Ira Structure Archives - Quest Trust Company

Why the Type of Self-Directed IRA You Have Can Impact Your Retirement Timeframe

Posted on September 2, 2015December 6, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

The type or types of retirement accounts you use can impact many different aspects of your overall retirement planning. Different accounts have different contributions, different features, different limitations, and different types of tax advantages. In fact, the type of self-directed IRA you choose can even impact your timeframe for retirement.

The two types of self-directed IRAs are traditional accounts and Roth accounts, and they differ in a few key respects. First, a traditional self-directed IRA is subject to the IRS rules on required minimum distributions. This means that once you reach age 70½, you’ll need to begin making withdrawals from your account.

The amount of the required minimum withdrawal each year is calculated based on the balance in your account and your age. The annual minimum withdrawal amount can change significantly from year to year, for example, if your account experiences particularly large investment gains or losses. Roth IRAs, on the other hand, are not subject to this set of rules.

Having to follow the rules on required minimum distributions could impact a person’s investment timeframe in that it forces a person to take taxable withdrawals from their traditional self-directed IRA regardless of their actual income needs, regardless of whether they desire to continue working, and irrespective of their other retirement assets.

The type of self-directed IRA you choose can also impact the income you’re able to draw from your account each year.

With a traditional self-directed IRA, you’ll be subject to income tax on the distributions you take from your account. This means that when you’re planning your strategy for when and how much you’ll withdraw from your account in order to fund your living expenses during retirement, you’ll need to do some additional calculations to account for your tax liability.

For example, let’s say your annual budget for all your expenses is $50,000 per year. If your self-directed IRA is set up as a traditional account, then taking a $50,000 distribution is likely to yield perhaps only $40,000 or less. So in order to wind up with $50,000 you might need to take a distribution of perhaps $60,000 or $65,000 or more, depending on your individual tax situation. Once you take these factors into account, you may determine that your traditional self-directed IRA won’t last you as long as you assumed it would just by looking at your account balance, particularly when your tax situation can change from year to year.

Distributions from a Roth self-directed IRA during retirement are not subject to income tax, so the amount you have in your account is the amount you can use for planning your distributions in whatever way you see fit.

It’s true that when you make contributions to a Roth self-directed IRA you can’t deduct those contributions for your income tax return. But choosing a Roth account over a traditional account can give you greater retirement planning flexibility going forward.

Considerations For Naming Beneficiaries Of Your Self-Directed IRA

Posted on March 3, 2015August 12, 2019 by questadmin

Estimated reading time: 3 minutes

From your savings and checking accounts to your 401(k) at work, to your taxable investment accounts, nearly every financial or savings vehicle you have is going to require you to name beneficiaries for the account. Here are some considerations for when you need to do so for your self-directed IRA.

Other Estate Planning Vehicles. The first thing to consider is what other estate planning techniques and accounts are you making use of. Consider not only things such as life insurance and trusts, but also beneficiary designations you may have on your investment accounts. If you own real estate, is it held individually, or as joint tenants with right of survivorship? Depending on your other financial assets, you may find that certain individuals or family members are adequately provided for, and that you can use your self-directed IRA beneficiary designations to benefit other individuals.

The Investments in Your IRA. Another consideration is the composition of investments in your self-directed IRA. For example, if your account includes a piece of real estate that you want to be passed to a particular individual, then you may need to set up a separate account for that asset. If your account contains no such assets, and you simply want your account to be divided by value to your beneficiaries, then a single account will suffice.

Spousal Heirs vs. Non-Spousal Heirs. In general, leaving a self-directed IRA to your spouse generally provides your spouse with much greater value than leaving the same account to a non-spousal heir. Spousal heirs can generally treat the self-directed IRA as their own, which allows them to continue the tax-advantaged status of the account. Non-spousal heirs must generally begin withdrawing from the account, and paying applicable taxes, within a relatively short time frame after your passing.

