Investment Types Archives - Quest Trust Company

Three Key Investments You Can Make in Your Self-Directed IRA, But Not in Your 401(k)

Posted on December 14, 2015April 13, 2021 by Ingrid Chavez

Estimated reading time: 2 minutes

Despite the larger annual contribution limits that are available to participants of a 401(k) plan, there’s one essential aspect in which 401(k) plans fail to measure up to self-directed IRAs, and that’s in the area of investment options. Even if you consider participating in your employer’s plan in order to receive matching contributions from them, you’re likely to find yourself faced with a handful of investment options, likely in the form of mutual funds that come with above-market fees.

But even if you have the best 401(k) plan on the market, and have a wide range of options to choose from, you still aren’t likely to be able to invest in publicly traded stocks. Furthermore, there are going to be three key investment classes that certainly won’t be available in your employer’s plan.

Real Estate.

Real estate investments are one of the most popular types of investments for self-directed IRAs. These types of assets allow investors to purchase virtually any type of investment property, including single family homes, condominiums, multi-family units, commercial properties, farm land, industrial property, and even undeveloped properties.

With a self-directed IRA you have freedom in your investment goals and approach with real estate as well. You can rent the property in order to generate an income stream, invest for capital gains, invest for speculative purposes, or some combination of these considerations. Note that you cannot use any of these properties yourself, nor can any members of your family use the properties. Doing so could subject you to financial penalties and taxes.

There are additional financial burdens if you seek to borrow money with your self-directed IRA in order to purchase the property, so many investors choose to limit themselves to properties or property interests for which they can pay cash from their account.

Private Loans.

Finally, you can use your self-directed IRA to make private loans to third parties. These loans can take the form of mortgages to prospective homebuyers, or to businesses looking to expand their operations. The basic concept of making private loans is easy to grasp, but preparing the necessary documentation and making sure the transaction is properly structured is essential.

While you may only choose to devote a part of your overall retirement nest egg to these retirement classes, it can be a great advantage to have access through them through a self-directed IRA.

Are You Diversifying Your Retirement Investments Across Your Various Accounts?

Posted on September 4, 2015December 6, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

When you hear the term “retirement account,” chances are you think primarily of IRAs and 401(k)s. And those two retirement savings and investment vehicles can and should certainly form the foundation of a solid retirement plan. Self-directed IRAs are a particularly powerful type of retirement savings account because you’re permitted to invest in the full range of legally permitted asset types, rather than being limited by traditional IRA custodians (such as banks and discount brokerages), or face the even more restricted with your investment choices in a 401(k).

But in a very real sense, virtually any investment or savings account can serve as a retirement account. Because you’re limited in how much money you can contribute each year to the tax-advantaged retirement accounts we mentioned above, you’re going to need to use those other account types if you’re able to save more than those specified amounts.

As you accumulate multiple accounts that you’re using to build a retirement nest egg, you’ll need to consider your investment diversification not on an account by account basis, but across all accounts considered together.

For example, let’s say you’ve determined that at present your optimal investment mix is something along the lines of 40% U.S. large cap stocks, 25% real estate investments, 25% debt instruments, and 10% cash. Your goal should not be to achieve that mix of investments within each IRA or other retirement account you have, but that you achieve it across the aggregate of your savings.

Let’s further assume that your primary retirement savings account is a self-directed IRA with a custodian such as Quest Trust Company, and that you also have a small 401(k) account at work, and a taxable investment account that’ve decided to use to help fund your retirement. Because you can’t use those smaller accounts to invest directly in real estate, and your options for choosing debt investments may be limited to publicly traded corporate and government bonds, the real estate and debt investments will likely be the primary focus of your self-directed IRA.

In fact, when you look at each of your accounts, they may appear to be woefully imbalanced and overly focused in a particular asset type. But taken as a whole, you can be confident that you’re on the right track in meeting your diversification goals.

Given the limitations of traditional IRAs and 401(k)s, it might be prudent to use those accounts primarily for the “plain vanilla” investments such as large cap publicly traded stocks, government bonds and the like. If you only have a self-directed IRA you can certainly use it to make such investments, but as your nest egg grows and you direct more retirement savings to different accounts, you can use this diversification technique to meet your targets.

As you save, be sure to to prioritize your contributions to those accounts for which you’ll receive the greatest benefit. Many investors choose to maintain both a traditional self-directed IRA as well as a Roth self-directed IRA in order to ensure they can make the best choice for their contributions each year.

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.

Becoming More Active in Your Self-Directed IRA Investments

Posted on September 10, 2014December 9, 2019 by questadmin

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

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.

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

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

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.

Do You Have an IRA Exit Strategy?

Posted on May 7, 2014April 13, 2021 by questadmin

Estimated reading time: 3 minutes

You may be familiar with the term “exit strategy,” but perhaps only with respect to the investment world. In fact, it’s also important that you have an exit strategy when it comes to your IRAs. So what exactly does “exit strategy” mean in the context of your IRA?

