Tips for Valuing Illiquid Investments In Your Self-Directed IRA

Estimated reading time: 3 minutes

In fact, you’re probably already somewhat familiar with this concept if you own your own home. You can get estimates of your current home value, but you’ll never really know exactly what it’s worth until you put it on the market and entertain offers.

Let’s take a look at some tips for how you might value illiquid investments that you hold in your self-directed IRA.

1. Define the Nature of the Illiquidity.
First, it might prove useful to identify the nature of the illiquidity. Is it simply due to a market downturn that’s resulted in less trading volume? Does the underlying investment have legal restrictions on you selling or transferring it (as is often the case with private equity investments)? By understanding why your investment may be hard to value or not, you’ll gain insight into not only how much it might be worth, but whether the factors that contribute to the illiquidity are short-term or long-term.

2. Consider Your Own Prior Experience.
When you first purchased the illiquid investment, how did you find it? How did you determine then what was an appropriate price to pay to acquire it? Use those same techniques to put yourself in the shoes of a prospective buyer. What factors and considerations will they use to calculate the worth of the asset?

Of course, this method can change over time. Markets for investments come online and develop, and there may be more information out there than there was when you first acquired the asset – For example, think about how much easier it is now to estimate the value of a piece of real estate with all of the online information that’s available.

3. Find Comparables.
Again, taking tips from real estate markets can be instructive. In order to determine the market value of a particular property, an agent or prospective buyer will identify recent sales of similar properties in the same or nearby neighborhoods in order to come up with a baseline for valuing a property.

The more recent the sale is, and more similar the property is to yours, the more valuable that information will be. Look to find a way to compare aspects that may be different but related to yours. For example, real estate buyers may look to a price per square foot measure as a way to compare properties of different sizes.

4. Find an Expert.
Finally, it’s likely safe to assume that whatever type of asset you’re talking about, there are others who have significant experience dealing with it. Nice experts may offer valuation services to help you be confident that, when it comes time to dispose of the asset, you’re able to get the best possible value. Be sure to ask for references and information about past deals for clients in order to feel confident that you’re dealing with someone who can provide you with the most help.

Tips For Managing A Large Real Estate Portfolio In Your Self-Directed IRA

Estimated reading time: 3 minutes

Real estate is a perennially popular investment type for individuals to pursue within their self-directed IRAs. The ability to invest in real estate – both developed and undeveloped properties – can provide an investment and risk profile that generally can’t be mirrored with traditional stock market investments.

But holding real estate within a self-directed IRA can also require a greater level of investment involvement as compared to those other asset classes.

With stocks or mutual funds, the only investor decision is generally just whether to buy or sell. But with real estate, you’ll need to take a much more active role in your investment. And as your real estate portfolio grows ever larger (as is often the case, because many investors view real estate as the ultimate “buy and hold” asset, and therefore tend to add to their positions more than they sell existing investments), you will want to make sure you’re managing your portfolio as efficiently and effectively as possible.

1. Have a Plan.
One of the biggest differences between real estate investments and other investment types is simply the transaction costs associated with making the investments. You can buy stocks, for example, and pay a relatively small commission – and if you quickly change your mind about the suitability of that investment you can sell it the next day and similarly pay a similarly small commission. That’s not the case when it comes to real estate. You need to do your research and planning ahead of time to be comfortable that you’re making the right decision.
You may also wish to consider how subsequent additions to your real estate portfolio in terms of risk and exposure to particular market downturns will affect you. For example, if you own multiple units in a single neighborhood or very small geographic area, then you’re bearing risks (both to the upside and downside) associated with that area’s growth.

2. Stay Active.
By “staying active” we mean that you’ll want to stay on top of your investments and frequently monitor the local market conditions, the condition of the property, and that your tenants are meeting all of their tenant obligations. The value of your investment can erode over time if you’re not paying close enough attention. When you monitor your investments you may also be able to identify opportunities or efficiencies to be gained across multiple real estate investments in your account.

3. Seek Out Professional Assistance.
The larger your real estate portfolio, the more you stand to gain by using a professional property management service. While you’re permitted to perform repair and management related tasks on your own investments, you can’t compensate yourself for your time or effort – doing so would constitute a prohibited “self-dealing” transaction. This is true even if you’re in the business of providing these services to other clients.