If you are earmarking accounts and investment assets to a range of heirs, consider designating all or a higher percentage of your self-directed IRA to your spouse, and using other estate planning tools for non-spousal heirs.

Don’t Forget Contingent Beneficiaries. While the issue of contingent beneficiaries is an issue for virtually all estate planning matters, it can be particularly important for self-directed IRAs. It’s important to review and update your beneficiary designations from time to time, and consider what you would want to happen if one of your named beneficiaries predeceases you.

In general, unless you need specific contingent beneficiaries, there are two ways in which your requests can be carried out in the event of an heir who predeceases you. A “per capita” designation means that the predeceased heir’s share is divided amongst the remaining heirs. For example, if you name three beneficiaries to equally share in your account, and one passes away before you, then the other two surviving heirs will share in the account unless you designate otherwise.

A “per stirpes” designation means that in the event of a beneficiary who predeceases you, that individual’s heirs will stand in their place and receive their bequest. This can sometimes be a better way to carry out your true estate planning intent. In the same example of three named beneficiaries, if one were to predecease you, then that individual’s heirs would receive their share instead of the two other beneficiaries you named.

In any case, the best way to avoid any uncertainty is to regularly review and update your account designations as appropriate.

Should You Use Your Self-Directed IRA to Buy Investment Properties While Interest Rates are Low?

Posted on October 20, 2014December 9, 2019 by questadmin

Estimated reading time: 2 minutes

The ability to invest in real estate is one of the most common reasons why retirement savers first start becoming interested in the self-directed IRA. An individual retirement account with a self-directed IRA custodian such as Quest Trust Company individuals to out their retirement funds to work in investments that traditional IRA custodians simply wouldn’t allow.

Adding to the desirability of investment real estate for retirement savers is that interest rates on mortgages and other types of borrowing continue to be quite low.

UBTI

Even if interest rates are low, you may not be able to derive the benefit you hope from borrowing money to buy real estate with your self directed IRA. This is because the tax laws that authorize individual retirement accounts put some limitations on how those accounts may be used. In particular, the activities of IRAs must be related to the fundamental purpose of the account, and that means to make investments. Borrowing money to make investments, however, is called out as an activity that’s at odds with the fundamental investment purpose.

As a result, when an IRA borrows money, the investment gains that result from that borrowing are considered to be unrelated business taxable income (or “UBTI”), which means that you’ll face a current year tax bill because of your investment borrowing. In many cases, this can greatly reduce or even exceed the advantages you gain by taking out a mortgage.

Investment Quality

If you choose to borrow money within your self-directed IRA in order to invest in real estate, be sure you are doing so because you are presented with a quality investment opportunity, rather than simply because interest rates are low. You should have a plan for how each piece of property you acquire is going to become a productive part of your portfolio, and your anticipated timeframe for that to occur.

Note that this doesn’t necessarily mean every piece of investment property you acquire needs to be productive right away. “Fixer uppers” are certainly appropriate for investment; just be sure you take into account any repair or remodeling costs into your financial analysis.

Fees

Regardless of how you choose to use your self-directed IRA to acquire investment properties, you should have a comprehensive understanding of the costs and fees that come with holding the property. For example, many real estate investors will tell you that as they build larger portfolios of property, they find that their costs on a per property basis tend to decline. This is because they are able to leverage certain economies of scale when it comes to property managers, repair and maintenance professionals, and other types of support they need in maintaining those properties.

Low interest rates can be a factor in deciding whether or not to buy investment real estate with your self-directed IRA, but it should not be the only factor.

Risks to Watch Out for With Self-Directed IRA

Posted on March 20, 2014 by questadmin

Estimated reading time: 3 minutes

Self-directed IRAs can be a very powerful tool to help you reach your retirement goals., But along with this powerful account structure come certain risks that you need to be on guard against……..

Borrowing Money or Using Leverage. Self-directed IRAs are so valuable largely because they can be used to purchase various types of investments that traditional IRA custodians would not allow. A retirement saver with a self-directed IRA at a custodian such as Quest Trust Company can use their account to purchase private equity investments, precious metals and real estate. It’s even possible in some circumstances (and subject to certain conditions) to take out a mortgage with a self-directed IRA in order to borrow money to purchase larger pieces of real estate.

