How to Value Illiquid Investments Within Your Self-Directed IRA

Estimated reading time: 3 minutes

Because self-directed IRAs allow you to invest in a broad variety of asset classes – including many asset types that traditional IRA custodians choose not to permit – you may elect to use some of the funds in your account to buy assets that are relatively illiquid. These might include real estate, private equity investments, as well private mortgages and other types of debt.

Even for good investments, a lack of liquidity provides some challenges; not the least of which is knowing the current value of those investments in your account. Here are some tips for valuing illiquid investments within your self-directed IRA.

Understand the Reasons for Your Valuation

The methods you use for valuing any illiquid investments you hold within your self-directed IRA depend in large part on why you’re doing the valuation.

Are you getting ready to reduce or sell your investment holding? If so, then having an accurate measure of value will be extremely important. After all, you don’t want to leave some of your investment gains on the table by accepting a price that’s too low. On the other hand, if you’re simply looking to come up with an estimated value for your overall portfolio, then getting a precise valuation for your illiquid asset will be somewhat less important.

At the end of the day, you’ll need to choose whatever method best fits your needs, and gives you a valuation that you’re most confident in.

Use Multiple Methods

Once you understand more about the task ahead of you, you’ll need to begin identifying different methods of valuing the illiquid investments in your account. It’s important to seek out multiple methods, because the more information and options you have about the value of your investment, the more likely it will be that you can determine its true value.

For example, when it comes to valuing residential real estate investments, your first method is likely to be identifying recent sales of comparable properties in the same or similar neighborhoods. This can help you determine just how much an unrelated buyer and seller actually valued the property.

You might also obtain a second opinion by giving a professional appraisal done on the property. You could even contact local real estate agents in order to come up with a market value for the property.

Conduct Periodic Valuations

It’s also a good idea to periodically value all the assets in your self-directed IRA – even the illiquid assets. By doing so he’ll have greater insight into the changing macro-level market factors that may be affecting the value of your investments. The frequency of these valuations will likely depend on your investment timeframe. For example, for a long term speculative real estate holdings (such as undeveloped land), then you may not need to concern yourself with valuation any more frequently than every year or two.

The best way to make solid investment decisions with your self-directed IRA is to have accurate and timely information. Make sure you know what each investment in your portfolio is worth, even the highly illiquid ones.


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.

Becoming More Active in Your Self-Directed IRA Investments

Estimated reading time: 2 minutes

Unfortunately, because the purpose of an IRA is to build a retirement nest egg that won’t be drawn down upon for many years, or even decades, some account holders mistakenly assume that means they need to hold their investments within the account for years or decades as well. The truth of the matter is that you should generally evaluate portfolio investments within a self-directed IRA with the same criteria that you use for any investments in a tax advantaged account.

While self-directed IRAs aren’t the ideal account type for rapid day trading activities, you still may be able to benefit from becoming more active in your investing process. The first step towards being more active is to arm yourself with knowledge.

Identifying New Investment Opportunities

In order to take a more active role in your retirement future is to identify all the new investment opportunities you’ll have available for your retirement nest egg when you have a self-directed IRA. Unlike the investment options you have with an IRA at a traditional custodian – mainly stocks, bonds and mutual funds – you will have significantly more options with a self-directed IRA.

Take the time to begin learning more about the opportunities available in investment real estate, private equity, private debt, and precious metals. Some of these asset classes may be ones that you have never had experience with before, so take the time to learn as much as you can about them before you begin investing.

Understand Your Investment Personality

Not every “good investment” is suitable for every individual. We each have our own investing personality, and it can vary significantly from individual to individual. Some people are simply not comfortable with high risk/high reward investments, while others may be unsatisfied with a “slow and steady” approach.

You can begin the process of identifying your investment personality by first considering some of the objective factors about your retirement planning, including how long you have to invest before you anticipate retiring, as well as other sources of retirement income you may have. Also consider your prior investing habits, your experience and knowledge of various types of investments.

Finally, you’ll need to evaluate your tolerance for risk

Don’t just consider this issue in a vacuum – attach some dollar figures to your thought process. Would you be able to tolerate a 10% drop in the value of your portfolio at any point over the next 10 years? What about a 20% decline at any point between now and your target retirement date? Are you truly comfortable accepting the possibility of investment losses if the trade-off is potentially higher gains?

Once you know more about the investment opportunities that are available, as well as your investing personality, you’ll be in a much stronger position to actively manage your account and to maximize your retirement nest egg.

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.