But you can hire an outside company or individual (provided they’re not related to you) to perform these services. Not only might that just bring a higher level of professionalism and service to your investments, it can also save you time and energy by not having to manage a growing portfolio yourself.

Steps For Rolling Over Existing Accounts Into A Self-Directed IRA

Estimated reading time: 3 minutes

As people work their way through one or more careers, and have several (if not dozens) of jobs, they can easily accumulate multiple retirement accounts. They generally come in the form of 401(k) accounts at past employers, traditional IRAs, Roth IRAs, and perhaps even employer pension plans (although this last type of benefit is becoming increasingly rare).

Unfortunately, it can often become quite an administrative burden to manage so many different accounts. For some individuals it can be challenging enough trying to come up with the time to review the monthly or quarterly statements from a single retirement account. Trying to do so for a half-dozen or more accounts can quickly become nearly impossible.

The best way to clear up this administrative nightmare is to roll over all of your existing accounts, including accounts from prior employers, into a single self-directed IRA. Here are the steps for doing so.

1. Identify Your Target Account.
If you don’t currently have a self-directed IRA, then you’ll need to set one up before you go any further. Requesting a rollover from a prior 401(k) or a current IRA, but not having a target account in place, can result in the other plan administrator sending you a check for your account balance. If you don’t deposit this check quickly enough, the IRS may consider it a taxable distribution, and the cost to you could be significant.

The better path forward is to have your self-directed IRA already in place, and request that your current custodian or plan administrator send your rollover proceeds directly to the new account.

2. Contact Your Prior and Current Account Administrators. Once you have a self-directed IRA set up, it’s time to contact each of your current and prior account custodians and administrators. When attempting a rollover of a 401(k) from a prior employer, you may need to begin the process by contacting the employer first; and if you don’t know where to begin, start with the HR or benefits department.

Have all the information regarding your new account ready to give the prior administrators, and be prepared to follow-up if the rollover doesn’t occur within the timeframe they specify. Some plans will give you the choice of liquidating your account and doing a rollover of the proceeds, or rolling over the investment positions themselves, while other plans will automatically liquidate your investments and do a rollover of cash. If you have the choice, make sure to do your research on what’s best for you.

3. Consider Your Next Investment Steps. As you may already know, self-directed IRAs provide significantly more investment options than traditional IRAs or 401(k)s, so it might seem a little overwhelming. You can use a self-directed IRA to invest in real estate, certain types of precious metals, private companies, private mortgages, and many other investment classes that almost certainly weren’t available with your prior retirement plans.

Exploring investment possibilities while the rollovers are occurring will give you the confidence to proceed with your retirement investing plan once the rollover funds are in your new account.

Selecting Your First Real Estate Investment For Your Self-Directed IRA

Estimated reading time: 3 minutes

Let’s say that like many individuals who are setting up their first self-directed IRA, perhaps drawn to the offerings of custodians such as Quest Trust Company because of the investment flexibility that such an account gives, you’re interested in using your new account to invest in real estate.

What are the next steps? How do you go about choosing your first real estate investment for your self-directed IRA?
What’s Your Prior Experience? When it comes to any new investment, there’s always some degree of learning as you go. But if you have very little or no experience with owning or managing real estate, then you may want to consider a more straightforward property for your first self-directed IRA investment.

What’s Your Investment Budget? Another key consideration is going to be the size of the investment budget for your first property. The more money you have available, the more options you’ll have.

As you formulate your budget, be sure to take into account the fact that any expenses for maintaining the property you buy must also come from within your self-directed IRA. This might be new contributions you are able to make each tax year, but these are subject to the annual contribution limits. Plan to either have your real estate generate enough income to pay for these expenses, or to incorporate other assets into your account in order to cover the real estate carrying costs.

What’s Your Current Portfolio Composition? Regardless of your preferred investment type, you always need to take care to avoid having too much of your portfolio committed to a single asset class. If you already have exposure to real estate in your portfolio (perhaps through banking stocks or REITs), then you want to factor that into your new investment considerations.

What’s the Purpose of the Real Estate Investment? Are you considering this real estate investment solely for potential gains, or do you have other goals in mind? For example, some people use their self-directed IRAs to purchase vacation or other properties that they intend to use themselves once they reach retirement age.