While this type of borrowing or leverage activity is permissible, it also comes with certain tax consequences. Specifically, any investment income is generated using borrowed money or leverage within a self-directed IRA will generate a current year tax liability for the account holder. This can come as a surprise to some retirement savers, since most other investment activities and the gains within an IRA did not give rise to similar liabilities.

Self-Dealing. The laws and regulations regarding IRAs are very clear and strict when it comes to the prohibitions on self-dealing. “Self-dealing” is receiving a benefit from your IRA before you take any formal distribution of assets from the account. And the notion of “benefit” is construed very broadly.

For example, you might choose to use your self-directed IRA to purchase a vacation cabin near a ski resort, with the idea of renting it out now to generate income for your IRA, eventually living in the cabin when you retire. This is a perfectly valid investment within a self-directed IRA, but you cannot personally use that cabin (nor can any family members or “related persons”) before you retire – even if you pay the same rental fees that an unrelated person would. Engaging in this type of self-dealing could result in significant financial penalties.

Investment Risks. Sometimes the funds in an IRA can seem a little removed from an individual’s other assets, particularly when that individual might not have penalty-free access to those funds for decades. This can sometimes lead the account holder to take investment risks with those funds that they wouldn’t feel comfortable taking with their non-retirement accounts.

This can go too far in the other direction as well. Given the importance of a retirement savings account, some individuals are overly conservative in their investment choices within a self-directed IRA. It’s true that capital preservation is important, but that shouldn’t be your only consideration, and it shouldn’t necessarily come at the expense of investment growth. For example, you could be very confident that your account balance would never decline, even temporarily, by investing all of your retirement assets and bank CDs. However, if this is your only investment type for 30 years, you may find it difficult to reach your retirement savings goals.

By understanding all of the rules that apply to self-directed IRAs, you’ll be in a much better position to reach your retirement goals

Take Advantage of Your Annual Gift Tax Exclusion

Posted on March 6, 2014April 13, 2021 by questadmin

Estimated reading time: 3 minutes

One aspect of tax planning that many individuals may not be familiar with is the taxability of gifts. Separate and apart from any estate taxes that may be due when you transfer assets after you pass away, gifts that you make during your lifetime may increase your federal tax liability as well.

The General Rule on Gift Taxes.

Unless a tax exclusion applies, making a gift to another person will generally trigger a tax liability in the year in which the gift is made. A “gift” is defined by the IRS as any transfer to another individual where the transferee does not provide equivalent financial value back to the transferor.

Of course, individuals have many reasons for making gifts before they pass away. Obviously many are going to want to see for themselves the benefits that accrue to the gift beneficiaries. Furthermore, foregoing gifts while still alive means leaving a larger estate, which could trigger tax liabilities that would effectively reduce the value of the estate that gets passed down to your heirs.

Individual Gift Tax Exclusions.

Fortunately, the tax code contains several provisions that exclude certain types of gifts from federal tax. Every recipient is subject to an annual exclusion amount, such that the aggregate amount of all gifts from you to that individual will not be subject to taxation if the amount is below the exclusion. For both 2020 and 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. This means that you can make many different gifts without triggering any tax liability, provided that each domain receives no more than $15,000.

While it might seem like the lifetime exclusion would easily cover all gifts that an individual could make, some taxpayers find that it’s important to document all of their financial gifts so that they can be sure not to exceed this lifetime tax-free gift cap. This is true because the applicability of the estate tax is determined based on the size of your estate after taking into account the prior taxable gifts you’ve made. In other words, if you made gifts during your lifetime in excess of the exclusion that was in force during the applicable tax year, then the amount that you can pass on before the estate tax applies is correspondingly reduced.

Other Gift Tax Exclusions.

