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Searching for a New Self-Directed IRA Custodian? Consider the Following Factors

Posted on September 24, 2015December 6, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

As individuals search for new ways to get the most out of their retirement savings, financial services providers are engaging in increasingly competitive practices in order to bring in new business. In fact, you may notice that every year, particularly around tax time, you’re bombarded with promotions from traditional IRA custodians (such as banks and discount brokers) looking to offer financial incentives to entice you to open new accounts with them. Even in the self-directed IRA marketplace, you may find that you have multiple options for custodial services.

In addition, if you already have a self-directed IRA you still may find yourself in the market for a new custodian — perhaps your account has grown to a level where you want a higher level of service, or you’re simply looking for something new. Here are some factors to consider when you find yourself searching for a new self-directed IRA custodian.

Experience. As self-directed IRAs become more prevalent and better understood by retirement savers, a number of financial institutions have entered the fray to offer custodial services. Not all of these companies have the same degree of expertise, however. As you search for a new custodian for your self-directed IRA, look to those that can point to a proven track record of providing custodial services.

Self-Directed IRA Specialization. In fact, you may wish to limit your search to companies that specialize in self-directed IRA custodial services. If a custodian is not distracted (and isn’t tempted to try to upsell you) with an overly-broad range of financial services, you can be more confident that you are receiving the best degree of service. In addition, verify that any custodian you are considering offers a full range of self-directed IRA services, including the opportunity to provide precious metals safekeeping and real estate related transactional services.

Pricing. Of course, with specialization and expertise comes cost. Don’t be tempted to compare the prices of different custodians without being sure that you’re comparing similar levels of service. After all, the idea that “you get what you pay for” often holds true with respect the self-directed IRA custodial services.

Opportunity to Learn. It’s important to understand exactly what types of services you can expect from a self-directed IRA custodian. For example, as part of their custodial services, no self-directed IRA custodian should be providing you with specific investment advice with regards to your individual account. Still, there are other ways that you can get assistance with your account. Look for a custodian that provides learning resources and other materials, perhaps something akin to a knowledge base.

Chances are you’ve developed some skills as a consumer, and know how to comparison shop. Rather than buy the first product you see, you take the time to compare the various pluses and minuses of the various options you have, before choosing the product that provides you the overall best deal. You can apply these skills with great effect the next time you’re looking for a new self-directed IRA custodian.

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

Posted on September 10, 2015April 13, 2021 by Ingrid Chavez

Estimated reading time: 2 minutes

While you might have been initially drawn to a self-directed IRA because of the investment flexibility that this account type offers when compared to IRAs with traditional custodians (e.g., being able to invest in precious metals, and real estate, and private companies), it’s true in all areas of investing that not every investment option is suitable for every investor.

Make the Maximum 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 2021 filing period is $6,000, with an additional $1,000 allowed for taxpayers age 50 and over), you won’t be able to make up for that lost opportunity in later years. Once the chance to make the maximum deposit has passed, it’s gone forever.

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 as well as a Roth self-directed IRA, 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.

Does Small Mean Little Investment Experience? 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 investments, you’re still free to choose investments that you have more experience and familiarity with.

Use 401(k) Rollovers. Finally, 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 401(k) to an IRA. Because many individuals are permitted to contribute to both 401(k)s and IRAs, this can be a great technique for building as large of a nest egg as possible.

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 Ways Marriage Can Impact Your Retirement Planning

Posted on August 28, 2015August 14, 2019 by Ingrid Chavez

Estimated reading time: 3 minutes

Getting married is one of the biggest steps two people can take in their lives. There are a number of major changes that both people will need to address — both personally as well as financially — as a result of getting married. For example, the new couple will need to decide whether and to what extent to intermingle their finances going forward, and how to deal with assets that each individual may bring into the marriage (such as real estate and investments).

Retirement planning can also be significantly impacted by marriage. The process of planning for your own retirement when you are single is vastly different than having to plan for two. Let’s take a look at three key ways that marriage can impact retirement planning.

Maximizing Contributions.

Depending on your and your new spouse’s work status, being married can increase the maximum contributions you can collectively make to your self-directed IRAs. It works like this: normally an individual must have earned income at least as great as the contribution they want to make in any given tax year. But when a married couple files a joint tax return, then they effectively have access to each claim a portion of that joint income as a basis for making a contribution to an IRA. This is a great outcome if one spouse works, but the other doesn’t.

Estate Planning Considerations.

Retirement planning and estate planning are often treated as wholly separate considerations, but in most cases they probably shouldn’t be. Think of it this way, if you’ve done a reasonably good job in saving for retirement, then the most valuable asset you have when you reach age 65 or 70 (apart from your home, perhaps) is likely to be your retirement nest egg.

As a result, the choices you make with your retirement savings — not just the investments you make and the asset types you hold within your account, but also the type of account you use in the first place — can make it easier (or harder) for you to reach your estate planning goals.

For example, a Roth self-directed IRA has certain advantages over a traditional account when it comes to passing your account to your spouse in the event you predecease them. While it’s possible to convert a traditional self-directed IRA into a Roth account, doing so can trigger current year tax liabilities, so there may be advantages for many young couples to simply start out within the Roth structure.

