Investment Goals Archives - Quest Trust Company

Don’t Count on Working For the Rest of Your Life (and Why Your Self-Directed IRA is Therefore So Important)

Posted on August 6, 2015December 7, 2018 by questadmin

Estimated reading time: 3 minutes

We’re all aware of the fact that many (if not most) Americans haven’t saved enough money toward their retirements. One common response to the anticipated gap between anticipated living expenses during retirement and the amount a person has saved is for that person to delay the date upon which they anticipate being able to retire.

The reasoning is certainly clear; by working longer a person will be able to both save more money for retirement, and to delay the date upon which they’ll have to begin living off the funds in their nest egg. Unfortunately, the statistics indicate that this isn’t always possible.

A recent study by the Employee Benefit Research Institute found that while a full one third of workers planned to retire after the reached age 65, less than half of those individuals actually remained in the workforce that long. On the flip side of the coin, while less than 10% of workers indicated that they planned to retire before they reached age 60, approximately 35% of individuals had actually left the workforce by the time they turned 60.

While some of these individuals may simply have been fortunate enough to accumulate much more than they originally planned to, that same report makes clear what’s driving these numbers. Nearly half of all retirees indicated that they left the workforce earlier than anticipated in order to deal with health issues, either their own issues or those of a spouse or family member.

In addition, a significant number of individuals who left the workforce earlier than they planned did so because of an employer downsizing or closure, or because they no longer had the skills to remain employed in a changing marketplace.

In short, just because a person hopes or plans to stay in the workforce for a longer period of time in order to make up a shortfall in their retirement savings, that doesn’t mean it will be possible to do so.

As an alternative, a person could also make up this shortfall by adjusting their anticipated retirement lifestyle, thereby reducing their retirement expenses. While there is likely to be a minimum amount that an individual or couple will need to retire with reasonably stability and security, chances are this amount is less than what they were hoping to live off of.

If you’re not willing to downsize your retirement plan, then you’re only left with one real alternative, and that’s to maximize your rate of retirement savings every single year, and to begin doing so immediately. You might also investigate the advantages that a Roth self-directed IRA could provide you, in terms of the tax-free distributions you can take, as well as the fact that you could let a Roth account continue to grow even after you reach age 70, such that you’re not subject to the rules on required minimum distributions.

Contact Quest Trust Company to learn more about how you can open a self-directed IRA and strengthen your financial future.

Will This Be The First Year You’re Subject To Required Minimum Distributions On Your Self-Directed IRA?

Posted on June 15, 2015April 13, 2021 by questadmin

Estimated reading time: 3 minutes

While the U.S. government wants to encourage individuals to save for retirement by providing tax incentives for using the IRA structure, they don’t want to forego the tax revenue entirely. For example, you’ll potentially be able to take a tax deduction for contributions you make to a traditional self-directed IRA, and won’t have to pay taxes on any investment growth or gains that occur and remain within your account, but you will have to pay taxes when you make withdrawals from your account.

One important way that the IRS rules manage the balance between allowing tax breaks for retirement savings, but requiring that the account holder pays taxes at some point, is the set of rules on required minimum distributions (“RMDs”).

RMD Basics. Once a traditional IRA account owner reaches age 72, they must begin taking distributions from their account, and those distributions must meet certain minimum amounts that are calculated based on the account balance and the account holder’s age. The account holder must withdraw the calculated minimum amount from their account every year.

It’s important to note that because the required minimum distribution amounts are only minimums, the account holder is always free to take larger or more frequent distributions from their account.

It’s perhaps even more important to understand that the RMD amount will almost certainly change from year to year. Because the calculation is made on the basis of the value of your account at the end of the year, your investment performance over the year will change the amount upon which the amortization calculation operates.

Special Considerations for Some Investments. Your RMD obligations do not take into account the composition of your traditional self-directed IRA. If you happen to have an account that is comprised of illiquid investments, you’ll still need to take an appropriate distribution, even if you don’t have the free cash available to do so. You can do this by taking a distribution of illiquid investments that have a fair market value that’s at least as much as your RMD amount, or you can distribute the asset itself. This might be desirable if the asset is a vacation property or some other asset you’d like to make personal use of during retirement.

But taking a large distribution in one year won’t get you a credit against any future RMDs in future years.

Roth Self-Directed IRAs are Not Subject to RMD Rules. Note that we’ve only been talking about traditional self-directed IRAs with respect to the rules on required minimum distributions. That’s because the Roth account is not subject to the same rules.

Given the value that this feature has to many individuals, one common way to maximize retirement flexibility is to convert a traditional account to a Roth account. This triggers a tax bill in the year of conversion, but many account holders find the change to be worth the cost.

