Becoming More Active in Your Self-Directed IRA Investments

Estimated reading time: 2 minutes

Unfortunately, because the purpose of an IRA is to build a retirement nest egg that won’t be drawn down upon for many years, or even decades, some account holders mistakenly assume that means they need to hold their investments within the account for years or decades as well. The truth of the matter is that you should generally evaluate portfolio investments within a self-directed IRA with the same criteria that you use for any investments in a tax advantaged account.

While self-directed IRAs aren’t the ideal account type for rapid day trading activities, you still may be able to benefit from becoming more active in your investing process. The first step towards being more active is to arm yourself with knowledge.

Identifying New Investment Opportunities

In order to take a more active role in your retirement future is to identify all the new investment opportunities you’ll have available for your retirement nest egg when you have a self-directed IRA. Unlike the investment options you have with an IRA at a traditional custodian – mainly stocks, bonds and mutual funds – you will have significantly more options with a self-directed IRA.

Take the time to begin learning more about the opportunities available in investment real estate, private equity, private debt, and precious metals. Some of these asset classes may be ones that you have never had experience with before, so take the time to learn as much as you can about them before you begin investing.

Understand Your Investment Personality

Not every “good investment” is suitable for every individual. We each have our own investing personality, and it can vary significantly from individual to individual. Some people are simply not comfortable with high risk/high reward investments, while others may be unsatisfied with a “slow and steady” approach.

You can begin the process of identifying your investment personality by first considering some of the objective factors about your retirement planning, including how long you have to invest before you anticipate retiring, as well as other sources of retirement income you may have. Also consider your prior investing habits, your experience and knowledge of various types of investments.

Finally, you’ll need to evaluate your tolerance for risk

Don’t just consider this issue in a vacuum – attach some dollar figures to your thought process. Would you be able to tolerate a 10% drop in the value of your portfolio at any point over the next 10 years? What about a 20% decline at any point between now and your target retirement date? Are you truly comfortable accepting the possibility of investment losses if the trade-off is potentially higher gains?

Once you know more about the investment opportunities that are available, as well as your investing personality, you’ll be in a much stronger position to actively manage your account and to maximize your retirement nest egg.

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

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.

How to Leverage Your Investment Power With a Self-Directed IRA

Estimated reading time: 2 minutes

As you invest over the course of years and decades, you become exposed to new types of investments, new investing terminology, and lesser-known investment concepts. One of these less common investment techniques is that of using leverage.

What is Leverage? In the simplest terms, leverage is borrowing money in order to invest it. Borrowing money incurs fees and expenses, of course, so the idea behind using investment leverage is that the amount you’re able to make from the investment you purchase with borrowed funds exceeds whatever you pay to borrow those funds.

Types of Leverage. As you might imagine, there are different types of leverage that individuals use in the hopes of boosting their investment returns. For example, if you have been approved for this type of investing activity, your taxable investment account (such as one you might have at a discount broker) will permit you a certain amount of leverage (borrowing) based on the existing holdings within your account.

IRA Consequences of Leverage. The legislation that authorizes IRAs as a tax advantaged retirement savings vehicle contains a number of limitations and restrictions on their use. In general, funds within an IRA can only be used for specified purposes (namely, investing for retirement), and borrowing money is not one of those specified purposes. This is true even if the proceeds of the borrowing are used for retirement investing. Taking out a loan within your IRA will result in Unrelated Business Taxable Income (also known as Unrelated Debt Taxable Income), which greatly reduces the tax benefits of your account.

Borrowing to Purchase Real Estate. A reduction in these tax benefits can be significant, but it shouldn’t necessarily be the deciding factor in your investment decision. Some retirement savers still find it worthwhile to take out a mortgage to purchase real estate within their self-directed IRA, despite the tax implications.

Understanding SEP IRA Tax Rules

Estimated reading time: 3 minutes

retirement accountsMost working adults are at least somewhat familiar with the two most popular types of personal retirement accounts – the IRA and the 401(k). The 401(k) plan is by far the most common type of retirement program that we see at work. Unfortunately, these types of retirement plans are generally somewhat costly to administer, and the administrators of those plans really only promote them to mid-size and larger businesses.

