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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.

Tips for Using Your Self-Directed IRA to Invest Internationally

Posted on July 31, 2014 by questadmin

Estimated reading time: 3 minutes

Seasoned investors often look to make investments wherever they feel gives them the best opportunity for the highest return. In some cases this may lead them to invest outside of the U.S. And individuals who have a self-directed IRA may also be interested in using that account to make international investments.

Identifying International Investments.

Your first line of research should be to investigate relatively straightforward investments such as stocks, mutual funds and exchange-traded funds to see if you can find investments that have appropriate international exposure.

Keep in mind that not everyone who is interested in international exposure will want to embrace that exposure to the exclusion of other markets. For example, did you know that a significant portion of the revenues from one of the most iconic American brands – McDonald’s – comes from their international territories? You may be able to find a number of different options with your research that can provide you with the level international exposure you are looking for.

Have a Trusted Advisor.

If you are interested in other types of international investments, including those that are “on the ground” outside of the U.S., then make sure that you always have expert assistance and advice to help you understand all of the parameters of any potential investment.

For example, it’s not uncommon for areas outside of the U.S. to have restrictions or limitations on who can own real estate. In some instances noncitizens are prohibited from owning property outright. If you want to pursue that type of investment, then you need to structure some type of non-majority ownership interest along with a local investor in order to close the deal. Getting expert assistance on these types of arrangements is essential.

Understand Your Taxes.

Recall that while self-directed IRAs provide you with the maximum degree of investment flexibility as compared to other retirement savings vehicles, certain aspects of your investing may have negative implications. For example, borrowing money inside an IRA in order to purchase real estate or make other investments will generally trigger UBTI (unrelated business taxable income) implications. Certain international investments may trigger similar concerns.

By the same token, you’ll need to understand whether making an investment internationally will subject you to any legal requirements or obligations as a result, including any foreign tax liabilities. Many countries have tax treaties with the United States in order to prevent undue taxation of investments, but it’s important that you research and understand all the implications of a potential investment.

Have an Exit Strategy.

If you do choose to invest in assets that are physically located outside the US, be sure to have given some thought to your long-term investment strategy, including when and under what conditions you will want to exit your position or liquidate your investment. If this process is more time-consuming than you are used to for a corresponding U.S.-based investment, for example, then you’ll need to plan accordingly.

As with any investment, the most important aspects to investing internationally, particularly if you are using your self-directed IRA, is to have a plan and do your homework.

Flip Houses With Your Self-Directed IRA

Posted on March 23, 2014 by questadmin

Estimated reading time: 3 minutes

One of the most powerful aspects of an IRA is that its structure permits you to grow your investments on a tax-deferred (in the case of traditional IRA) or tax-free (in the case of a Roth IRA) basis. With a long-term investment focus, you have the potential to grow your account balance for decades.

But even if the scope of your account is long-term, that doesn’t mean that the time frame for the individual investments within your self-directed IRA necessarily have to be long term. One potentially lucrative investment type with a relatively short-term outlook is flipping houses. And yes, you can make these types of investments with a self-directed IRA.

What is a Real Estate “Flip?” Some investors may not be familiar with the concept of flipping, so let’s first talk a briefly about what exactly that is. Flipping a piece of real estate refers to the process of buying a home and then quickly putting that property back on the market for sale. Between purchase and sale the investor (the “flipper”) may or may not do renovations or other improvements to boost the resale value. But in many cases the opportunity arises simply because the investor believes the property is being sold for less than its true value.

Using Your IRA For Real Estate Investing. Unfortunately, there is a lot of misinformation in the marketplace, and many retirement savers don’t realize that they can use their IRA funds to engage in flipping houses or other real estate investment activities. Federal law explicitly authorizes the use of IRA funds for these investments – any inability to use an IRA to do so is a limitation that’s imposed by many IRA custodians in order to make their job easier. A custodian such as Quest Trust Company will let you make every type of IRA investment that’s permitted by law.

A Few Words About Leverage. Depending on the balance in your self-directed IRA, you may be able to flip real estate as an investment strategy by using cash for all of your purchase transactions. Doing so would certainly make the process go more quickly, thereby potentially allowing you to engage in more transactions and boost your returns.

But if you choose to use leverage by borrowing money to purchase real estate for flipping, it’s important to understand that you may be incurring a current year tax liability because of that borrowing. Using leverage to make investments within an IRA can generate what’s known as “unrelated business taxable income.” And unlike other types of income you generate with your IRA, unrelated business taxable income is not tax exempt

Finally, if you’re considering flipping houses with your self-directed IRA, make sure to go into each transaction well educated and well prepared. Real estate investing (and flipping in particular) might be fun and exciting, but it’s still investing. So if you’re not already experienced with this type of investment, start with smaller transactions and proceed cautiously until you learn more.