As noted above, the exclusion for tax-free gifts is capped at $15,000. In addition, there are certain types of gifts that will not trigger any current year taxation, irrespective of the amount. These are:

gifts made for the purpose of paying an individual’s higher education tuition expenses (but not room, board, books or other associated educational expenses);
gifts made for the purpose of paying an individual’s medical expenses;
gifts made to your spouse; and
gifts to a political organization for their own use.

The gift tax rules can be a challenge for taxpayers who are facing them for the first time. If you believe that the gift tax provisions may apply to your situation, the best course is probably to consult with a professional advisor.

Can You Use a 1031 Exchange in Your Self-Directed IRA?

Posted on October 4, 2013May 6, 2021 by questadmin

Estimated reading time: 3 minutes

You may not be familiar with so-called “1031 Exchanges” (named such after the section of the Internal Revenue Code that authorizes them). A 1031 Exchange provides an exception to the tax laws by allowing you to postpone paying taxes that are due on the gain realized from the sale of real estate if you immediately reinvest your proceeds in a similar property as part of a qualifying like-kind exchange.

Note that simply selling a property and buying a new property will not qualify as a Section 1031 exchange. In order to avail oneself of this tax code benefit, the purchase and sale transactions must be mutually dependent upon one another. For many investors, using a third-party facilitator or intermediary to help structure the transaction is the best way to ensure legal compliance.

Applicability to Investments Within Self-Directed IRAs. You may be wondering why a section 1031 exchange could ever be relevant to their self-directed IRAs. After all, aren’t IRAs and the investment activities therein tax-deferred (in the case of a traditional IRA) or tax-free (in the case of a Roth IRA)? While that’s generally true, strictly speaking not every IRA activity qualifies for these tax benefits.

Debt Financing Triggers UBTI. Individual retirement accounts are only tax advantaged to the extent that they engage in activities that are related to their primary purpose. By law, this means that any income or gains that are generated from debt financing will not be exempt from current taxation. Therefore, if your self-directed IRA borrows money in order to purchase real estate, then the portion of the income and investment gains that are attributable to the financing will be subject to current year taxation.

If you’ve held investment real estate within your self-directed IRA for a long time, and you used to financing to acquire it, then a straightforward sale of a property may trigger a significant tax bill for you in a year of sale. And remember that this tax liability can’t be satisfied using funds from within the IRA (at least not without triggering potential early withdrawal penalties).

Using a 1031 Exchange to Defer UBTI Tax Liabilities. Let’s say your self-directed IRA holds a piece of real estate that has significantly increased in value, but the market conditions are such that you believe now is the time to dispose of the property and blocking me. If your IRA used financing to originally purchase the property, the potential tax liability might be a financial disincentive for you to make your desired investment decision. But by using a 1031 exchange within your self-directed IRA, you’ll postpone having to pay for those UBTI liabilities until years (or possibly even decades) later.

Understand that section 1031 transactions are relatively specialized, and should not be undertaken without a certain amount of due diligence beforehand. In addition, many investors find that using professional assistance is the best way to make sure that things go smoothly.

Finding a Property Manager for Your Self-Directed IRA Real Estate Portfolio

Posted on September 23, 2013June 7, 2019 by questadmin

Estimated reading time: 3 minutes

The potential upside and cash flow possibilities of investment real estate make it a highly attractive option for retirement savers who have self-directed IRAs. Unfortunately, some investors may be somewhat reluctant to invest in real estate because of the higher level of attention that particular asset class demands.

Unlike equity and debt investments, investing in real estate involves a physical asset that the owner is responsible for maintaining, promoting and safeguarding. The most common solution to these issues is for real estate investors to retain the services of a property manager. Here are some options for finding the right manager for your self-directed IRA real estate portfolio.

Hire an Individual. If your real estate portfolio is relatively small, you might be able to hire someone you already know to manage the property. Sometimes a local handyman can be all the assistance you need to manage a single property. If you choose an individual manager, then be sure that person carries an appropriate type and amount of liability coverage.

