Quest Trust Company›Blog›Directed Ira

Tag: Directed Ira

Getting Started with a Self-Directed IRA When Your Nest Egg is Small

Posted on by Ingrid Chavez
Estimated reading time: 5 minutes

Investing can be a tough proposition for many, especially those who are just starting out and only have a small amount of money. It can feel like investing such a tiny amount of money will never help us meet our investment goals or have enough in our retirement fund. However, investing small amounts of money now can lead to healthy returns later on down the road. You might have initially been drawn to a self-directed individual retirement account (IRA) because of the flexibility that this account type offers by allowing you to invest in alternative investments like real estate, promissory notes, and private entities. However, it can be hard to know how to get started, so we are offering a few tips to help you get on your way to successful investing.

Does Small Mean Less Experienced?

If your nest egg is relatively small because you’re just starting out with your retirement savings and don’t have a lot of investing experience, then don’t feel pressured to start investing in the most complicated and advanced investment types right away. Even though the self-directed IRA structure permits investments in a wide range of alternative assets, you’re still free to choose ones that you have more experience and familiarity and are comfortable with the level of risk.

Maximize Your Contributions Every Year

When your self-directed IRA balance is relatively small, it’s vital that you make the maximum contributions to your account each and every year. If you fail to make the maximum contribution in any given tax year (the contribution limit for the 2023 filing period is $6,500, with an additional $1,000 allowed for taxpayers ages 50 and over), you won’t be able to make up for that lost opportunity in later years. If you can maximize your contribution every year, it will help your nest egg grow that much faster.

Consider Maintaining Two Accounts

It’s a common misconception, but taxpayers are not limited to having a single IRA. In fact, it can be good practice to maintain both a traditional self-directed IRA (which grows tax deferred) as well as a Roth (which grows tax free), and then decide where to make your deposits each year based on the tax deduction advantages you might be able to get from contributing to the traditional account. The key is to deposit the maximum each year, regardless of the self-directed IRA you choose, and remember that it’s always possible to convert a traditional self-directed IRA to a Roth account whenever you decide that you only want or need a single account.

Rollover Your 401k

Another way to grow your self-directed IRA is through the use of rollovers. Whenever you leave an employer, you’re permitted to roll over the funds you’ve accumulated in your 401k to an IRA, and there is no limit to the amount you can rollover. This can be a great technique to increase the amount of money in your IRA and open you up to more investment options. Another benefit of a rollover is you can maintain tax-deferred status of your retirement assets without having to pay current taxes or early withdrawal penalties.

Invest in a Real Estate Investment Trust (REIT)

REITs can be a great option because they allow investors to invest a small amount of capital in pooled real estate projects and housing developments. REITs provide an attractive alternative for those looking to diversify their investments without directly investing in real estate. Also, because they distribute a large portion of its rental income to shareholders in the form of dividends, they can provide a steady cash flow to investors as a source of passive income. Since REITs are professionally managed by experienced real estate professionals, they are responsible for acquiring, managing, and disposing of properties in the portfolio, which help provide comfort to you knowing that you are minimizing risk with a more secure investment opportunity.

Partner with Other Accounts or Investors

Another great option when you don’t have a lot of funds to invest on your own is partnering. Self-directed IRAs can be used in partnership with other entities for investment opportunities. This strategy involves splitting ownership percentages between the IRA and the other party/parties involved. Each party has a percentage of ownership in the investments which is set at the beginning and remains the same throughout the investment. Profits are distributed based on the ownership percentage, and expenses are split accordingly. We go into more detail on the topic in our article Maximize Your Investments Funds With Partnering – Quest Trust (questtrustcompany.com)

Learn the Power of Real Estate Options

This is one of the most powerful tools for real estate investors. An option is basically a contract between the buyer and seller giving the buyer the option to purchase the property for a fixed price within a certain timeframe. The buyer has the right, but not the obligation, to buy. Property owners agree to options for several reasons, including timing income for tax purposes, obtaining non-repayable money, and negotiating flexible options. This is especially true for owners in pre-foreclosure situations.

Quest Founder H. Quincy Long goes into much more detail about real estate options in this video Real Estate Options: Learn About This Creative Investment “Option” for Small IRAs – YouTube.

There are so many choices available that it can be overwhelming when you are getting started developing your investment strategy. That’s why at Quest, we believe in providing free education to encourage more investors to take control of their retirement and achieve their financial goals. We offer 2-3 educational events per week to help investors learn more about their options with self-directed accounts. For more information about our events and how to register, go to Self Directed IRA Live Events & Webinars | Quest Trust Company. If you have any questions about your options, you can schedule a free 1 on 1 consultation with one of our IRA specialists.

 

 

 

Why It’s Important To Coordinate Your Taxable Investments With Your Self-Directed IRA Investments

Posted on 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.

Increase Your Private Investment Allocation With Your Self-Directed IRA

Posted on 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.

Does My Level of Retirement Savings Justify a Self-Directed IRA?

Posted on by questadmin
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.