Risks to Watch Out for With Self-Directed IRA

Posted on March 20, 2014 by questadmin

Estimated reading time: 3 minutes

Self-directed IRAs can be a very powerful tool to help you reach your retirement goals., But along with this powerful account structure come certain risks that you need to be on guard against……..

Borrowing Money or Using Leverage. Self-directed IRAs are so valuable largely because they can be used to purchase various types of investments that traditional IRA custodians would not allow. A retirement saver with a self-directed IRA at a custodian such as Quest Trust Company can use their account to purchase private equity investments, precious metals and real estate. It’s even possible in some circumstances (and subject to certain conditions) to take out a mortgage with a self-directed IRA in order to borrow money to purchase larger pieces of real estate.

While this type of borrowing or leverage activity is permissible, it also comes with certain tax consequences. Specifically, any investment income is generated using borrowed money or leverage within a self-directed IRA will generate a current year tax liability for the account holder. This can come as a surprise to some retirement savers, since most other investment activities and the gains within an IRA did not give rise to similar liabilities.

Self-Dealing. The laws and regulations regarding IRAs are very clear and strict when it comes to the prohibitions on self-dealing. “Self-dealing” is receiving a benefit from your IRA before you take any formal distribution of assets from the account. And the notion of “benefit” is construed very broadly.

For example, you might choose to use your self-directed IRA to purchase a vacation cabin near a ski resort, with the idea of renting it out now to generate income for your IRA, eventually living in the cabin when you retire. This is a perfectly valid investment within a self-directed IRA, but you cannot personally use that cabin (nor can any family members or “related persons”) before you retire – even if you pay the same rental fees that an unrelated person would. Engaging in this type of self-dealing could result in significant financial penalties.

Investment Risks. Sometimes the funds in an IRA can seem a little removed from an individual’s other assets, particularly when that individual might not have penalty-free access to those funds for decades. This can sometimes lead the account holder to take investment risks with those funds that they wouldn’t feel comfortable taking with their non-retirement accounts.

This can go too far in the other direction as well. Given the importance of a retirement savings account, some individuals are overly conservative in their investment choices within a self-directed IRA. It’s true that capital preservation is important, but that shouldn’t be your only consideration, and it shouldn’t necessarily come at the expense of investment growth. For example, you could be very confident that your account balance would never decline, even temporarily, by investing all of your retirement assets and bank CDs. However, if this is your only investment type for 30 years, you may find it difficult to reach your retirement savings goals.

By understanding all of the rules that apply to self-directed IRAs, you’ll be in a much better position to reach your retirement goals

Things to Avoid when Considering Real Estate Investments for Your Self-Directed IRA

Posted on October 10, 2013June 7, 2019 by questadmin

Estimated reading time: 3 minutes

Most individuals generally approach potential investments by looking for those that meet certain financial or business criteria. It’s often useful to approach investment decisions by identifying what characteristics you’re looking for.then analyzing the various possibilities you have available to find those that meet your criteria.

But it’s also important to be aware of certain types of investments that you’ll want to actively avoid. In the context of real estate investing. here are some factors to consider.

Avoid Rushed Transactions. Successful real estate investing often depends on having as much information as possible about a property before acquiring it. In addition to market research, you’ll also want to conduct a thorough inspection of the property itself, Often times you’ll need to bring in outside experts to help with the inspection, and this takes time to schedule and complete. Avoid transactions where you find the seller trying to unduly rush the process – if you haven’t had the time to complete your due diligence on any property, don’t be afraid to walk away from the transaction.

Avoid Leverage. When you’re looking at potential real estate investments for your self-directed IRA, it’s generally a good idea to avoid borrowing money to acquire property. Not only will leverage create UBTI (unrelated business taxable income) issues, but borrowing money will also put your IRA on the hook for paying that money back. Remember that any borrowing done by your self-directed IRA must be repaid with funds in or generated by your account – using outside money to satisfy the obligations of your IRA will trigger additional tax penalties.

This isn’t to say it’s never appropriate to use leverage. In fact, when used strategically it can greatly boost your investment returns. But you may need to change your mindset from many first time real estate investors who’ve only had experience with real estate in the form of taking out a mortgage to buy their own homes, and think that that’s always the best way to move forward.

Avoid Becoming Emotionally Involved. Finally, you want to avoid any temptation to become emotionally connected with any real estate investments you make. It’s easier to become attached to a home or piece of property than it is to a stock investment (although some investors do form unreasonable attachments to certain stock investment), and fail to treat the property for what it is – an investment that you’re purchasing with your self-directed IRA in order to build your wealth for retirement,, By introducing an emotional element into your investment decisions, it becomes much harder to reach your goals.

Again, this is likely to stem from the fact that many individuals form emotional attachments to the real estate that they purchase to live in. Make sure to draw a distinction between your personal real estate holdings and those you hold for investment purposes within your self-directed IRA.

By avoiding potentially problematic real estate transactions while you’re keeping an eye out for the best ones. you’re sure to reach your long term financial goals.