As you consider these types of investments, remember that the IRS regulations prohibiting self-dealing, meaning that you cannot use (nor can anyone in your family use) the property you buy until you take a distribution of it from your account during retirement (or face significant penalties if you take that distribution prior to retirement).

Start Small. Many first-time investors find that the best way to become more familiar with investing in real estate is to start small. This might be a single-family home, or even a condominium. Having a small investment in real estate can give you the opportunity to learn more first-hand, without over-committing your retirement portfolio to this type of asset.

Even though real estate is a fairly unique investment asset, it’s still subject to traditional financial analysis. Make sure you familiarize yourself with the local and broader real estate environment before making your first investment with your self-directed IRA.

Possible Advantages Of Having More Than One Self-Directed IRA

Estimated reading time: 3 minutes

You’ll often hear the financial advice that you can save time and money by rolling over your various IRAs and 401(k)s from previous employers into a single self-directed IRA. Doing so can help you better manage your retirement nest egg, potentially save on expenses, and provide you with the opportunity to invest in high-priced assets.

And there’s certainly a great deal of truth to that advice. It can often seem difficult to stay completely on top of a single retirement account, let alone multiple accounts.

But that doesn’t mean that there aren’t circumstances in which you can gain an advantage for yourself by having multiple self-directed IRAs. Let’s take a look at some of those potential advantages.

Better Management of Individual Assets

Because having a self-directed IRA with a custodian such as Quest Trust Company permits you to invest in unique individual assets such as real estate and private equity and debt instruments, there may be instances where you want to hold such assets in a separate account.

For example, if you own a multi-family apartment complex in a self-directed IRA, it might be easier to monitor or evaluate investment performance of that asset if there are no other holdings in the account. After all, consider how the income and expenses for this type of investment, as well as your management obligations, is likely to be significantly more complicated than holding a simple stock investment.

One Roth Self-Directed IRA and One Traditional Self-Directed IRA

Individuals who have variable levels of income from year to year, including those who frequently change jobs, may find themselves able to make deductible contributions to a traditional self-directed IRA in some years, while being ineligible to make such deductible contributions in other years.

These non-deductible contributions could certainly be made to the individual’s traditional self-directed IRA, but a better approach might be to set up a separate Roth self-directed IRA in order to receive those contributions. Because a Roth self-directed IRA has unique advantages over traditional accounts, you may wish to know of these advantages yourself while still having the potential to make deductible contributions to a traditional account.

Further Advantages of a Roth Self-Directed IRA

Having a separate Roth self-directed IRA as well as a traditional account can help you better achieve your various long-term financial goals better than simply having a single IRA. For example, a Roth self-directed IRA is not subject to the IRS rules on required minimum distributions, so if you have two accounts – one Roth account and one traditional cash account – you can use the traditional account to fund your living expenses once you reach retirement, while continuing to let your Roth account grow on a tax-free basis for as long as you choose.

Furthermore, Roth accounts provide a greater level of flexibility when it comes to estate planning, and some individuals use their Roth accounts as a quick and easy way to ensure their loved ones are taken care of after they pass.

Ultimately the decision of whether to have more than one self-directed IRA will depend on your particular financial situation. But many individuals have found that it can be quite valuable.

Minimizing Investment Expenses In Your Self-Directed IRA

Estimated reading time: 3 minutes

Self-directed IRAs are much more powerful than traditional retirement accounts. They allow the account holder to invest in the full range of investments permitted by the IRS (which include real estate, private companies, private debt, and even precious metals), rather than being limited to the standard range of “stocks, bonds and mutual funds” that would be permitted by a traditional custodian.

As you might expect, this additional opportunity and flexibility sometimes comes at a price. Think about two different types of investments you might hold outside of a retirement account; shares of stock in a publically traded company, and a piece of rental real estate. The only costs you’re likely to face with owning the shares of stock are the commissions when you buy and sell shares. Simply holding the stock won’t likely incur any expenses or fees, except perhaps for taxes on dividends you receive, and an account maintenance fee that you may already be subject to.

But holding a piece of real estate for investment purposes is a much different scenario. The property itself is likely to need physical maintenance and upkeep, and there are certain to be expenses connected with finding tenants. And you’ll face a property tax bill every year, even if you aren’t bringing in any rental income.

