convert IRA Archives - Quest Trust Company

How Much Retirement Income Can You Generate With Real Estate Investments?

Posted on September 15, 2015October 31, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

Why do you save for retirement? At the most basic level, you probably save so that you’ll be able to pay for your living expenses once you reach your desired retirement age (whatever that age may be). One of the best ways to plan for your retirement finances is to have the goal of putting together a nest egg that generates enough income every year to cover some or all of those living expenses. This will often be preferable to having to liquidate your investments in order to pay your living expenses, and be at risk of depleting your account too quickly, and effectively outliving the usefulness and value of your retirement savings.

Unfortunately, individuals who aren’t familiar with self-directed IRAs, and the additional investment opportunities that those accounts can provide as compared to IRAs with traditional custodians, might take an overly narrow view of the types of investments that can generate meaningful income.

More specifically, many would consider an “income investment” to be something like a municipal bond or U.S. government bond, or a corporate debenture, or perhaps even publicly traded stocks that pay quarterly dividends. While these are certainly income generating investments, they only scratch the surface of what’s available to a retirement saver who has a self-directed IRA.

Private Debt Investments. Self-directed IRAs are authorized to invest in private debt instruments. This can include not only personally guaranteed notes (lending money directly to an individual), but also borrowings from businesses, and even private mortgages. That’s right, with a self-directed IRA you can make loans to people who are looking to buy a home, and use the home as your security for repayment — just like a traditional mortgage lender would do.

These types of investments have the potential to generate a significant income stream, and the more risk you’re willing to take with respect to repayment, the greater that income can be.

Real Estate. Speaking of home buyers, you can use a self-directed IRA to invest in real estate directly, and generate income from renting the properties you buy. In the residential marketplace, stagnant incomes have combined with increasing real estate prices and tighter lending standards to create a huge demand for rentals. In some areas the growth in prevailing rents has actually exceeded the rate of growth for home prices.

And you’re not limited to residential properties when you invest with a self-directed IRA. You can use your account to purchase commercial properties, including office, retail, and industrial properties. These types of investments can provide exposure to a different type of risk if you’re looking to diversify your retirement investment portfolio, but they can still generate a healthy level of periodic income.

Obviously, making these types of investments is a significantly more complicated process than simply buying a corporate bond. When considering these types of investments with your self-directed IRA, be sure to seek out qualified professional assistance to help you as necessary.

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 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.

Increase Your Private Investment Allocation With Your Self-Directed IRA

Posted on March 23, 2015October 31, 2018 by questadmin

Estimated reading time: 3 minutes

Individual retirement accounts are perhaps the single most powerful tool you have in your retirement planning arsenal. You have greater control and flexibility over your retirement funds as compared to an employer-sponsored 401(k), and a Roth IRA can provide significant benefits for tax savings and estate planning purposes.

Self-directed IRAs take things a step further. Having an account with a custodian such as Quest Trust Company will allow you to invest in an even wider range of asset types, including a variety of private investments. Here are some ways to increase your portfolio allocation into these investment types by using a self-directed IRA.

Private Mortgages. Regardless of the state of the economy, people are always going to want (or need) to buy and sell homes. The IRS regulations permit you to use a self-directed IRA in order to issue private mortgages. Provided you understand the process fully, follow all legal requirements and evaluate your risks accordingly, you may find this to be a significant boost to your portfolio.

In fact, when prevailing interest rates increase and it becomes more difficult for the average home buyer to get a loan from a bank, you may have even more opportunities for making private mortgages.

Private Equity. Similarly, a self-directed IRA can be used to make private equity investments as well. Depending on the size of your portfolio and your overall financial situation, this can be a way to gain a completely unique risk/reward exposure that wouldn’t be available in any other investment you could make.

Some private equity investments will require that the investor be a so-called “accredited investor”. This is a legal term defined by the SEC to mean a person who either (1) has a net worth of at least $1,000,000 (not including the value of their primary residence), or (2) has an annual income of at least $200,000 over each of the last two years (or has a joint income of $300,000 in each year with their spouse) and a reasonable expectation to achieve the same income this year.

Note that even if you’re looking to invest with your self-directed IRA and your account meets these standards, you’ll still need to meet those standards individually.

Private Partnership Interests. You can use your self-directed IRA to invest in various types of private partnerships. These may include traditional businesses as well as natural resources development opportunities such as those that can be found in the oil and gas industries.

