Ira Contributions Archives - Quest Trust Company

Quest Trust CompanyBlogIra Contributions

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.

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.

Tips for Balancing and Diversifying Your Retirement Portfolio

Posted on October 23, 2014December 9, 2019 by questadmin

Estimated reading time: 3 minutes

As your retirement portfolio grows, you’ll need to become more active in the management of your various retirement savings accounts. It’s true that you probably won’t need to spend a great deal of time balancing or diversifying a retirement portfolio of $5,000. But once your account balance reaches $50,000 or $500,000, portfolio balance and diversification will become much more important. Here are some tips for doing so.

Consider All Your Options

Make sure you understand all of the investment options you have available to you with your self-directed IRA. If you’re new to working with a self-directed IRA custodian such as Quest Trust Company, then you may not realize all of the different investment choices you have with that type of account. In addition to stocks and bonds and mutual funds, you can use a self-directed IRA to invest your retirement savings in things such as precious metals, real estate, and even private debt and equity.

Having this degree of investment flexibility allows you to diversify in ways that you wouldn’t be able to do with your 401(k), or an IRA that’s held with a traditional custodian such as a discount brokerage or your local bank. If you’re not familiar with how a particular investment works, educate yourself so that you can decide if it’s appropriate for you.

Find the Right Solution for Your Needs

There isn’t a single best diversification strategy that works for every single investor in every stage of their life, and regardless of their individual financial situation. Different individuals will have different amounts of retirement savings in other accounts, different family needs, different desired lifestyles during retirement, and so on.

As you work to balance and diversify your retirement portfolio, make sure you understand what your long term financial goals are, and how your retirement portfolio fits into your overall financial situation. What type of retirement do you envision? Do you have other sources of retirement income? Will you want to use your retirement accounts as a way to accomplish other goals, including perhaps estate planning?

Stay Active

It’s important to take an active role in your retirement savings. This doesn’t mean that you need to trade in and out of your investments on a daily basis (and, in fact, that approach will almost certainly negatively impact your investment returns). But it does mean that you should stay current on how each of your investments is performing, and whether any market conditions have changed in such a way that you would not purchase that same investment again if given the opportunity to do so.

That’s such an important fact that it bears repeating again – In order to be able to effectively balance and diversify your portfolio you need to be up to date on the current market realities. Get in the habit of reviewing and analyzing your portfolio periodically, in order to make sure you’re maximizing the growth potential of your retirement account.

Do You Have a New Child on the Way? Here are Some Changes to Consider for Your Self-Directed IRA

Posted on September 17, 2014December 9, 2019 by questadmin

Estimated reading time: 3 minutes

Big life changes often bring about big changes to your financial plans as well. Finding a new job, losing your job, getting married, getting divorced, or having a parent or family member suddenly require long-term medical care can all introduce a significant need to reevaluate your long-term plans. Having a child is another instance in which you may wish to consider making some changes to your retirement accounts, including your self-directed IRA.

Prioritize Your Contributions

You should be working to prioritize and maximize the effectiveness of your IRA contributions each year, but it will become even more important when you have a new child. You’ll be faced with many new expenses relating to your becoming a parent, and these financial challenges can sometimes have the unfortunate effect of causing individuals to forego or reduce their annual retirement contributions.

But when you know you have another person counting on you – now and into the future – it’s even more important that you continue executing your long term financial plan. And a big part of this is making sure that you contribute to your self-directed IRA every single year.

Updating Your Beneficiaries

As you work to integrate your new child into your life, you’ll likely be doing things like updating your will, adding your child to your health insurance, and perhaps naming them as a beneficiary of your life insurance policy.

This is also a good time to revisit the beneficiary designations you might have made for each of your financial accounts, including your self-directed IRA. Depending on how they are phrased, these types of beneficiary designations can supersede the terms of your will your will, so you never want to just assume that your assets will be distributed in accordance with what you may have written in your will. The beneficiary designations in your IRA documentation must be up to date.

Converting to a Roth IRA

Also on the subject of beneficiaries, it’s important to note that a self-directed Roth IRA contains a number of different estate planning advantages over a self-directed IRA that’s set up as a traditional account.

Converting an existing self-directed IRA from a traditional account to a Roth account will cause a tax hit in the year of conversion, but if you still have a decade or two before retirement, or you have significant other retirement assets, then performing such a conversion can be a big boost to your overall wealth. And if you haven’t yet set up your self-directed IRA, then consider all of the long-term advantages that a Roth account can provide over a traditional account.

Under ideal circumstances, you should be reviewing all of your financial accounts on a fairly regular basis, including long-term accounts such as your self directed IRA. It’s certainly not uncommon for people to neglect those regular evaluations. But when you have a new child on the way, it’s absolutely essential that you give your accounts another look.