Traditional IRAs require that once you reach age 72, you must begin taking distributions from your account each year. The minimum withdrawal amount is calculated each year based on your account balance and your age. (These are known as the “Required Minimum Distribution” or “RMD” rules.) The penalties for not following the RMD rules can be severe, and can effectively undo much of the tax advantage you may have gained by setting up the IRA in the first place.

But remember that for traditional IRAs, withdrawals will add to your taxable income. And if you’re subject to the Required Minimum Distribution rules, you’ll be forced to take those withdrawals (and pay the taxes that are due), regardless of whether or not you actually need that money to fund your retirement expenses.

On common technique for avoiding the RMD rules is to convert a Traditional IRA to a Roth account. Roth IRAs are not subject to the rules on RMDs, and you can even continue contributing to a Roth IRA after you reach age 72 – something that’s prohibited for Traditional IRAs. This means that an individual who has other resources to draw upon to fund their retirement can accumulate significant wealth and accomplish various estate planning goals using the Roth IRA structure.

It’s true that converting to a Roth account will incur an immediate tax liability, but the various advantages of the Roth IRA may significantly outweigh that liability for many account holders. Furthermore, while contributions to a Roth IRA are never deductible, individuals may find that if they’re covered by a retirement plan at work then they may not be able to make deductible contributions to a Traditional IRA either (if their incomes are above a certain level).

Speaking of estate planning, another way that IRA holders fail to prepare an exit strategy is by giving inadequate consideration to the beneficiary designation on their accounts. It’s common for account holders to name their spouse as their primary designation, but then fail to name their children or grandchildren as contingent beneficiaries.

If an IRA passes to an individual’s estate, then when the assets are distributed to the individual’s heirs those heirs must generally take distribution of those assets (thus accelerating the tax liability). But if those same beneficiaries were designated as such within the IRA account, they’d be able to choose a longer term distribution of funds, thereby delaying the tax liability (and letting the assets continue to grow on a tax-deferred basis).

Again, there are various advantages that a Roth IRA can provide over a traditional structure when it comes to estate planning. By opening a self-directed Roth IRA with a custodian such as Quest Trust Company, there are even more opportunities to maximize your retirement savings.

Understanding SEP IRA Tax Rules

Posted on April 18, 2014April 13, 2021 by questadmin

Estimated reading time: 3 minutes

Most 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.

Flip Houses With Your Self-Directed IRA

Posted on March 23, 2014 by questadmin

Estimated reading time: 3 minutes

One of the most powerful aspects of an IRA is that its structure permits you to grow your investments on a tax-deferred (in the case of traditional IRA) or tax-free (in the case of a Roth IRA) basis. With a long-term investment focus, you have the potential to grow your account balance for decades.

But even if the scope of your account is long-term, that doesn’t mean that the time frame for the individual investments within your self-directed IRA necessarily have to be long term. One potentially lucrative investment type with a relatively short-term outlook is flipping houses. And yes, you can make these types of investments with a self-directed IRA.

What is a Real Estate “Flip?” Some investors may not be familiar with the concept of flipping, so let’s first talk a briefly about what exactly that is. Flipping a piece of real estate refers to the process of buying a home and then quickly putting that property back on the market for sale. Between purchase and sale the investor (the “flipper”) may or may not do renovations or other improvements to boost the resale value. But in many cases the opportunity arises simply because the investor believes the property is being sold for less than its true value.

Using Your IRA For Real Estate Investing. Unfortunately, there is a lot of misinformation in the marketplace, and many retirement savers don’t realize that they can use their IRA funds to engage in flipping houses or other real estate investment activities. Federal law explicitly authorizes the use of IRA funds for these investments – any inability to use an IRA to do so is a limitation that’s imposed by many IRA custodians in order to make their job easier. A custodian such as Quest Trust Company will let you make every type of IRA investment that’s permitted by law.

A Few Words About Leverage. Depending on the balance in your self-directed IRA, you may be able to flip real estate as an investment strategy by using cash for all of your purchase transactions. Doing so would certainly make the process go more quickly, thereby potentially allowing you to engage in more transactions and boost your returns.

But if you choose to use leverage by borrowing money to purchase real estate for flipping, it’s important to understand that you may be incurring a current year tax liability because of that borrowing. Using leverage to make investments within an IRA can generate what’s known as “unrelated business taxable income.” And unlike other types of income you generate with your IRA, unrelated business taxable income is not tax exempt

Finally, if you’re considering flipping houses with your self-directed IRA, make sure to go into each transaction well educated and well prepared. Real estate investing (and flipping in particular) might be fun and exciting, but it’s still investing. So if you’re not already experienced with this type of investment, start with smaller transactions and proceed cautiously until you learn more.

The Most Important Retirement Planning Questions You Need to Consider

Posted on March 12, 2014 by questadmin

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.