checkbook ira Archives - Quest Trust Company

Owning a Checkbook Control IRA

Posted on December 12, 2017December 23, 2020 by Juan Deshon

Estimated reading time: 3 minutes

Checkbook IRA is a term that makes reference to IRA accounts that gives holders of a certain account complete control of their investments by using a checking account. To do this, the person in control of the account makes sure things like a trust are created, and these are only able to be managed by the administrator for the account or the holder of the account. Then, a bank account is opened by the IRA, which leads to the owner receiving a checkbook for the account. Investments can now be made by writing a check. So what are the pros and cons of owning a checkbook IRA?

Pros

There are many pros to having a checkbook IRA, but the main benefit to having a checkbook IRA is how much control the owner of the account is given. If there is not a checkbook connected to the account, the holder of the account must regularly stay in contact with the manager of the account so that investments can be made. Checkbook IRAs can also create savings on custodial fees. Usually, a fee will be charged on each investment made using an IRA. Directly making investments allows an owner of an IRA account to avoid large fees that could be charged simply for investing money into their own personal account. Minimal fees may still be charged, but it will be smaller and it will only have to be paid annually.

Cons

Though paying less to make investments does sound really good, there will no longer be a custodian to look over any of your investments before they can be confirmed. Many problems could arise, but the most common problem is that an investment that is not allowed to be used towards IRA funds might be made, which could lead you to getting penalized by the IRA. You also have the option of running into misreports of investments around the time of taxes. Custodians are usually people who get paid for helping you go through with investments and make sure that you are paying your taxes. They are also in charge of your W-4 yearly. If there are any mistakes with transactions, the custodian is likely to end up misreporting.

When to Use Checkbook IRAs

Though they seem easier to use, checkbook IRAs are not easy for everyone to use. The best people to use these accounts are people who have become very familiarized with how investments work and the processes behind tax accounting. This is a perfect account for someone like a Certified Public Accountant, and since many of them work in private practices, they are not likely to run accounts from an employer. They can still set up accounts for retirement, though. Since they are able to understand investments that are deferred from taxes and understand what can happen with their investments once a transaction goes through, a custodian may not be beneficial to them and further actions with investments. Being unfamiliar with the regulation could be dangerous to your IRA if you are self-directing it.

Are You Diversifying Your Retirement Investments Across Your Various Accounts?

Posted on September 4, 2015December 6, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

When you hear the term “retirement account,” chances are you think primarily of IRAs and 401(k)s. And those two retirement savings and investment vehicles can and should certainly form the foundation of a solid retirement plan. Self-directed IRAs are a particularly powerful type of retirement savings account because you’re permitted to invest in the full range of legally permitted asset types, rather than being limited by traditional IRA custodians (such as banks and discount brokerages), or face the even more restricted with your investment choices in a 401(k).

But in a very real sense, virtually any investment or savings account can serve as a retirement account. Because you’re limited in how much money you can contribute each year to the tax-advantaged retirement accounts we mentioned above, you’re going to need to use those other account types if you’re able to save more than those specified amounts.

As you accumulate multiple accounts that you’re using to build a retirement nest egg, you’ll need to consider your investment diversification not on an account by account basis, but across all accounts considered together.

For example, let’s say you’ve determined that at present your optimal investment mix is something along the lines of 40% U.S. large cap stocks, 25% real estate investments, 25% debt instruments, and 10% cash. Your goal should not be to achieve that mix of investments within each IRA or other retirement account you have, but that you achieve it across the aggregate of your savings.

Let’s further assume that your primary retirement savings account is a self-directed IRA with a custodian such as Quest Trust Company, and that you also have a small 401(k) account at work, and a taxable investment account that’ve decided to use to help fund your retirement. Because you can’t use those smaller accounts to invest directly in real estate, and your options for choosing debt investments may be limited to publicly traded corporate and government bonds, the real estate and debt investments will likely be the primary focus of your self-directed IRA.

In fact, when you look at each of your accounts, they may appear to be woefully imbalanced and overly focused in a particular asset type. But taken as a whole, you can be confident that you’re on the right track in meeting your diversification goals.

