How to Pay Emergency Family Medical Expenses With Your Self-Directed IRA

Estimated reading time: 3 minutes

For many Americans, being able to manage their family’s medical expenses is a significant financial concern. And this has been a growing issue for many years. In inflation-adjusted terms, total national health care expenditures have grown 818% since 1960, while inflation-adjusted wages have only grown 16%.

Adding to these financial challenges is the fact that our medical expenses are largely unpredictable. Medical emergencies and unexpected injuries and illnesses occur, and they often cause big financial problems. In some cases, families will turn to their single biggest asset for financial help – their retirement nest egg. Here are some steps for using your self-directed IRA to pay for those emergency family medical expenses.

Avoid Early Withdrawal Expenses. Depending on your financial situation, you may be able to use funds from your self-directed IRA without having to pay early withdrawal penalties. Recall that any time you take money out of a self-directed IRA prior to reaching age 59½ the amount of withdrawal will be subject to a 10% penalty (in addition to any taxes that may be due), unless an exception applies. The most relevant exception here is for certain qualified medical expenses. (If your self-directed Roth IRA is old enough, you may also be able to withdraw your original contributions, but not any earnings, on a tax-free basis as well.)

In order to qualify, the withdrawal can only cover that portion of the medical expenses that exceed 10% of the account holder’s adjusted gross income for that year (or 7.5% for account holders age 65 and older).

Disability. If the injury or illness that results in significant family medical expenses also results in a permanent mental or physical disability, you may be eligible for penalty free withdrawals from your account. A physician must determine that the disability exists, that it prevents you from engaging in gainful employment, and it must be one that is either likely to result in death or continue on for an indefinite period.

Stay Adequately Insured. One key way to stay financially healthy in the case of large medical expenses is to maintain adequate health insurance. Obviously the insurance markets are always changing (and even more so over the past few years), but having health insurance provides you with a strong measure of financial security. If you lose your job and receive unemployment compensation for 12 consecutive weeks as a result, then you are eligible to make penalty-free withdrawals from your self-directed IRA in order to pay for health insurance for yourself and your family.

The decision to withdraw funds early from your self directed IRA should not be undertaken lightly. Even if you can do so without incurring the 10% penalty, the withdrawal can still end up costing you. Once the money is out of your account you will be able to pay it back in, so you will forever lose out on the tax-advantaged growth opportunities that they self-directed IRA provides. It can be a comfort to know that you have those funds available if you truly need them, but they should be thought of as your last financial resort for emergency medical expenses.

Using Your Self-Directed IRA to Invest in Illiquid Assets

Estimated reading time: 3 minutes

When most investors think of investments they tend to focus on assets and asset classes that are relatively liquid. We’re talking about investments that you can trade in and out of relatively easily and at relatively low cost – things like stocks, mutual funds, banks CDs and the like. Liquidity means that your money is always available if you have an emergency or other pressing expense. (While it’s true that you may have to forfeit some of the interest you earned in order to liquidate a bank CD before maturation, the money is still there for you to use.)

For this reason, there’s sometimes a tendency to avoid investments that are illiquid. These investments include assets like real estate and investments in private companies. If you ever need to sell these investments, you might find that it takes a bit of time to actually “cash out.” Some investors are reluctant to have their funds tied up in this way.

Fortunately this type of illiquidity is perfectly consistent with the long-term investment timeframe of the self-directed IRA. Withdrawing money from a self-directed IRA before retirement generally incurs penalties (and in the case of a traditional account, taxes as well), so account holders are generally more comfortable with holding illiquid investments because they wouldn’t easily be able to use the underlying funds outside of the account anyway.

Real Estate. Real estate is a popular illiquid investment to hold in a self-directed IRA. Given the costs that are generally imposed on both the sellers and the buyers of any real estate transaction, most real estate investors tend to have a medium-term to long-term outlook, and rightly consider these investments to be illiquid.

Private Mortgages. Owning a piece of property outright is not the only way to invest in real estate. With a self-directed IRA you can lend money to others to enable them to purchase real estate. Many investors find that they can generate healthy returns by becoming active in lending markets that their local banks and mortgage companies don’t participate in.

This might mean commercial lending, or lending to first-time or high-risk lenders that may find difficulty in obtaining financing through traditional means. As you might expect, with higher risk comes a higher interest rate that you can charge.

Remember that as the originator of the private mortgage, you have to be prepared to carry the note to maturity. While a borrower can always choose to pay down their mortgage early, there’s no way for the lender to force early repayment. It’s possible to sell your mortgage note to another investor, but this secondary market is probably quite thin and potentially expensive to take advantage of.

Private Equity. By the same token, private equity investments are also highly illiquid, and therefore are well-suited for self-directed IRAs. It’s important to understand that the investment documents themselves may prohibit transferring the interest to third parties, so these may be the least liquid of any of the investment types we’ve discussed.

If you find an investment opportunity that’s going to tie up your money for a number of years, consider participating in it within your self-directed IRA.