Hire a Property Management Service. If you own multiple properties, or are looking for a higher level of service, then you should look to hire a professional property management service. As you might expect, the property management industry is fairly well developed. This means that for practically any area of the country you’ll be able to find a service that can manage your real estate holdings. Make sure to understand the services that are available, as well as the fees that you will be responsible for.

It’s worth noting that a professional property manager may also be able to provide you with valuable assistance if you ever find yourself in a situation where your tenant is not complying with the terms of their lease. A manager that has experience with eviction or similar proceedings can be invaluable.

Understand What You’re Looking For. Before you start trying to find a property manager for your real estate investments, you should evaluate the types of services you need. The first step is likely to be making a list of all the maintenance and upkeep obligations that you are responsible for as the property owner. For example, if your rental property is a condominium, or a single-family home that’s subject to homeowners association (HOA) rules, then you need to be confident that your property manager will be able to meet all of those obligations.

If you own a multi-family home or apartment building, there may be some local or state regulations that you also need to satisfy. If you’re not familiar with these duties, an experienced property manager can help you bridge the gap in your expertise.

Finally, there’s one last option to consider – managing your real estate investments yourself. You won’t be able to pay yourself any compensation from your self-directed IRA (whereas fees can be paid to a third party property manager), but you might find that you have fewer worries about your investments knowing exactly what’s happening with them.

Visit here to grab more information on self directed IRA and investment plans.

Using a Self-Directed IRA to Advance Your Estate Planning Goals

Posted on October 16, 2012 by questadmin

Estimated reading time: 3 minutes

Self-directed IRAs can be used to invest in a wide variety investment types, from common investments like publically traded stocks, bonds and mutual funds, all the way to investments such as real estate, private equity and precious metals.

But saving and funding your own retirement is really only one part of the equation. You may also want to consider issues that no one really enjoys thinking about – for example, what happens once the self-directed IRA account holder passes away, and their account is transferred to their heirs and/or death beneficiaries?

It’s important to realize that self-directed IRAs are legally identical to the standard IRA types that other retirement savers will open with traditional custodians such as a discount investment broker or a local bank or credit union. (The differences arise from the fact that the custodian of a self-directed IRA, such as Quest Trust Company, is able to help the account holder invest in the full range of investment options that are legally permitted within the IRA structure.)

This means that you can take different estate planning goals into account by using your self-directed IRA, and the way you do so sometimes depends on whether your self-directed IRA is structured as a traditional IRA or a Roth IRA.

With either type of IRA, if your account passes to your spouse then they’ll be able to roll over your account holdings into their own account. Any required minimum distribution calculations will then be based on your spouse’s age. A spouse may also decide to disclaim all or part of the assets, in which case they’ll pass on to the next eligible beneficiaries. This latter option can sometimes be a powerful family estate planning tool.

If assets from a self-directed IRA pass to a non-spouse beneficiary, then they’ll need to begin taking required minimum distributions by the end of the calendar year following the account owner’s death. If the self-directed IRA was established as a Roth IRA, and assuming that the account was established at least five years before that distribution, then the beneficiaries will be able to take their required minimum distributions from the inherited account on a tax-free basis. If your self-directed Roth IRA is large, this can end up saving many tens or even hundreds of thousands of dollars in taxes.

Finally, it’s important for the holder of a self-directed IRA to make sure that it’s clear to his or her heirs what assets are actually held within the IRA. Since many people still don’t understand that IRAs can be used to hold investments such as real estate and private equity (provided that the IRA is with a custodian like Quest Trust Company, which specializes in providing self-directed IRA services), there can sometimes be confusion when a person’s estate goes through probate. It’s important that your executor be advised that any of the less common investment types you hold in your self-directed IRA be dealt with in the manner required by applicable IRS regulations.

With a little advance planning, and making sure your heirs have a solid understanding of the laws and regulations that apply (particularly those governing required minimum distributions), you can use a self-directed IRA to save on taxes and further your estate planning goals.