Given the limitations of traditional IRAs and 401(k)s, it might be prudent to use those accounts primarily for the “plain vanilla” investments such as large cap publicly traded stocks, government bonds and the like. If you only have a self-directed IRA you can certainly use it to make such investments, but as your nest egg grows and you direct more retirement savings to different accounts, you can use this diversification technique to meet your targets.

As you save, be sure to to prioritize your contributions to those accounts for which you’ll receive the greatest benefit. Many investors choose to maintain both a traditional self-directed IRA as well as a Roth self-directed IRA in order to ensure they can make the best choice for their contributions each year.

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.

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.

The Basic Relationship Between Social Security Benefits And Your Self-Directed IRA

Posted on April 7, 2015April 13, 2021 by questadmin

Estimated reading time: 2 minutes

Regardless of whether you envision Social Security to be a significant component of your retirement income, or simply a helpful supplement to your self-directed IRA, it’s important to understand how the two are related. The timing and nature of distributions you take from a self-directed IRA can impact the size of your Social Security benefits, as well as the income taxes you may have to pay on those benefits.

First things first. Under current law, your eligibility to receive Social Security retirement benefits, and the amount of those benefits, is a function of your prior work experience and earnings, not how much you have saved. In other words, having a large self-directed IRA or taking significant distributions from your account during retirement won’t make you ineligible for Social Security benefits.

However, those distributions may impact the taxability of the Social Security benefits you receive. Finally, it’s important to keep in mind when you’re planning your retirement income strategy that you control when you begin receiving Social Security retirement benefits (anywhere between age 62 and age 70), and you control when you begin taking distributions from your self-directed IRA – with no limit for Roth account, and required minimum withdrawals from a traditional account kicking in at age 72.

Roth Self-Directed IRA Benefits.

Significantly, distributions from your Roth IRA will not affect your Social Security benefits in any way. Just as is the case with traditional IRAs, they are not considered earned income by the Social Security administration for purposes of calculating your benefits in an early retirement scenario. In addition, they are excluded from the definition of “combined income” when considering the taxability of those Social Security benefits.

Distribution Strategies.

Given that your Social Security benefits will be increased the longer you wait to take them (with the deferred retirement credits increasing up to age 70), some individuals can maximize their total retirement income by waiting as long as possible to take Social Security, and taking distributions from their self-directed IRA in order to fund retirement living expenses. The analysis is highly individualized, and you’ll have even more options to consider if you are married and your spouse is also eligible for Social Security benefits.

But remember that you’ll only put yourself in a stronger financial position by maxing out your self-directed IRA contributions each and every year, and trying to build the largest account possible.

Coming Tax Law Changes In 2015 That Could Affect Your Self-Directed IRA

Posted on February 27, 2015October 31, 2018 by questadmin

Estimated reading time: 2 minutes

As you know, the federal income tax code is a dynamic set of laws and regulations, and every year brings about changes. For example, you’re probably already well aware that the income limits for self-directed IRA contributions and/or deductibility tend to increase every year, and the annual contribution limits increase over time as well.

A Clarification on Rollover Rules. One of the biggest “changes” to the rules relating to self-directed IRAs is actually in the nature of a clarification of an existing rule. Any current IRS regulations allow IRA holders to make, once a year, a rollover between accounts and take possession of the rollover proceeds individually, provided that they re-deposit those funds into their new account within a 60 day period. Many individuals interpreted this annual rollover limit to apply on an account by account basis, meaning that if they held multiple IRAs, they could make the same number of rollovers, provided that no account was rolled over more than once per year.

The Tax Court clarified that this rollover rule actually applies per account holder, meaning that the individual can only make one IRA rollover per year, regardless of the number of accounts they hold. The clarification was meant to address perceived abuses by some individuals who would open a large number of IRAs and then use the 60-day rollover provision to essentially make interest-free short-term loans to themselves without any negative tax consequences.

The Tax Court further clarified that the 12-month period of limitation does not mean merely once per calendar year. Rather, after a permitted rollover, the individual cannot make another until after 12 months, even though that period will likely extend into the next calendar year.

Note that direct custodian to custodian transfers are not affected and you can make direct rollovers as frequently as you’d like. This means that this new clarification should not impact your ability to roll your existing accounts into a single self-directed IRA, provided that the rollover is done directly from custodian to custodian.