How Your Self-Directed IRA can Boost Your Tax Refund

Posted on September 2, 2014April 13, 2021 by questadmin

Estimated reading time: 2 minutes

As we inch closer to the tax filing deadline, we’re all looking to reduce our tax bill so that we can receive back the largest possible tax refund (or reduce the size of the check we have to send to the IRS). We can decrease the annual tax burden by utilizing the greatest number of deductions that are available.

If the deduction for IRA contributions is available to you, it can prove to be an extremely valuable benefit. Here’s how your self-directed IRA can boost your tax refund:

Deductibility for Traditional IRAs. Depending on your modified adjusted gross income (MAGI), and whether you are covered by a retirement plan at work (such as a 401(k)), 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).

Note that these figures only relate to the deductibility of contributions, not eligibility for contributions. In general, any individual with earned income can contribute to a traditional IRA in an amount not exceeding that earned income. In contrast, being able to make contributions to a Roth IRA (which are not deductible) will depend on your MAGI.

Tax Benefits for Roth IRAs.

Despite the fact that you can’t take a tax deduction for contributions you make to your self-directed Roth IRA, there are still some reasons for you to consider that type of account. Withdrawals from a Roth IRA are made on a completely tax-free basis, instead of having to pay taxes on withdrawals as you would with a traditional IRA.

Furthermore, Roth IRAs are not subject to the rules on required minimum distributions. If you have a traditional self-directed IRA then you are required to make specified withdrawals every year once you reach age 72. If you don’t need to take withdrawals from your self-directed IRA in order to pay your living expenses, the benefits of being able to let the balance of your Roth IRA continue to grow tax-free can be significant.

To learn more about self-directed Roth IRAs, contact an experienced custodian such as Quest Trust Company.

Tips for Navigating the IRA Rules on Required Minimum Distributions

Posted on August 30, 2014 by questadmin

Estimated reading time: 3 minutes

In general, the concept of an individual retirement account is relatively easy to understand, even for individuals who haven’t yet opened an account for themselves. The IRA lets you save money for retirement by making investments of your choosing (and self-directed IRAs provide even more options in this regard) and you’ll receive certain tax benefits as part of owning an account.

But some aspects of the IRA are fairly new to some people in the first open an account. One of the most potentially confusing concepts is the IRS rules on required minimum distributions (or “RMDs”). Here are some tips for navigating and staying on the right side of the rules.

What is the General Rule for Required Minimum Distributions?

The IRS requires that once the owner of a traditional IRA reaches age 70½, that individual must begin taking distributions from their account. These distributions are subject to a required minimum (which is calculated on the basis of the individual’s life expectancy and account balance), and must be made each and every year. There are several important points to recognize when it comes to this rule.

Roth IRAs Aren’t Covered.

Perhaps most significant rule is that the RMDs only apply to traditional accounts. Roth IRAs are not subject to the RMD rules. This means that an account holder can continue to let their Roth IRA grow for many years into retirement. For retirees who have multiple sources of retirement income (Social Security, 401(k)s, other IRAs, etc.), this can be a great way to maximize their overall nest egg.

In addition, since different types of IRAs – particularly Roth accounts – can be used to achieve various estate planning goals, the fact that Roth accounts are not subject to the rules for RMDs makes them especially attractive savings vehicles.

The RMD Amounts are Only Minimums.

The rules on RMDs don’t exist for the purpose of creating a withdrawal schedule that you must follow during retirement. The amount that is calculated as the required minimum for any given year is just that; a minimum. You are always free to take out more than the RMD amount from your account each year.

The RMD Amounts Change.

Furthermore, because the RMD amount is based in part upon the balance in your account, your investment performance can significantly change the RMD amount from one year to the next. As your account grows, for example, the amount might actually increase significantly from one year to the next.

Self-Directed IRA Considerations.

Special considerations must be given to these rules if you choose to structure your self-directed IRA as a traditional account. Consider how you will satisfy the RMD rules each year once you enter retirement. For example, if your account investment portfolio is comprised largely of real estate, will you need to liquidate any of your holdings in order to meet your obligations?

If you find that satisfying the rules for RMDs from a traditional self-directed IRA may be too onerous, remember you can always evaluate the possibility of converting to a Roth account.

Best Practices for Maximizing Your Tax Benefits With a Self-Directed IRA

Posted on August 28, 2014 by questadmin

Estimated reading time: 3 minutes

Self-directed IRAs are a powerful tool to help individuals build the largest possible retirement nest eggs. Obviously there is great value to being able to choose from the widest possible range of investment options. But the greatest upside of having a self-directed IRA and making regular contributions to it is the fact that it provides you with long term tax-deferred (or, in the case of a Roth IRA, tax-free) growth.

