management you need to exert over investment in a stock market index fund as compared to a single-family home. If you don’t have the experience to confidently manage a particular asset in your account, get help.

When You’re Spending Too Much Money. Different asset classes may also require different levels of maintenance fees and expenses in order to maintain. Again, consider a piece of residential real estate versus a stock market index fund. You’ll spend nothing maintaining your index fund position (the management fees are automatically paid by the fund), while you’ll be responsible for upkeep of the real estate. If you’re doing this all yourself, you may not be able to accomplish it in the most cost-effective manner. If you find yourself spending too much money trying to accomplish these management tasks, then consider bringing in help. Believe it or not, sometimes bringing in outside expert assistance will end up saving you money, even though you’ll be paying additional fees for their assistance.

Because your goal with your self-directed IRA should be to maximize your account value, don’t let ego or pride get in the way of maximizing your nest egg. Sometimes bringing in outside help is the best way to meet your long-term retirement goals.

Maximizing Contributions.

Estate Planning Considerations.

Strategic Distributions.