It’s the same case with different types of investments that you hold within a self-directed IRA. Here are a few important concepts to consider to minimize the investment expenses within your self-directed IRA.

Understand Your Costs Before Investing. You’ll do a much better job of minimizing your investing expenses if you have a better understanding of what they’re likely to be before you invest. If you’re considering a particular type of investment within your self-directed IRA, and you’ve previously made similar investments in non-retirement accounts, then use that experience to estimate what your expenses might be, and to help you identify ways to reduce them.

Shop Around. Even if you’ve determined that you want to make a specific type of investment (let’s say real estate), it can pay to shop around for another specific asset in the same class that might carry lower expenses. For example, rather than purchasing a single-family home that comes with sizable repair costs, you might instead look to buy a property with a similar investment profile but that’s likely to require fewer repairs.

Use a Professional. Believe it or not, managing certain types of investments within your self-directed IRA yourself might be more expensive than hiring someone to do it for you. This is especially the case where you’re unfamiliar with the particular type of investment. When you’re considering bringing in outside help, remember to take into account the fact that you cannot compensate yourself for any time you spend managing investments within your self-directed IRA, whereas you can use funds from within your account to pay for professional management services.

Finally, don’t get so focused on reducing expenses that you fail to consider promising investment opportunities. Ultimately you want to maximize the total return in your portfolio, so if you have to spend a little more in order to make a lot more, that should be a trade-off you’re willing to make.

Making The Maximum Contributions To Your Self-Directed IRA In 2021

Estimated reading time: 3 minutes

One of the keys to successful long-term retirement saving is to save as much as you are able, year in and year out. Consistent saving helps to insure that you’re not investing solely at market high points, and there’s simply no substitute for steady investing over time.

For the tax year 2021, individuals can contribute up to $6,000 per year to their IRAs, with a $7,000 limit for individual age 50 and over. Being able to make these annual contributions puts you in the best possible position to reach your retirement goals, in large measure because once you miss the opportunity to make an IRA contribution for a given tax year, you can’t go back later and make up for it. Your annual IRA contributions are the ultimate “use it or lose it” situation.

Here are some tips for helping you make the maximum contributions to your self-directed IRA in 2021.

1. Plan Ahead. Of course, the best way to put yourself in a position to make the maximum allowable contributions to your self-directed IRA in 2021 is to plan ahead. This means incorporating your IRA contributions into your budget.

One of the most common reasons that individuals come up short with their annual contributions is that they take the approach of waiting until the end of the year to begin thinking about how to come up with their contributions or, worse yet, simply taking the approach that they’ll contribute whatever money they have “left over” at the end of the year. You’ll rarely be successful with this type of a passive savings approach.

2. Prioritize. Sometimes retirement savers are intimidated at the prospect of making a one-time contribution of $6,000 (or $7,000 if you’re age 50 or over). But these amounts are simply the annual caps on contributions to your account. If it’s a better fit for your budget and cash flow, you can choose to make smaller quarterly or monthly contributions, or even allocate a small portion of each paycheck to your self-directed IRA.
Note that these limits are cumulative annual amounts, so an individual with multiple IRAs can contribute a total of $6,000 to their accounts, not $6,000 to each account. If you choose to have multiple self-directed IRAs (and there are some very good reasons you may wish to do so), then plan accordingly.

3. Get Creative. You may be familiar with the concept of strategically selling certain losing investments from your taxable accounts in order to offset the gains you’ve realized from other investments, thereby reducing your overall tax bill. By the same token, this type of strategy may be able to get your taxable income low enough for you to be able to make a deductible contribution to a traditional self-directed IRA, thereby reducing your tax bill even more.

Remember that with a self-directed IRA, you’re not cut off from making contributions for a particular tax bill on December 31 of that year. So, you actually have up to the tax filing deadline (or the date on which you file your 2021 return, if you do so before May 17) in order to contribute.

Is A Self-Directed IRA More Powerful Than Your 401(k) At Work?

Estimated reading time: 2 minutes

Most individual retirement savers have a wide range of opportunities and account options to help them save. Quite often it comes down to two basic choices; a 401(k) plan that’s offered by your employer, and an IRA that you set up with the custodian of your choice.

But some people don’t realize that there are actually some significant differences when it comes to choosing that IRA custodian. Traditional custodians such as discount brokers, banks and credit unions offer an artificially restricted set of investment options that you can choose from. Self-directed IRA custodians allow the full range of investment choices that are permitted under the relevant IRS regulations.