Strategic Distributions.

Each new spouse will likely have their own Social Security benefits to manage when it comes time to retire. Even an individual who doesn’t earn enough income to receive benefits based on their own income can be eligible for a spousal benefit based on their spouse’s work record.

Since a person’s monthly Social Security benefit check can vary significantly, depending on whether they take benefits as early as possible (age 62), or delay taking their benefits until age 70. This leads to a number of different benefit maximization strategies, which will depend greatly on the couple’s particular situation and circumstances, in which one spouse begins taking social security, and the couple lives off that income (as well as income from one or both of their IRAs), while the other spouse delays taking Social Security in order to maximize their monthly benefit.

Using Your Self-Directed IRA To Invest Outside the U.S.

Posted on April 17, 2015August 12, 2019 by questadmin

Estimated reading time: 3 minutes

Even though self-directed IRAs held with a custodian such as Quest Trust Company are generally recognized as the most flexible retirement savings option, most investors choose to limit themselves to assets or companies located within the United States. In fact, many countries have well-developed investment markets, so looking outside the U.S. may be just the key to helping you find the perfect investment for your needs. If you choose to consider investing abroad, here are some of the biggest issues to keep in mind.

Foreign Taxation Issues.

You should not assume that everything you know about U.S. tax law when it comes to property held within an individual retirement account holds true abroad. It may be possible that certain types of investing activities, even if they happen within a self-directed IRA, will subject you to a foreign tax liability.

Real Estate Considerations.

Let’s take a closer look at one of the more popular foreign investment types; real estate. The first thing to remember is that all of the IRS rules prohibiting self-dealing continue to apply even for real estate outside the U.S. That means if you’re investing your account in a vacation property abroad, you and your family (and other related parties) are prohibited from using it – even for a single day – when it is still held within your account.

Foreign Ownership Restrictions.

It’s not uncommon for foreign countries, or regional or local government bodies, to impose restrictions or limitations on foreign ownership of real property. In some cases a foreigner is prohibited from owning property outright, which means that your investment options would be limited to some type of minority stake. This may or may not help you achieve your investing goals, depending on precisely why you’re investing.

In some countries, similar restrictions may also apply to owning manufacturing facilities or other types of business as well.

The Investment Process.

If this will be your first time investing abroad, you’ll also need to familiarize yourself with whatever the local investing process may be. Continuing with our real estate example, you’ll need to know and understand which local agencies need to be involved in the process, what types of taxes, fees or assessments need to be paid as part of the transaction, and how the documentation for the transfer of ownership needs to be recorded or otherwise formalized. The best approach will almost certainly be to do your homework before you spend a lot of time looking for investment opportunities.

Consider a Partnership.

In many instances, the best way to address many of these issues is to partner with a local investor and approach the investment opportunity jointly. Again, you will have to do your homework in identifying potential partners that suit your needs, but in some cases choosing not to undertake the investment by yourself can make the process much easier.

Regardless of the investment opportunities you’re considering pursuing abroad, it becomes essential that you understand all the limitations, restrictions and risks that may be unique to the investment you are considering.

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.

What Type of Real Estate Investment Makes the Most Sense For Your Self-Directed IRA?

Posted on November 3, 2014December 9, 2019 by questadmin

Estimated reading time: 3 minutes

Having the ability to invest in real estate with your self-directed IRA means that you have important and powerful alternatives to simply investing in stocks, bonds and mutual funds, as you would be limited to with a traditional IRA custodian.

But even if you’re interested in using your self-directed IRA to invest in real estate, you’ve still got choices to make in terms of the types of real estate to purchase. You can make this determination by asking yourself what are your investment goals and objectives.

Long-Term Growth

If your primary investment objective is long-term growth, then there are a number of different types of real estate investments you can make. Some of the most common types of investment real estate, including single-family and multifamily residential properties, are certainly capable of generating healthy long-term returns.

As with any type of investment, though, you still need to do your research in order to be as confident as possible that you are choosing the right property. Real estate investments as a whole will increase in value over time, but that’s not always the case. And just take a look at what’s happened to real estate prices across the country over the last 20 or 30 years. Some local real estate markets have experienced growth rates significantly higher than others.

When your goal is long-term growth you can also find many opportunities in other types of investment real estate, including commercial and industrial properties, undeveloped land, and even farmland.

Current Income

On the other hand, if you’ve already entered retirement then you’re much more likely to be interested in how real estate investments can generate income to cover your retirement expenses, rather than long-term growth potential. One possible exception is if you have a significant estate that includes other retirement accounts, and you’re looking to make use of a self-directed Roth IRA to help you achieve your estate planning goals.

A Retirement Home

Many self-directed IRA holders consider this type of investment, but fewer than you think actually follow through. Since many future retirees plan to move to a different part of the country once they stop working, it’s possible to buy a retirement home with the funds in a self-directed IRA, and then use that during retirement.

One important factor to consider if you choose to go this route is that any use of that retirement home by you or any members of your family, at any point before you actually retire, is prohibited by the rules on IRAs. That’s because such a use would be considered “self- dealing” (that is, using retirement funds or assets to benefit yourself before you actually take a distribution of those funds or assets), and this could trigger taxes and penalties if it occurs before retirement.