Inherited IRA Rules. Another big rule change comes directly from the Supreme Court. Prior to last year’s decision, there was some uncertainty and disagreement as to whether an inherited IRA was subject to federal protection from creditors (as may be the case in a bankruptcy proceeding) in the same way that employer-sponsored retirement plans were. The court’s decision clarified that unless the IRA is bequeathed to a spouse, an inherited IRA would in fact be subject to the claims of creditors.

These new and clarified tax rules will not affect every owner of a self-directed IRA, but it’s important to gain at least a passing familiarity with them so that you can avoid making any decisions with your account that will unintentionally cost you or your heirs money in the years to come.

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

Posted on September 26, 2014April 13, 2021 by questadmin

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.

How Your Self-Directed IRA can Boost Your Tax Refund

Posted on September 2, 2014April 13, 2021 by questadmin

Estimated reading time: 2 minutes

As we inch closer to the tax filing deadline, we’re all looking to reduce our tax bill so that we can receive back the largest possible tax refund (or reduce the size of the check we have to send to the IRS). We can decrease the annual tax burden by utilizing the greatest number of deductions that are available.

If the deduction for IRA contributions is available to you, it can prove to be an extremely valuable benefit. Here’s how your self-directed IRA can boost your tax refund:

Deductibility for Traditional IRAs. Depending on your modified adjusted gross income (MAGI), and whether you are covered by a retirement plan at work (such as a 401(k)), the contributions you make to a traditional IRA may be tax deductible.

Individuals who are not covered by a workplace retirement plan are eligible for full tax deductibility of their contributions, regardless of their MAGI.
For single individuals who are covered by a plan at work for 2021, IRA contributions are fully deductible for a MAGI of up to $66,000 (with a gradual deductibility phase out between $66,000 and $76,000).
For married couples filing jointly, where the contributing spouse is covered by a workplace plan, full deductibility is available for a MAGI of $105,000 (with a deductibility phase out between $105,000 and $125,000).

Note that these figures only relate to the deductibility of contributions, not eligibility for contributions. In general, any individual with earned income can contribute to a traditional IRA in an amount not exceeding that earned income. In contrast, being able to make contributions to a Roth IRA (which are not deductible) will depend on your MAGI.

Tax Benefits for Roth IRAs.

Despite the fact that you can’t take a tax deduction for contributions you make to your self-directed Roth IRA, there are still some reasons for you to consider that type of account. Withdrawals from a Roth IRA are made on a completely tax-free basis, instead of having to pay taxes on withdrawals as you would with a traditional IRA.

Furthermore, Roth IRAs are not subject to the rules on required minimum distributions. If you have a traditional self-directed IRA then you are required to make specified withdrawals every year once you reach age 72. If you don’t need to take withdrawals from your self-directed IRA in order to pay your living expenses, the benefits of being able to let the balance of your Roth IRA continue to grow tax-free can be significant.

To learn more about self-directed Roth IRAs, contact an experienced custodian such as Quest Trust Company.

Common Misconceptions About the Self-Directed IRA

Posted on September 3, 2012 by questadmin

Estimated reading time: 3 minutes

As you research and review your various retirement savings options, you may hear mention of something called a “Self-Directed IRA.” There is a great deal of confusion surrounding this kind of retirement account, so it’s important to clear up some of the most widely held pieces of misinformation in order to understand exactly what a self-directed IRA is.

The IRA specialists at Quest Trust Company want to make sure you have the knowledge you need to make an educated decision about your options. They’ve put together the following list in order to help you know all the facts.