Why You Should Consider Consolidating Multiple Retirement Accounts Into a Single Self-Directed IRA

Estimated reading time: 3 minutes

Over time, many of us accumulate a number of different financial accounts. For example, we might start a new 401(k) or other employer-sponsored retirement plan each time we change jobs. Or we might open a new IRA in order to receive the benefit of a promotional offer that our broker is sponsoring.

Unfortunately there are a number of downsides to maintaining multiple retirement accounts. In most cases, you can benefit from consolidating multiple retirement accounts into a single self-directed IRA.

Investment Options.

Let’s consider two possible scenarios; one in which you have five different IRAs with a $50,000 balance in each, versus a situation where you have a single self-directed IRA with a $250,000 balance. Your nest egg in each of these situations is identical, but your investment options going forward are not.

Given that a self-directed IRA custodian such as Quest Trust Company will not limit your investment choices in the same way that a traditional custodian would, you can use those funds to purchase real estate or to invest in private companies. You can even issue mortgages to real estate buyers or investors.

Those types of investments often require a higher account balance compared to what you would need to purchase stocks or bonds. Simply put, you’ll have more investment choices if you consolidate your multiple retirement accounts into a single self-directed IRA.

Furthermore, if some of your retirement accounts are 401(k)s that you have left at prior employers, rolling these over into your self-directed IRA can open up a new world of investment opportunity. Most employer-sponsored plans are severely limited in terms of available investment options.

Ease of Administration.

Don’t overlook the fact that having to manage multiple IRAs can present you with a significant administrative burden. Even with just four or five separate accounts, you’re going to have to spend a lot of time managing all the paperwork and statements that those various accounts produce. In addition, when it comes time to retire it can be even more of an administrative burden to execute a withdrawal strategy over multiple accounts.

Ease of Contribution Strategies.

If you maintain multiple IRAs, it can be a challenge to decide how to make contributions such that you grow all of your accounts. Remember that the IRS annual contribution limit regarding IRAs is an overall amount, not a per-account maximum. This means that if you’re looking to contribute $6,000 this year, and you have four or five separate IRAs, you need to figure out a plan for how to divide up that contribution amount. In contrast, having a single self-directed IRA simply means that you make the maximum contribution to that one account.

Finally, having a single IRA also makes sense because it allows you a greater level of insight into your investment risk and portfolio makeup. This insight can help you build the largest possible nest egg for your retirement.

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.

How to Get Ready for Tax Season

Estimated reading time: 3 minutes

The tax filing deadline is still a few months away, but if you’ve ever stressed about or struggled through the process of trying to beat that deadline, you know that putting in a little time and effort before the big day rolls around can pay off handsomely. Here are some steps for getting ready for the upcoming tax season.

Start Collecting All Relevant (and Potentially Relevant) Documentation. Sometime in mid to late January the financial institutions you do business with will start to send you various types of tax forms (the most common of which are likely to be a various types of 1099 Forms and the Form 1098 Mortgage Interest Statement). If you haven’t done so already, create a separate file or folder for your tax records once you receive your very first form.

Whenever you have a little time, start collecting additional financial and tax records to place in that same folder. Collect all receipts for business related expenses, educational and job training expenses, any year-end credit card or brokerage account statements (these can often help you identify certain tax relevant expenses and gains), and any other types of forms or records that relate to transactions with tax implications. Err on the side of being over-inclusive– if it might be relevant to your upcoming tax return, then include it in the folder for now.

Review Last Year’s Return. Another good way to start getting ready for the current tax season is to go back and review the tax returns are filed over the past couple years. This can be a useful way to refresh your memory on different types of deductions and credits that you may have available to you again this year.

Make a List of Your Changed Circumstances. Of course, your tax filing situation this year may be different from years past if your circumstances have changed. Before you begin preparing your return it would be useful to make a list of all tax relevant circumstances that changed in the past year. Did you get married or have children? Did she start a business? Did you buy a home? Could you change jobs or careers? Did you inherit money? Did you make or liquidate any business investments? All of these changes can have significant tax consequences.

Familiarize Yourself With Tax Law Changes. The tax laws and regulations change from year to year, and sometimes those changes can be significant. Even if your income is the same as it was last year, you might find yourself topping out in a different income tax bracket, paying a different amount of Social Security tax, paying different rates on any dividends or capital gains you may have, and paying different amounts in the Medicare surtax.

On the other side of the coin, you may see favorable adjustments to the personal exemption amount you can take, as well as the standard deduction if you don’t itemize your deductions. Similarly, you may see increases in the amount that you can save during the next tax year in your 401(k) or IRA, and if you’ve turned 50 you can now start to take advantage of the higher “catch up” contribution limit. Learn more about the recent changes to the tax law to avoid missing out.

The best way to make sure you don’t overpay on your taxes is to begin the tax filing process as early as possible