Furthermore, many of the plans are limited to only certain types of mutual funds, which significantly reduces the ability of retirement savers to select exactly the types of investments they want to hold. For small businesses (even sole proprietors), setting up a 401(k) is likely to be a less than ideal way to provide additional benefits to themselves and their employees.

Fortunately, there is another option – the SEP IRA. SEP IRA stands for “Simplified Employee Pension IRA,” and it’s an account type that combines the best of both worlds; the higher contribution limits of employer-sponsored plans with the tax benefits and low costs and investment flexibility of IRAs. Here are some of the key SEP IRA tax law basics.

The SEP IRA Must Not Be Preferential. All employees must receive the same benefits under an SEP IRA. This means that a small business owner cannot open up this type of retirement plan only for themselves. If they choose to open the plan they must set up an account and make the same types of contributions for all eligible employees.

Additional Employee Requirements. In addition, employees other than the business owner must also meet several additional requirements. The employee must be at least 21 years old, must have worked for the employer for at least three of the past five years, and must have received at least $500 in compensation during the year.

Tax Treatment of Contributions and Withdrawals. Contributions to a SEP IRA are similar to those of a traditional IRA when it comes to taxability. That is, contributions are generally tax-deductible, and withdrawals are generally taxed at the account holder’s then current marginal tax rate.

SEP IRA Contribution Limits. Calculating the annual contribution limits for a SEP IRA is more complicated than doing so for a Traditional or Roth IRA. The SEP-IRA is considered an employer-sponsored plan. Contributions must be made by the employer and can vary each year between 0% and 25% of compensation (maximum $57,000 for 2020 and $58,000 for 2021). Each eligible employee must receive the same percentage.

For self-employed individuals who set up a SEP IRA, determining the contribution limit is more complicated. The best way to make the computation is to use IRS publication 560 (section 5), but in general the contribution limit will be approximately 18.6% of the businesses in net profit. Further complicating matters is the fact that the contribution limit is computed not from the businesses net profit but from an adjusted figure that takes into account the applicable self-employment tax.

There are a few other factors that could further effect the computation. For more information please contact Quest Trust Company or any other experienced IRA custodian.


The Most Important Retirement Planning Questions You Need to Consider

Estimated reading time: 3 minutes

Planning for retirement can be a significant undertaking. While the principles of successful retirement planning are easy to understand (e.g., begin saving early in life, try to max out your tax advantaged contributions each year, and invest according to your personality and risk profile), reaching your retirement goals can often be quite a challenge.

There are plenty of important questions you should ask you financial advisor, of course, but first you need to ask yourself a few questions:

When do you want to retire? This is probably the first question that every individual considers when they begin thinking about how they’re going to handle their own retirement. Asking yourself this question is important because the longer you have between now and your target retirement age, the more options you’ll have on how to get there.

What do you want your retirement to look like? The next question to ask yourself is what you want your retirement to be like when you reach that age. Where do you want to spend your retirement years? Do you want to relocate to another part of the country (or to another part of the world)? Do you envision your retirement as a luxurious one, or a more modest one?

Do you plan to work during retirement? It’s a relatively recent development that retirees would consider working in any capacity once they reach their retirement years. But for many, the prospect of not having the structure of gainful employment – even if it’s just on a part time basis – can be a significant negative. Note that this need to be gainfully occupied can be accomplished through volunteer work, consulting or a number of other methods.

Am I doing everything I can? Tax-advantaged retirement plans such as IRAs and 401(k)s have annual contribution limits. It’s important to try to contribute the maximum allowable amount each end every year, because if you fail to do so you won’t be able to contribute more in later years to make up the unused amounts.

Once you’ve asked yourself these baseline questions, you can then meet with your broker or investment advisor and consider the following:

What is the state of your current portfolio? In order to evaluate your current retirement plan, you must have a solid understanding of your current portfolio. When you consider all of your accounts together (including assets and savings that are held in non-retirement accounts), do you understand how your investment risks are allocated, and are those risks appropriate for your investment approach and tolerance for risk?

Does your current portfolio require adjustment? Once you understand the composition of your current investment portfolio, you can discuss with your advisor whether you need to make any adjustments with respect to either your current assets, or to future amounts that you’ll contribute to your accounts.

Keep in mind that your situation will change over time, so you’ll want to periodically ask these questions again from time to time.