Considerations For Naming Beneficiaries Of Your Self-Directed IRA

Posted on March 3, 2015August 12, 2019 by questadmin

Estimated reading time: 3 minutes

From your savings and checking accounts to your 401(k) at work, to your taxable investment accounts, nearly every financial or savings vehicle you have is going to require you to name beneficiaries for the account. Here are some considerations for when you need to do so for your self-directed IRA.

Other Estate Planning Vehicles. The first thing to consider is what other estate planning techniques and accounts are you making use of. Consider not only things such as life insurance and trusts, but also beneficiary designations you may have on your investment accounts. If you own real estate, is it held individually, or as joint tenants with right of survivorship? Depending on your other financial assets, you may find that certain individuals or family members are adequately provided for, and that you can use your self-directed IRA beneficiary designations to benefit other individuals.

The Investments in Your IRA. Another consideration is the composition of investments in your self-directed IRA. For example, if your account includes a piece of real estate that you want to be passed to a particular individual, then you may need to set up a separate account for that asset. If your account contains no such assets, and you simply want your account to be divided by value to your beneficiaries, then a single account will suffice.

Spousal Heirs vs. Non-Spousal Heirs. In general, leaving a self-directed IRA to your spouse generally provides your spouse with much greater value than leaving the same account to a non-spousal heir. Spousal heirs can generally treat the self-directed IRA as their own, which allows them to continue the tax-advantaged status of the account. Non-spousal heirs must generally begin withdrawing from the account, and paying applicable taxes, within a relatively short time frame after your passing.

If you are earmarking accounts and investment assets to a range of heirs, consider designating all or a higher percentage of your self-directed IRA to your spouse, and using other estate planning tools for non-spousal heirs.

Don’t Forget Contingent Beneficiaries. While the issue of contingent beneficiaries is an issue for virtually all estate planning matters, it can be particularly important for self-directed IRAs. It’s important to review and update your beneficiary designations from time to time, and consider what you would want to happen if one of your named beneficiaries predeceases you.

In general, unless you need specific contingent beneficiaries, there are two ways in which your requests can be carried out in the event of an heir who predeceases you. A “per capita” designation means that the predeceased heir’s share is divided amongst the remaining heirs. For example, if you name three beneficiaries to equally share in your account, and one passes away before you, then the other two surviving heirs will share in the account unless you designate otherwise.

A “per stirpes” designation means that in the event of a beneficiary who predeceases you, that individual’s heirs will stand in their place and receive their bequest. This can sometimes be a better way to carry out your true estate planning intent. In the same example of three named beneficiaries, if one were to predecease you, then that individual’s heirs would receive their share instead of the two other beneficiaries you named.

In any case, the best way to avoid any uncertainty is to regularly review and update your account designations as appropriate.

Calculating A Fair Market Value Of Your Illiquid Self-Directed IRA Investments – And Why It Matters

Posted on February 19, 2015April 13, 2021 by questadmin

Estimated reading time: 2 minutes

When you want to know the true, fair market value of your checking account, savings account, or bank CDs, you simply check your balance. It’s the same case with your publically traded stock investments; you simply log into your account while the market is open and you’ll get an instant and accurate valuation.

But what’s the fair market value of your home or your car? You might have a general idea of the proper value, but it can be challenging to come up with an accurate assessment. You may also find it a bit challenging to come up with a fair market value for illiquid investments you hold inside your self-directed IRA.

Let’s examine some of the most common illiquid investments in self-directed IRAs, how you can calculate a fair market value, and why this can be so important.

Real Estate. Real estate investments are generally considered to be illiquid, even if the property is located in a “hot” market where the number of buyers greatly exceeds the number of sellers. That’s because the sales transaction itself generally takes some time, so even if you have strong buyer interest in a property you’re trying to sell,it can take several weeks or more before you actually liquidate and receive your check.

Because a property is only worth what someone is willing to pay for it, you can calculate a fair market value for investment by looking at recent comparable sales in your area, or enlist the help of a local estate expert and draw upon their experience.

Private Equity and Debt Instruments. You’ll probably need to rely more on expert assistance when you need to find the fair market value of any private equity or private debt investments you hold within your self-directed IRA. This is due in large part to the fact that the data regarding prior transactions won’t likely be available – such transactions are not a matter of public record in the same manner as are real estate transactions.

Why Does it Matter? Knowing the fair market value of illiquid investments within your self-directed IRA is important for several different reasons. First, the more accurate the valuation information you have about the investments in your self-directed IRA (and the other investments you have), the better you’ll be able to plan, assess the risks, and diversify your overall investment portfolio.