The best piece of investment real estate for your self-directed IRA is the one the best matches your investment goals and outlook.

Using Your Self-Directed IRA to Make Small Real Estate Investments

Posted on October 26, 2014December 9, 2019 by questadmin

Estimated reading time: 2 minutes

Many retirement savers may find that their best opportunities for real estate investment come from smaller properties and transactions. Let’s examine some of the ways you can use your self directed IRA to make smaller investments in real estate.

Concerns With Financing

One big reason that many self-directed IRA account owners look for smaller real estate investments is financing. When the individual retirement account does not have sufficient assets to purchase the subject real estate outright, and has to borrow or take out a mortgage in order to close the transaction, there can be significant negative tax consequences.

Investment financing within an IRA is considered to be “unrelated business taxable income” (or “UBTI”), which gives rise to an immediate year tax liability. In order to avoid UBTI, the account holder can limit themselves to real estate purchases that they can make outright with the assets in their account. This might include smaller residential properties, or perhaps even just undeveloped properties. In the case of undeveloped properties, the account holder may have to adjust their investment outlook to a longer focus.

Buy Into an Investment Group

Another strategy for using self-directed IRA to make smaller investments in real estate is to pool your funds with other investors. By doing so, the investment group will have the resources to be able to purchase larger properties. This technique allows your individual investment to stay small and manageable, but potentially has no limit on how large of an investment the group can make.

This type of collective investment strategy can be accomplished through a private group or a real estate investment trust (“REIT”) that is traded on a public stock exchange.

Watch the Fees

Seasoned real estate investors understand that once they own a certain number of properties, administration of those investments becomes more efficient due to economies of scale with respect to property managers, maintenance fees, and the like. As you begin to invest in smaller properties, you need plan for the fees you’re likely to incur, and be sure that the investment makes financial sense.

You must also be confident that you’ll have the capability of paying all of those fees directly from your account. Paying such fees from outside of the account can trigger negative tax implications.

Understand Why You’re Making the Investment

Finally, as with any other investment you make in your self-directed IRA, it’s important to understand exactly why you are doing so. For smaller properties, what is your exit strategy? When will it be appropriate to dispose of the property, and under what conditions or circumstances?

Your self-directed IRA can be used to purchase properties of all sizes and types, although the planning and administration you need to do for smaller properties will be different.

Real Estate Alternatives to Consider With Your Self-Directed IRA

Posted on October 16, 2014December 9, 2019 by questadmin

Estimated reading time: 3 minutes

Real estate is one of more popular types of investments that retirement savers choose to make with their self-directed IRAs. Custodians who offer self-directed IRAs, such as Quest Trust Company, offer also offer many other legally permissible investment options that other traditional custodians don’t offer, and which allow individuals the greatest ability to apply their investment philosophy to their retirement savings.

But direct investments in real estate might not be suitable for every investor’s portfolio or investment profile. The key to successful investing, whether in the context of retirement planning or even general investing, is to find investments that are suited to your needs and to your investment approach. Fortunately, there are ways to invest in real estate assets without having to meet the administrative challenges of managing direct real estate holdings.

Real Estate Investment Trusts

One option for being able to invest in real estate without having to take on the risk of doing so directly is to purchase shares of a so-called “real estate investment trust” or “REIT.”

A real estate investment trust is an actively managed trust that itself invests in real estate of various types. Shares of a REIT are generally traded like shares of stock on the major exchanges, and are typically structured and operated in order to receive special tax breaks – the most significant of these is that the REIT offers high yield to investors. For investors who are looking for current income, REITs can be a great option.

Most REITs are generally focused on a particular type of property (such as multifamily residential or commercial) or real estate mortgages. But there are some REITs that try to take a hybrid approach by investing in physical properties as well as mortgages.

Investment Partnerships

Another way to invest in real estate without having to hold property is to commit a portion of your portfolio to private investment partnerships that focus on real estate investments. Rather than buying property yourself, you are buying an interest in an investment partnership that has its own administrative structure in place to buy and manage properties for the benefit of the partners. While you’ll likely be able to vote on many of the decisions he investment partnership makes, it’s vitally important that you are comfortable with the partnership management structure that’s in place.

Private Mortgage Lending

When you have a self-directed IRA you can make private loans as another type of investment. You’ll probably want to stick to loans that are secured (meaning that the borrower pledges collateral that you can take possession of if they fail to meet their loan repayment obligations), and this includes private mortgage lending. This is yet another way to invest in real estate alternative investments and not have to hold property directly.

The term “real estate” means a specific type of investment class to many investors. There are in fact a wide range of real estate alternatives that you can invest in with your self-directed IRA without having to hold property directly.

Maximizing Contributions.

Estate Planning Considerations.

Strategic Distributions.

Long-Term Growth

Current Income

A Retirement Home

Concerns With Financing

Buy Into an Investment Group

Watch the Fees

Understand Why You’re Making the Investment

Real Estate Investment Trusts

Investment Partnerships

Private Mortgage Lending