For many, the main choice is between a 401(k) at work and an IRA, possibly a self-directed IRA with a custodian such as Quest Trust Company. It’s certainly possible to use both accounts, but if you have to choose between them, here are some factors to consider.

Investment Options. We mentioned it above, but this is possibly the biggest difference between a self-directed IRA and a 401(k). You can use your self-directed IRA to invest in real estate, private companies, precious metals, issue private debt, and more. At the other end of the spectrum, your employer-sponsored 401(k) will only provide you with a limited set of options. In fact, many 401(k) plans only offer a relatively small range of mutual fund choices, and you won’t even be able to invest in publicly traded stocks.

For many, having the broadest range of investment options is the most important factor in deciding between accounts, and their self-directed IRA is the clear winner.

Contribution Limits. It’s true that your annual contribution limit for a 401(k) that’s offered by your employer is likely to be higher than that for a self-directed IRA. For 2021, the contribution limit for the IRA is $6,000 (plus an additional $1,000 for individuals age 50 and older).

Employer Matching. Employer matching of your contributions to your 401(k) can be valuable, but make sure you understand the limitations and restrictions that may apply. For example, some employers only provide a match for investments that goes directly into company stock. While this might seem like a great opportunity to earn “free money” in your account, be sure that your company stock is a suitable investment for your portfolio, and that you don’t become too heavily weighted in at particular investment. Furthermore, many employers have done away with work or reduced their match programs.

You can still leverage the value of the higher contribution limits for 401(k) plans by simply prioritizing the first $6,000 (or $7,000) of your retirement savings toward your self-directed IRA, then contributing any additional amounts you have available to your 401(k). Remember that when you stop working for that employer you can always roll over your 401(k) into your self-directed IRA.

Investing In Oil And Gas With Your Self-Directed IRA

Estimated reading time: 3 minutes

When people think of the “alternative” investment types they can purchase with a self-directed IRA, they generally think of precious metals, real estate, private equity and private debt. (And let’s be clear, it’s probably unfair to think of these as “alternative” investments because they are fully authorized by the IRS regulations relating to IRAs.) Another asset class, and one that perhaps comes to mind as often, relates to the oil and gas industries.

Because oil and gas investments are less common, let’s discuss some of the basics for making those investments with a self-directed IRA.

Don’t Ignore the Learning Curve. Oil and gas investments are arguably one of the most complicated types of investment that you can make. Concepts of mineral interests, surface rights, working interests and royalty streams are not generally encountered with other investments.

Because many oil and gas investments are relatively illiquid, it’s absolutely essential that you do your due diligence on any potential investment, and fully understand the nature of the arrangement you may be participating in. As with any other investment, don’t rush into an oil and gas opportunity if you don’t fully understand all the relevant terms, provisions and risks.

Types of Oil and Gas Investments. There are a number of different ways to make investments in the oil and gas industries, including not only the commodities and futures contracts, but interests in the refining and drilling companies, as well as investing in land or mineral interests where drilling is taking place (or likely to take place in the future).

Other Energy Projects. Even though we’re focusing here on oil and gas investments, understand that other energy industry projects may provide you with similar opportunities. If you don’t find any suitable oil or gas projects to invest in, consider solar energy projects, wind energy, biofuel, or water energy projects as well.
The developments of just the past few years solidly demonstrate just how much potential there is for oil and gas activity within the United States. But you may also wish to consider other projects that may exist outside the United States.

Tax Considerations. Depending on the type of investment you’re considering, you should check whether there are tax incentives available for investments made with non-taxable funds. If so, and you have enough funds available in your taxable investment account, then you may wish to make the investment outside of your self-directed IRA in order to maximize your benefits. However, many of these tax breaks have expired as domestic development has boomed, so most potential investments may still be suitable for your self-directed IRA.

Also consult with an expert to understand how UBTI (Unrelated Business Taxable Income) might impact your investment. This concept (which can be an issue for self-directed IRA owners when they seek to use debt financing to make an investment – such as getting a mortgage for a real estate purchase) can result in an immediate tax bill for certain types of investments.

The key in all aspects of an oil or gas investment within your self-directed IRA is to do your homework.