In addition, if your self-directed IRA is set up as a traditional account, you’ll become subject to the rules on required minimum distributions once you reach age 72. This isn’t particularly problematic from an administrative perspective if all of your investments are liquid, like stocks. You always know what your account is worth, and therefore you can easily calculate your RMD obligations. You can also quickly sell whatever investments you need to in order to meet those obligations.

Should You Use Your Self-Directed IRA to Buy Investment Properties While Interest Rates are Low?

Posted on October 20, 2014December 9, 2019 by questadmin

Estimated reading time: 2 minutes

The ability to invest in real estate is one of the most common reasons why retirement savers first start becoming interested in the self-directed IRA. An individual retirement account with a self-directed IRA custodian such as Quest Trust Company individuals to out their retirement funds to work in investments that traditional IRA custodians simply wouldn’t allow.

Adding to the desirability of investment real estate for retirement savers is that interest rates on mortgages and other types of borrowing continue to be quite low.

UBTI

Even if interest rates are low, you may not be able to derive the benefit you hope from borrowing money to buy real estate with your self directed IRA. This is because the tax laws that authorize individual retirement accounts put some limitations on how those accounts may be used. In particular, the activities of IRAs must be related to the fundamental purpose of the account, and that means to make investments. Borrowing money to make investments, however, is called out as an activity that’s at odds with the fundamental investment purpose.

As a result, when an IRA borrows money, the investment gains that result from that borrowing are considered to be unrelated business taxable income (or “UBTI”), which means that you’ll face a current year tax bill because of your investment borrowing. In many cases, this can greatly reduce or even exceed the advantages you gain by taking out a mortgage.

Investment Quality

If you choose to borrow money within your self-directed IRA in order to invest in real estate, be sure you are doing so because you are presented with a quality investment opportunity, rather than simply because interest rates are low. You should have a plan for how each piece of property you acquire is going to become a productive part of your portfolio, and your anticipated timeframe for that to occur.

Note that this doesn’t necessarily mean every piece of investment property you acquire needs to be productive right away. “Fixer uppers” are certainly appropriate for investment; just be sure you take into account any repair or remodeling costs into your financial analysis.

Fees

Regardless of how you choose to use your self-directed IRA to acquire investment properties, you should have a comprehensive understanding of the costs and fees that come with holding the property. For example, many real estate investors will tell you that as they build larger portfolios of property, they find that their costs on a per property basis tend to decline. This is because they are able to leverage certain economies of scale when it comes to property managers, repair and maintenance professionals, and other types of support they need in maintaining those properties.

Low interest rates can be a factor in deciding whether or not to buy investment real estate with your self-directed IRA, but it should not be the only factor.

Advice for Managing Multiple Investment Properties Within Your Self-Directed IRA

Posted on September 7, 2014December 9, 2019 by questadmin

Estimated reading time: 2 minutes

Real estate investing, despite the housing meltdown that occurred a few years back, remains quite popular. In fact, in many respects real estate investing has become more popular over the past few years, as more families are unable to meet the stricter mortgage requirements, or simply aren’t interested in owning a home. These factors drive up the demand for rental properties.

This has made real estate a very popular investment class, particularly for individuals who have chosen the flexibility of a self-directed IRA with a custodian such as Quest Trust Company. But investment real estate generally requires a level of involvement far greater than investments in stocks or bonds. Here are some tips for managing multiple investment properties within your self-directed IRA.

Know When It’s Time to Get Help

Perhaps the most important piece of advice when it comes to investing in real estate is that you should know when it’s time to get professional help. Managing a single piece of investment real estate can be challenging enough, but when your obligations are multiplied by numerous properties – particularly when those properties are not located close to one another or are not to the same investment type (e.g., residential vs. commercial vs. farmland) – they can quickly become overwhelming.

If you currently own investment real estate, take a look at how much time you’re spending in the management of your properties. Then research how much you would have to spend on professional help for those same services. You won’t be able to deduct those costs as you would if those investments were held outside of a tax-preferred account, but you may find that expense to be worth it.

Evaluate Each Property Individually

One element of property management in the context of investing within your self-directed IRA is confirming that a particular property is suitable for your investment portfolio. Just as you periodically evaluate other types of investments (stocks, mutual funds, etc.) to make sure that they’re still a good fit for your goals and needs, you need to do the same thing with each piece of real estate you hold.

Set up a schedule to evaluate each individual piece of property in your portfolio

Ask yourself if it is performing as you had anticipated when you acquired it (or in the time period since your last review). If not, determine whether or not there is anything you can do to improve its performance. If the property is no longer suitable as an investment, then determine whether there’s a sensible way to get that property out of your portfolio.