3 Reasons Why Self-Directed IRAs are Worth the Time and Energy

Estimated reading time: 3 minutes

You’ve likely found that setting up a new IRA is usually a quick and easy process. After all, many traditional IRA custodians use online forms and (in the case of a bank or brokerage that’s acting as custodian) these custodians generally allow you to instantly transfer money to fund your new IRA from other accounts you may have at the same institution.

But setting up a self-directed IRA isn’t that much more time consuming than an IRA with a more traditional custodian. It’s true that it might take a little extra time to fill out an extra form or two, or to fund your account. But what’s more important is that the benefits of having a self-directed IRA instead of a traditional account far outweigh the small amount of extra time and energy you’ll have to expend.

1.         The Opportunity for Greater Gains. If you have an IRA with a bank or brokerage as the custodian, then you’re going to be significantly limited in the types of investments you can choose for your account. Traditional IRA custodians generally limit investments to stocks, bonds, mutual funds and bank CDs. While there’s nothing inherently wrong with this selection of investments, many individuals would like to be able to invest at least a portion of their retirement funds and investment classes that have an opportunity for higher rates of return.

With a self-directed IRA with a custodian such as Quest Trust Company, you’ll also be able to invest in precious metals, real estate, private equity, mortgages and other negotiable interests, and even privately held companies.

2.         Great Opportunities for Real Estate Investing. As noted above, a self-directed IRA with a custodian like Quest Trust Company gives you the opportunity to invest in real estate. For many individuals, their largest single investment asset (apart from their primary residence) is their IRA. This means that the IRA balance you’ve accumulated over the years can be put to use investing in the wide variety of opportunities in the real estate market.

For example, it’s possible to use a self-directed IRA to invest specifically in the property or piece of real estate that you intend to live in during retirement. Some self-directed IRA account holders have used their accounts to purchase a future retirement property, rent that property out to third parties (thus generating additional income to their account), then simply take a distribution of the entire property from the account once they retire. This can provide great peace of mind for individuals who may be worried about their living expenses and situation once they enter retirement.

3.         Pinpoint Targeting of Your Investing. Let’s say you’ve researched a particular market or industry or type of product and want to invest in it. With a traditional IRA, unless you’re able to identify a publically traded company with exposure to that market (assuming such a public company exists), you’re frozen out of that investment option. With a self-directed IRA you can invest in private companies in that market, make loans to those companies, and various other types of related transactions.

In short, the self-directed IRA will give you investing opportunities that simply don’t exist elsewhere.

How to Get Ready for Tax Season

Estimated reading time: 3 minutes

The tax filing deadline is still a few months away, but if you’ve ever stressed about or struggled through the process of trying to beat that deadline, you know that putting in a little time and effort before the big day rolls around can pay off handsomely. Here are some steps for getting ready for the upcoming tax season.

Start Collecting All Relevant (and Potentially Relevant) Documentation. Sometime in mid to late January the financial institutions you do business with will start to send you various types of tax forms (the most common of which are likely to be a various types of 1099 Forms and the Form 1098 Mortgage Interest Statement). If you haven’t done so already, create a separate file or folder for your tax records once you receive your very first form.

Whenever you have a little time, start collecting additional financial and tax records to place in that same folder. Collect all receipts for business related expenses, educational and job training expenses, any year-end credit card or brokerage account statements (these can often help you identify certain tax relevant expenses and gains), and any other types of forms or records that relate to transactions with tax implications. Err on the side of being over-inclusive– if it might be relevant to your upcoming tax return, then include it in the folder for now.

Review Last Year’s Return. Another good way to start getting ready for the current tax season is to go back and review the tax returns are filed over the past couple years. This can be a useful way to refresh your memory on different types of deductions and credits that you may have available to you again this year.

Make a List of Your Changed Circumstances. Of course, your tax filing situation this year may be different from years past if your circumstances have changed. Before you begin preparing your return it would be useful to make a list of all tax relevant circumstances that changed in the past year. Did you get married or have children? Did she start a business? Did you buy a home? Could you change jobs or careers? Did you inherit money? Did you make or liquidate any business investments? All of these changes can have significant tax consequences.

Familiarize Yourself With Tax Law Changes. The tax laws and regulations change from year to year, and sometimes those changes can be significant. Even if your income is the same as it was last year, you might find yourself topping out in a different income tax bracket, paying a different amount of Social Security tax, paying different rates on any dividends or capital gains you may have, and paying different amounts in the Medicare surtax.

On the other side of the coin, you may see favorable adjustments to the personal exemption amount you can take, as well as the standard deduction if you don’t itemize your deductions. Similarly, you may see increases in the amount that you can save during the next tax year in your 401(k) or IRA, and if you’ve turned 50 you can now start to take advantage of the higher “catch up” contribution limit. Learn more about the recent changes to the tax law to avoid missing out.

The best way to make sure you don’t overpay on your taxes is to begin the tax filing process as early as possible