It’s Not a Separate Type of IRA. One of the most common points of confusion is that the self-directed IRA has a different legal status from a “traditional” IRA that someone might choose to open with a discount investment broker or local bank. In fact, a self-directed IRA and other IRAs are, legally speaking, the same type of account. The annual contribution limits are the same, the withdrawal rules are the same, and the permitted investment types are the same. The main substantive difference between a self-directed IRA and a traditional or Roth IRA lies with the custodian. Custodians for self-directed IRAs enable account holders to make the investment types that are legally permitted within an IRA, but which other IRA custodians usually do not permit.
Not Every Investment Type is Permitted. It’s true that self-directed IRAs allow a greater number of investment choices as compared to what most IRA custodians permit in their accounts. But this doesn’t mean that the self-directed IRA is a “free-for-all” or that an account holder can invest in absolutely anything they want. The IRS rules on prohibited investments still apply, and prevent a self-directed IRA holder from investing in various asset classes, including collectibles or life insurance policies.
Self-Dealing Rules Still Apply. The standard rules which prohibit self-dealing within an IRA still apply to self-directed IRAs to the same extent as other IRAs. For example, having a self-directed IRA will certainly make it easier to invest in real estate, but the account holder is not allowed to sell their own property to the account, nor is the account holder (or any prohibited parties directly related to the account holder) allowed to use that real estate for their own personal use.
You Can’t Get “Checkbook Control” Over Your IRA. One of the greatest points of confusion surrounding self-directed IRAs is whether you can ever access your account funds and quickly make investments through “checkbook control” over the IRA. The theory is that the account holder sets up a limited liability company, then the IRA purchases all of the LLC interests (while the account holder is still the LLC manager), thereby giving the LLC the power to invest those funds without having to go through the IRA custodian. Unfortunately, this investment technique has never been directly approved by the IRS, and there is a great degree of uncertainty in whether it would withstand a legal challenge.

When you have a clearer understanding of what a self-directed IRA is and is not, you may feel more comfortable with the account, and how it might fit into your overall retirement strategy. To help gain a better understanding, contact Quest Trust Company today at 800-320-5950 for a no-cost, no-obligation appointment. Their specialists can help you interpret your options with a self-directed IRA and put you at ease about your retirement planning decisions.

The Truth About “Checkbook Control” Over a Self-Directed IRA

Posted on August 8, 2012November 30, 2018 by questadmin

Estimated reading time: 3 minutes

You’ll hear a lot of things when you start researching the self-directed IRA as a way to save towards your retirement. Some of these things will be true, some will be questionable and others will be flat out wrong.

The basic elements of a self-directed IRA are beyond dispute. A self-directed IRA can be setup either as a traditional IRA or a Roth IRA, and the type you choose will determine your rights and obligations with respect to contribution limits and tax deductibility.

Having a self-directed IRA will enable you to invest in the many asset types that are legally permitted, but which traditional IRA custodians (such as banks, credit unions and investment brokerages) do not allow. Permitted investment types include investments in real estate, making mortgage and other loans to other individuals, buying businesses, purchasing tax liens and making private equity investments.

But one aspect of self-directed IRA is that some custodians handle differently the ability to exercise “checkbook control” over your account (also known as checkbook LLC or checkbook IRAs). According to some IRA custodians, the process for setting up this type of account is as follows: the account holder directs their custodian to use funds from the IRA to purchase all of the units of a new LLC that the account holder creates, the LLC opens a checking account and deposits the funds it received from the investment by the IRA, and the account holder now has the ability to use the LLC’s checking account to make investments. The primary selling point of this structure is that the account holder can make investments quickly, without having to involve the custodian.

Unfortunately, the legal basis for checkbook control IRA isn’t one that’s explicitly set forth in the IRS regulations. Rather, self-directed IRA custodians who offer checkbook control over retirement accounts have to rely on an aggressive (some might say overly aggressive or perhaps even unreasonable) interpretation of a single enforcement case. Because the legal basis for a “checkbook control” IRA is so uncertain, individuals who pursue this type of structure are risking the integrity of the account and even its tax status. If the IRS ever issues a clear but unfavorable pronouncement about these types of IRAs, the account holders could be faced with significant penalties and tax liabilities.

Perhaps more importantly, the supposed need for checkbook control over an IRA account is based on a faulty assumption – that there’s necessarily a need for that type of access to IRA funds in the first place. Most investors take a long term investment outlook with their IRA funds, so the ability to put their account funds to work on a day’s notice is not important. Furthermore, retirements savers can choose a self-directed IRA custodian who responds quickly to their investment directives, and eliminate the need for checkbook control.

Even if you choose to take an aggressive position with your IRA investments, don’t try to push the envelope with respect to your account structure. It is prudent to stay away from self-directed IRAs that promise you checkbook control over your funds.

Quest Trust Company, Inc. is guided by a relentless need to supply the American public with the proper FREE education on what is truly possible with all retirement and qualified plans. We change people’s lives through IRA investment education and free people’s IRAs to invest in what they know best. For a free consultation, visit us at: http://www.questira.com/