Have an Exit Strategy

In fact, it’s important to have an exit strategy for each and every property in your portfolio. Understand when it makes sense to no longer hold a particular property, or when it makes sense to have your funds invested in something else.

Take Full Advantage of These Valuable Tax Benefits in Your Self-Directed IRA

Posted on August 22, 2014April 13, 2021 by questadmin

Estimated reading time: 2 minutes

If you are new to individual retirement accounts, you may not be familiar with all of the key tax breaks that they can provide.

Current Year Deductions for Contributions.

The tax benefit that most taxpayers (even those who haven’t yet set up an IRA for themselves) are familiar with is the possibility that the annual contributions they make to their account can be deducted from their tax return for the year of contribution.

There are some limitations and requirements in order to receive this deduction. Depending on your modified adjusted gross income (MAGI), 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).

Tax Deferred Investment Growth

Perhaps the bigger tax benefit of a self-directed IRA is that your investments are not subject to taxation while they grow within your account. In contrast, consider what happens when you sell a stock or mutual fund that you hold a taxable investment account. If the investment gained in value, you’ll be subject to tax on the gain in that tax year, even if you don’t withdraw the investment proceeds from your account. The situation is similar for investment interest or stock dividends. Even if you immediately reinvest the money you receive, you are still subject to taxation on those amounts.

In contrast, the balance in your self-directed IRA can grow inside the account without tax liability. If your self-directed IRA is structured as a traditional account, you’ll only be subject to taxation when you take a distribution of funds from that account. This taxation may only be after several decades of growth, so the benefit can be quite significant.

Tax Free Investment Growth

The benefits of a Roth self-directed IRA are even greater. You won’t ever be eligible to adopt the contributions you make to that account, but the withdrawals you make during retirement will be tax free. That’s right – the rules on Roth IRAs mean that you won’t ever have to pay taxes on the investment growth and income within your account.

Because the long-term tax advantages of a self-directed Roth IRA are so significant, many individuals choose to convert their traditional accounts into Roth accounts (and pay the tax bill that comes with such a conversion) in order to receive that benefit.

Bonds or Dividend-Paying Stocks – Which are Better For Your Self-Directed IRA?

Posted on August 8, 2014October 31, 2018 by questadmin

Estimated reading time: 2 minutes

Regardless of your overall investment outlook, your preferred investment types, or even the size of your retirement portfolio, there’s a good chance that won’t at least part of your nest egg to be in assets that generate a regular income stream.

This is often a common scenario when someone enters retirement, and needs to begin living off of what they’ve accumulated in their various retirement accounts. Rather than having to sell off investments and reduce the size of their overall portfolio, many individuals choose investments that generate an income stream and can cover some or even all of that individuals or retirement expenses.

Differences in Risk

Bonds are generally considered to be a safer investment than stocks in terms of risk to capital. Bondholders receive their interest payments before the company can pay any stockholder dividends, and bondholders are generally near the front of the line in getting any type of payout if the company experiences any significant financial difficulty.

This generally results in greater market volatility and price fluctuations of stock investments over bond investments. Investors who are looking to make trades with a relatively short or medium term time frame will need to take these risk differences into account.

Differences in Potential Upside

In the most general of terms, stocks are considered to have a greater upside potential as compared to bonds. Bondholders are limited to receiving their stated interest payments, and those payment levels won’t grow over time, in contrast to the dividend payments at a common stockholder might receive. Furthermore, bondholders won’t share in the growth of the company in the same way that stock investors will.

But that certainly isn’t to suggest that it’s impossible to realize significant capital gains through bond investing. Remember that as current interest rates go up and down, the price of any given bond to instrument will tend to vary inversely to that interest rate change. This means that as current rates fall, the value of a bond will tend to increase.

Cash Distinguished

It’s important to note that when we’re analyzing and evaluating the relative pros and cons of bonds and dividend paying stocks, we’re still very much keyed into the investment elements of those asset classes. In other words, even where the primary investment goal is current income, we still evaluate and ultimately select our investments giving consideration to whether we can also realize gains on those investments too.

Bonds and dividend paying stocks should therefore be distinguished from cash or investments such as bank CDs. In general, the purpose of those investments is not to generate current income (particularly with the historically low interest rates we’ve seen over the past number of years), but liquidity and security of principal.

Top Five End-of-the-Year Tax Moves

Posted on July 24, 2014April 13, 2021 by questadmin

Estimated reading time: 3 minutes

While you generally have until the tax filing deadline to make tax your contributions to your individual retirement accounts, nearly all other tax moves you make must be accomplished prior to December 31 of this year. With that in mind, here are the top five end of the year tax moves you may wish to consider.