Remember that when you invest your self-directed IRA in a private partnership, you’re prohibited from benefitting from it individually while the investment is still held within your account. So if the partnership invests in vacation real estate properties, neither you nor your family or any other related parties can stay in the property while you’re still invested.

Regardless of the private investments you’re considering making, be sure to do your research and understand all the risks before you commit your account funds.

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.

Why You Should Start a Self-Directed IRA as Early as Possible in Your Life

Posted on November 11, 2014December 9, 2019 by questadmin

Estimated reading time: 3 minutes

Many young adults tend to focus on the immediate year tax benefits of making contributions to an IRA. This is certainly one important factor in maximizing the potential of an individual retirement account, but it might not be the most valuable one.

Perhaps the biggest benefit from having an IRA is that all investments income and gains that are kept inside the account (that is, not taken as a distribution by the account holder) occur on a tax-deferred or tax-free basis. The upshot of this tax-advantaged growth is that young adults should be working very hard to start a self-directed IRA as early as possible in order to maximize their benefit.

Let’s take a closer look

Consider two individuals, one of whom makes their first $5,000 contribution to a self-directed IRA at age 25. The other individual makes their first $5,000 contribution at age 35. By the time each of these individuals reaches age 55, the value of their investments will be very different. Assuming an 8% annual rate of return, the first individual’s contribution will be worth a little over $50,000. The second individual’s same $5,000 contribution, made a bit later in life, will be worth less than half that – just over $23,000. Giving your contributions as long as possible to grow will be the key to a prosperous retirement, and that means starting an account and making annual contributions as early in life as possible.

Let’s now take this hypothetical scenario one step further and compare the long-term differences between a Roth self-directed IRA and a traditional self-directed IRA. Let’s again look at what happens to a contribution to each type of account after 30 years of growth. We’ll use the same assumptions (an 8% annual return and a 30% tax rate) for a $5,000 contribution.

After 30 years, that contribution to each type of account will have grown to just over $50,000. But because distributions from a traditional IRA are subject to tax, the value of that $50,000 account will actually be $35,000 once the distribution is taken and the taxes are paid. Distributions from a Roth IRA can be made tax-free during retirement, so that $50,000 is actually worth $50,000 to the account holder.

But what about the tax deduction that may have been available for the traditional self-directed IRA in the year of contribution, you might ask. At a 30% tax rate, that deduction will be worth $1,500. Assuming the account holder invests all of hat money (and that’s a big assumption) in a taxable account, the $1,500 will grow to approximately $15,000 after 30 years. (Note that this is a best case scenario representing all capital gains, as any reinvested dividends would be taxed, thereby reducing that amount). But that investment growth will be subject to tax, so the after tax value would be much less.

This second example helps demonstrate why, for many account holders, a self-directed Roth IRA may be preferable to a traditional account.

Can You Use a Self-Directed IRA to Invest in Tax Liens?

Posted on September 14, 2014December 9, 2019 by questadmin

Estimated reading time: 3 minutes

When you have a self-directed IRA as part of your retirement strategy, you’ll have a much wider range of investment options available for your nest egg. With a custodian such as Quest Trust Company, you’ll be able to invest in precious metals, private equity, and real estate. Individuals who first become interested in opening a new self-directed IRA often get that interest because they think they might be interested in making real estate with their retirement funds.

But direct investments in property are only one way to invest in real estate related items. You can use a self-directed IRA to make private mortgage loans secured by real estate, and you can invest in tax liens as well.

What are “Tax Liens”?

A tax lien is essentially an encumbrance worked at that place on certain property (usually real estate) when the owner of that property fails to pay their taxes. There are several important legal implications of tax claims. For the property owner, the most important implication is that if they fail to make good on their tax debt, then the taxing authority (generally a local government) will eventually have the legal right to foreclose and force a sale of the property in order to

Local governments do this out of necessity. Simply put, they need the cash immediately, in order to fund operations, and can’t afford to wait for the taxpayer to make good on their property tax obligation. In order to obtain their funds, the local government will sell the right to receive those tax revenues to a private investor. The investor receives the legal right to receive payment of the tax from the delinquent property owner, plus interest that occurs at a predetermined rate.

Investing in Tax Liens With a Self-Directed IRA

Tax liens are essentially a debt instrument secured by a piece of property. As such, they are a permissible investment class for a self-directed IRA.