Here are some of the best practices for maximizing all the available tax benefits you have with a self-directed IRA.

Current Year Tax Deductions for Contributions

If your self-directed IRA is structured as a traditional account, then you may be able to take a current year tax deduction for the value of your annual contributions, depending on your income and whether you are covered by a retirement plan at work. While you’ll be subject to taxation on withdrawals from your traditional self-directed IRA once you reach retirement (which wouldn’t be the case for withdrawals from a Roth account), you may decide that the current year tax advantage is worth it to you.

Hold Tax-Advantaged Investments in Your Taxable Accounts

Because all investment income and capital growth that happens within a self-directed IRA is tax-advantaged, holding investments that have built in tax-advantages is redundant and wasteful in terms of tax benefits. Therefore, if you invest in tax-free government bonds then those assets would be better held in a taxable account, and not your self-directed IRA.

Avoid UBTI

Also in the same category of avoiding mistakes is making sure used to your clear of unrelated business taxable income (UBTI). In the context of self-directed IRAs, UBTI most often becomes an issue when an account holder borrows money to make an investment – commonly by taking out a mortgage in order to buy real estate. Borrowing money to invest is outside of the statutory authorizations of any IRA, so it’s important to avoid any transactions that would lessen the tax benefits of your account.

Maximize Tax Free Growth

In order to maximize the benefits of tax-deferred or tax-free growth within your self-directed IRA, it’s important to let your account grow for as long as possible. One implication is that you should try to avoid taking any early withdrawals from your account. Even if you fall within one of the penalty-free exemptions for doing so, by reducing the amount you have invested you reduce the amount of tax benefit you’ll achieve in the years leading up to retirement.

Consider a Conversion to a Self-Directed Roth IRA

Finally, if you truly want to maximize your tax benefits, consider converting a traditional self-directed IRA into a self-directed Roth account. You’ll need to pay taxes on the conversion amount, but if you can afford that current year tax hit, and you have a number of years before retirement, it may be the best long-term decision.

Of course, tax laws evolve and change over time, so it’s also very important that you stay up-to-date on all the rules and regulations regarding self-directed IRAs.

Three Common IRA Myths to Guard Against

Posted on August 26, 2014 by questadmin

Estimated reading time: 3 minutes

There is a lot of good information out there about individual retirement accounts. Quest Trust Company, for example, has published a great deal of valuable information and guidance about the pros and cons of the various account types, including the self-directed IRA, how to get started, and pitfalls to avoid.

But there’s also no shortage of misunderstandings that people have, as well some common IRA myths have been around for decades, it seems. The biggest problem with this misinformation is that it can lead people to make sub-optimal decisions regarding their accounts, or perhaps even to not open an account in the first place.

Here are three of the most common myths that you need to guard against.

It’s Not Worth Making Non-Deductible Contributions to an IRA.

Many retirement savers are initially drawn to IRAs because their contributions may be tax-deductible in the year they are made. This can be an extremely strong incentive to contribute, as it effectively gives the account holder and immediate “rebate” or return on their investment equal to the amount of their deduction.

The downside of this valuable benefit is that it can sometimes lead people to focus too much on the possibility of a deduction and not enough on the long-term benefits of the IRA itself. For example, Roth IRAs don’t allow deductibility of contributions, but all investment earnings and income within the account can be withdrawn tax-free during retirement. (With a traditional IRA, those withdrawals during retirement would be taxable.)

Even if you are not eligible to make contributions to a Roth account, making nondeductible contributions to a traditional IRA still provide a significant tax savings because of the tax deferred nature of investment earnings. Just keep in mind that you may want to set up a separate account for those nondeductible contributions, just to ease your administrative burden.

You Can’t Make Contributions to an IRA and 401(k) in the Same Year.

Another common misconception is that an individual cannot contribute to both a 401(k) and an IRA in the same tax year. This is simply not the case.

Both IRAs and 401(k)s have annual contribution limits, and your decision to participate in an employer-sponsored 401(k) may impact the type of IRA contribution you can make (deductible versus nondeductible) but you certainly can – and should – seek to maximize your IRA contributions each year.

Self-Directed IRAs Have No Investment Limitations

This myth is really only applicable to self-directed IRAs, but it’s an important one to understand. Self-directed IRAs provide individual investors with far more options than the IRAs that are available from traditional custodians. But there are IRS restrictions that apply to all IRAs (even self-directed IRAs), including prohibitions on self-dealing. For example, you can’t use your self-directed IRA to invest in a business that you draw a salary from, or to purchase art or collectible coins (even if your intention is to make those purchases for investment purposes).

The best way to make sure you understand all the important factors surrounding IRAs is to do your research.

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.

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.