Contribute to Your IRA. Maximizing your contributions each year to your self-directed IRA is one of the most valuable things you can do each and every year from a tax perspective. Even if the contributions to your IRA are not deductible, the long-term tax savings can be quite significant. Make this a priority.
Match Investment Losses With Gains. As you know, the tax burden arising from investment gains will depend on how long you held the investment as well as your level of income. Individuals who are facing relatively high tax bills from short-term investment gains can offset (either in part or entirely) those gains by realizing a corresponding investment loss. If you are already considering selling a losing investment, you may therefore want to close the sale prior to December 31, 2013, in order to reduce your tax bill.
Consider All Available Deductions. Be sure you are considering all available tax reductions before you file your return. You are likely to already be familiar with most or all of the deductions, but consulting with a tax advisor (or even using a trustworthy piece of tax filing software) may reveal a valuable deduction or two that you didn’t previously know about. In some cases the availability of a tax break – such as a Federal Renewable Energy Tax Credit – may require you to spend additional money, but if it’s a purchase you would likely be making in the near future anyway, the effective cost will be reduced when you can receive a tax deduction in connection with that expenditure.
Consider Deferring Income. If you own your own business or are self-employed as a consultant, you may be able to save money on your 2020 taxes by deferring income into 2021. Your ability to do this will depend upon the method of accounting you use for your business (i.e., cash basis accounting versus accrual). By delaying sending out invoices, or even pushing forward the due dates of those invoices, you may be able to shrink your 2020 tax bill. (Of course, you’ll still have to pay the appropriate tax as part of your 2021 return.)
Start Planning for 2021. There’s no reason to wait until January 1 to begin planning your 2021 tax strategy. A starting point may be considering the areas in which you fell short during the past year. For example, if you aren’t going to be able to make the maximum allowable contribution to your self-directed IRA this year, be sure to readjust your budget so that you’ll be able to do so next year.

Finally, pay attention to changes to the tax laws that occur or are likely to occur at the end of the year (or in 2014, but are made retroactive in effect) and verify that the assumptions on which you’ve based your 2020 tax planning remain valid.

Can You Start Self-Directed IRAs for Your Children?

Posted on July 17, 2014 by questadmin

Estimated reading time: 3 minutes

One question that often comes up when a new parent begins considering their child’s future finances is whether they can start an IRA on their behalf. Since the time value of money is perhaps the greatest power of a self-directed IRA, it’s easy to see why parents would try to make this happen. Unfortunately, IRAs can only be opened by individuals for themselves, with money they earn themselves. Let’s take a closer look.

The Earned Income Requirement. The biggest hurdle you’ll have to overcome when you work to help your child opened a self-directed IRA is the IRS requirement of earned income. In order to make any contribution to an IRA, the account holder must have earned income of at least that amount for the year of contribution.

So, for example, let’s consider an individual who has accumulated a significant amount of assets in their non-retirement accounts and now lives off of their investment earnings. Even if that individual earns $100,000 per year in investment income, they won’t be able to make contributions to an IRA unless they have earned income as well. Earned income is essentially what someone receives in exchange for their time or services. This might be salary or commissions from their job, or income they receive from freelancing or working as an independent contractor.

A Part-Time or Summer Job. If your child is old enough to get a part-time or summer job, then whatever they make will constitute earned income. They are now eligible to open a self-directed IRA in deposit this amount.

Hiring Your Child. Even if your child has an “income” from savings or taxable investment accounts you may have set up for them, they’re not able to use those funds to open or contribute to a self-directed IRA. But if you have a home-based business or consulting career on the side, consider whether there are tasks you may be able to hire your child to do. You can’t create a “sham” position for your four-year-old, but you may be able to hire your 10 or 11-year-old child to help you with very simple tasks such as basic filing, collating or envelope stuffing. Make sure the work they do is genuine, and don’t pay them an unreasonable amount – these could constitute red flags for the IRS.

Funding the Account. It’s worth noting that the IRS rules on earned income don’t require that the account holder deposit the exact dollars that they earn. So if your child is able to earn $500 or $1,000 over the course of the year by babysitting or mowing lawns, then they are eligible to deposit that same amount into an IRA – even if it’s not the same dollars. In other words, they might spend or save what they earn, and then you could gift them the same amount that they can use to open their own self-directed IRA.
It’s important to understand that the earlier you can help your child open their own self-directed IRA, the better chance they’ll have of reaching their own retirement goals (even if they haven’t formed those goals yet themselves).