However, unlike many investment types that you may be familiar with, the actual process for making investments in tax liens varies from local government to local government. One common approach is for the local government to auction off each lien individually, with the beginning at the face value of the debt owed. In most tax lien auction scenarios with more than a few properties up for bid, there will be a range of premiums that are bid.

The Right to Receive Property

The biggest source of confusion surrounding investments in tax liens is the right of the tax lien investor to take possession of the underlying property in order to receive payment. While it’s generally true that after a certain period of nonpayment the holder of the tax lien can foreclose upon the property, this procedure is not available quickly, and there are usually multiple opportunities for the taxpayer to redeem their property interest.

The bottom line is that tax liens may be a suitable investment for your self-directed IRA, but you should not make those investments in anticipation of taking title to real estate at a deep discount.

Why You May Want to Bring Dividend Stocks into Your Self-Directed IRA

Posted on May 13, 2014 by questadmin

Estimated reading time: 2 minutes

Even though self-directed IRAs allow account holders to invest in a very wide range of investment types, there’s sometimes a tendency for those account holders to get locked into those that they might not invest in with their taxable accounts. But depending on your investment goals and financial needs, some of these more “common” investment types can be a great fit.

Take dividend-paying stocks, for example. These are a mainstay of many investors’ taxable account portfolios, but they may be a great fit for the self-directed IRA as well. Here’s why.

You Can Adjust Your Holdings Easily.

Owning real estate can provide a wide range of investment advantages, to be sure. But if you’re holding property in your self-directed IRA directly (as opposed to holding shares of a real estate investment trust, for example), then you need to fully understand how liquid or illiquid your investment might be.

Liquidity issues with respect to real estate can come in two basic variants. First, depending on the local market conditions for your particular piece of property, you may not be able to sell their property when you want or need those funds. Secondly, for all intents and purposes liquidating real estate is an all or nothing approach.

You’ll have better options with dividend paying stocks. For example, if you hold dividend stocks you can sell 5%, 10% or 50% of your holdings (or increase your holdings by similar amounts) quite easily. But you can’t quickly or easily sell half of a single-family home that you own for rental purposes.

Dividend Stocks Have an Established Track Record.

Publicly traded companies that have been around for decades have a long established track record of paying dividends. While there’s very little in the investment world that’s guaranteed, you can be confident that companies which have raised their dividend payouts every year for the last 10, 20 or more years are going to make it a business priority to continue doing so in the future.

Easy Reinvestment.

Holding any investment that generates regular income comes with a built in concern; namely, how you’re going to put that dividend income to work. For example, with a real estate investment you receive rental income checks each month. But you can’t use that income to buy more of the same house since you already own it. You need to find some other way to put that income to work.

With the income you receive from dividend paying stocks, it’s possible to simply purchase more of the same stock. After all, if you believe in the investment enough to hold it in your account, then you’d probably be comfortable owning more of it. And owning more stock means that your next dividend payment will be higher. That’s the power of compounding.

2014 IRA Contribution Rules and Limits

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

Estimated reading time: 3 minutes

Chances are that you’ve either just recently filed your 2020 taxes, or will do so soon. One of the biggest ways to have a positive impact on your overall tax bill is to make tax-deductible contributions to an IRA. Even if you’re not eligible for tax-deductible contributions, making nondeductible contributions can provide significant tax savings in the future, and help you save for your retirement.

As you may already know, your eligibility to make contributions to IRAs is determined every tax year, and if you fail to maximize your contributions in a particular year, there’s no way to make up for it in following years. Annual IRA contributions are a “use it or lose it” proposition, so it’s important to make your contributions each and every year.

Standard Contribution Amounts. For 2021, the limit for an individual’s contributions to their IRAs is $6,000 (in aggregate across all accounts, not $6,000 per account). This amount is unchanged from 2020. The annual “catch-up” additional contribution for individuals aged 50 and over also remains unchanged at $1,000.

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.

Roth IRA Eligibility. In 2021, there is also still eligibility limits for individuals to make contributions to a Roth IRA. Single taxpayers with a MAGI of $125,000 can make a full contribution, and those with a MAGI between $125,000 and $140,000 can make a lesser contribution. Married taxpayers can make full contributions where their MAGI is $181,000 (and lesser contributions for a MAGI between $198,000 and $208,000).

Finally, note that while there are income limits for making contributions to a Roth IRA, there are no longer any income limits for taxpayers to convert Traditional IRAs to Roth accounts. This can be a very valuable and useful tax planning tool. Contact an IRA custodian such as Quest Trust Company for more information.