Can You Use a 1031 Exchange in Your Self-Directed IRA?

Posted on October 4, 2013May 6, 2021 by questadmin

Estimated reading time: 3 minutes

You may not be familiar with so-called “1031 Exchanges” (named such after the section of the Internal Revenue Code that authorizes them). A 1031 Exchange provides an exception to the tax laws by allowing you to postpone paying taxes that are due on the gain realized from the sale of real estate if you immediately reinvest your proceeds in a similar property as part of a qualifying like-kind exchange.

Note that simply selling a property and buying a new property will not qualify as a Section 1031 exchange. In order to avail oneself of this tax code benefit, the purchase and sale transactions must be mutually dependent upon one another. For many investors, using a third-party facilitator or intermediary to help structure the transaction is the best way to ensure legal compliance.

Applicability to Investments Within Self-Directed IRAs. You may be wondering why a section 1031 exchange could ever be relevant to their self-directed IRAs. After all, aren’t IRAs and the investment activities therein tax-deferred (in the case of a traditional IRA) or tax-free (in the case of a Roth IRA)? While that’s generally true, strictly speaking not every IRA activity qualifies for these tax benefits.

Debt Financing Triggers UBTI. Individual retirement accounts are only tax advantaged to the extent that they engage in activities that are related to their primary purpose. By law, this means that any income or gains that are generated from debt financing will not be exempt from current taxation. Therefore, if your self-directed IRA borrows money in order to purchase real estate, then the portion of the income and investment gains that are attributable to the financing will be subject to current year taxation.

If you’ve held investment real estate within your self-directed IRA for a long time, and you used to financing to acquire it, then a straightforward sale of a property may trigger a significant tax bill for you in a year of sale. And remember that this tax liability can’t be satisfied using funds from within the IRA (at least not without triggering potential early withdrawal penalties).

Using a 1031 Exchange to Defer UBTI Tax Liabilities. Let’s say your self-directed IRA holds a piece of real estate that has significantly increased in value, but the market conditions are such that you believe now is the time to dispose of the property and blocking me. If your IRA used financing to originally purchase the property, the potential tax liability might be a financial disincentive for you to make your desired investment decision. But by using a 1031 exchange within your self-directed IRA, you’ll postpone having to pay for those UBTI liabilities until years (or possibly even decades) later.

Understand that section 1031 transactions are relatively specialized, and should not be undertaken without a certain amount of due diligence beforehand. In addition, many investors find that using professional assistance is the best way to make sure that things go smoothly.

Deciding When it’s Time to Sell a Real Estate Holding From Your Self-Directed IRA

Posted on September 21, 2013June 7, 2019 by questadmin

Estimated reading time: 3 minutes

Even if you’re a firm believer in the value of a “buy and sell” investing philosophy, you’ll still likely agree that there are times when it’s appropriate to sell an investment from your portfolio. And given the effort and transaction costs that go into real estate investment transactions, it’s important to be confident that you exit from a real estate holding when the time is right. Here are some considerations you’re certain to make when conducting your analysis.

You Need the Liquidity.You may decide that it’s time to sell a particular piece of real estate from your self-directed IRA if you need the liquidity. Unlike other types of investments, most real estate holdings are an “all or nothing” proposition. In other words, whereas you can pare down your investments in a particular stock by selling a portion of your shares, you usually have to sell your entire piece of real estate outright in order to exit the investment.

If your financial situation or your overall investment strategy dictates that you have more cash available in your self-directed IRA, then selling a real estate holding might be the best path towards improved liquidity.

Market Conditions Have Significant Changes. When real estate market conditions change significantly, the best financial decision may be to sell your real estate holdings. For example, this might be because the relevant market for the real estate you hold is no longer strong, and you’d rather have your account funds working for you in a different asset class.

On the other hand, you might believe the real estate market has gotten overheated, and that the market value for a piece of property you hold is significantly in excess of its intrinsic value. This might dictate an immediate liquidation so that you can take advantage of the favorable market conditions.

Your Investment Assumptions Have Changed. When you used your self-directed IRA to make the initial real estate investment, you had a number of assumptions in mind. Perhaps you bought a distressed property in a location that you thought would turn around economically within the next five or 10 years. Or maybe you bought a multi-family unit based on assumptions of the cash flow it would generate for your self-directed IRA. But if you’ve found that your assumptions aren’t holding true, you may determine that it’s best to exit that particular real estate investment and direct your funds elsewhere.

Things are Going According to Plan. Finally, you simply may decide that it’s time to sell a real estate holding from your self-directed IRA because things have gone according to plan. If you initially made the investment looking for a particular amount of capital appreciation, and you’ve now reached that amount, you may choose to follow through on your initial plan to sell.

If you aren’t familiar with some of the administrative steps necessary to purchase or sell real estate within a self-directed IRA, contact Quest Trust Company today.

Check out how Quest Trust Company helps in investment decisions with Self Directed IRA. Click here to know more.

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/