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Is Now a Good Time to Invest in Real Estate With Your Self-Directed IRA?

Posted on September 17, 2015October 31, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

In most parts of the United States, the real estate market has recovered from its down period in 2007-2008. And in many cases, the growth has resumed at an impressive pace. This leads many retirement savers to ask themselves whether now is a good time to invest in real estate with their self-directed IRAs.

The short answer is that it’s almost always a good time to invest in real estate, or any other asset for that matter, depending on how and where you invest.

For example, if you look to invest in a part of the nation that might not be close to you, or even to invest abroad, or perhaps even to invest in a type of property that you hadn’t previously considered, then you’re likely to find a number of opportunities.

But the more important set of questions you need to ask yourself prior to making any real estate investment related more to your investment outlook, tolerance for risk, and other issues.

How Will You Manage the Property? One important factor in your investment decision-making process should be how you plan to manage any properties you purchase. For example, do you intend to manage them yourself, or will you hire a professional property manager?

Keep in mind that if you manage the property yourself, you won’t be able to receive any compensation or other value for your time (such compensation would be considered prohibited “self-dealing”). If you hire an outside property manager, you are permitted to pay that individual or company with funds from your self-directed IRA.

What’s Your Budget? While it’s possible to make real estate related investments in virtually any amount, you’ll find that you have many more options if you have a larger balance in your self-directed IRA. The costs and fees associated with real estate investments include not only the price of the property itself, but also any closing costs or fees associated with the purchase transaction. At a bare minimum, you’ll likely have to pay annual property taxes on the investment, as well as some degree of maintenance or upkeep expense. These funds must come from within your self-directed IRA, because paying with outside money can subject you to IRS penalties.

Local Rental Market Considerations? When doing an analysis on a particular real estate market, be sure to not only consider the asking prices of houses on the market, and comparable recent sales, but also the local rental market conditions. Perhaps the price for home sales has gone up a lot recently, but if the prevailing rents for those properties has increased even more, then you may have a favorable set of investment conditions (assuming that you plan to rent the property you purchase).

Finally, regardless of the type of real estate investment you make, be sure to have a plan for when and under what conditions you’ll sell the property. You don’t want to become emotionally attached to an investment, and you should always be willing to move on to a better investment opportunity when circumstances dictate.

Getting Started with a Self-Directed IRA When Your Nest Egg is Small

Posted on September 10, 2015April 13, 2021 by Ingrid Chavez

Estimated reading time: 2 minutes

While you might have been initially drawn to a self-directed IRA because of the investment flexibility that this account type offers when compared to IRAs with traditional custodians (e.g., being able to invest in precious metals, and real estate, and private companies), it’s true in all areas of investing that not every investment option is suitable for every investor.

Make the Maximum Contributions Every Year. When your self-directed IRA balance is relatively small, it’s vital that you make the maximum contributions to your account each and every year. If you fail to make the maximum contribution in any given tax year (the contribution limit for the 2021 filing period is $6,000, with an additional $1,000 allowed for taxpayers age 50 and over), you won’t be able to make up for that lost opportunity in later years. Once the chance to make the maximum deposit has passed, it’s gone forever.

Consider Maintaining Two Accounts. It’s a common misconception, but taxpayers are not limited to having a single IRA. In fact, it can be good practice to maintain both a traditional self-directed IRA as well as a Roth self-directed IRA, and then decide where to make your deposits each year based on the tax deduction advantages you might be able to get from contributing to the traditional account. The key is to deposit the maximum each year, regardless of the self-directed IRA you choose. And remember that it’s always possible to convert a traditional self-directed IRA to a Roth account whenever you decide that you only want or need a single account.

Does Small Mean Little Investment Experience? If your nest egg is relatively small because you’re just starting out with your retirement savings and don’t have a lot of investing experience, then don’t feel pressured to start investing in the most complicated and advanced investment types right away. Even though the self-directed IRA structure permits investments in a wide range of investments, you’re still free to choose investments that you have more experience and familiarity with.

Use 401(k) Rollovers. Finally, another way to grow your self-directed IRA is through the use of rollovers. Whenever you leave an employer, you’re permitted to roll over the funds you’ve accumulated in your 401(k) to an IRA. Because many individuals are permitted to contribute to both 401(k)s and IRAs, this can be a great technique for building as large of a nest egg as possible.

Don’t Count on Working For the Rest of Your Life (and Why Your Self-Directed IRA is Therefore So Important)

Posted on August 6, 2015December 7, 2018 by questadmin

Estimated reading time: 3 minutes

We’re all aware of the fact that many (if not most) Americans haven’t saved enough money toward their retirements. One common response to the anticipated gap between anticipated living expenses during retirement and the amount a person has saved is for that person to delay the date upon which they anticipate being able to retire.

The reasoning is certainly clear; by working longer a person will be able to both save more money for retirement, and to delay the date upon which they’ll have to begin living off the funds in their nest egg. Unfortunately, the statistics indicate that this isn’t always possible.

A recent study by the Employee Benefit Research Institute found that while a full one third of workers planned to retire after the reached age 65, less than half of those individuals actually remained in the workforce that long. On the flip side of the coin, while less than 10% of workers indicated that they planned to retire before they reached age 60, approximately 35% of individuals had actually left the workforce by the time they turned 60.

While some of these individuals may simply have been fortunate enough to accumulate much more than they originally planned to, that same report makes clear what’s driving these numbers. Nearly half of all retirees indicated that they left the workforce earlier than anticipated in order to deal with health issues, either their own issues or those of a spouse or family member.

In addition, a significant number of individuals who left the workforce earlier than they planned did so because of an employer downsizing or closure, or because they no longer had the skills to remain employed in a changing marketplace.

In short, just because a person hopes or plans to stay in the workforce for a longer period of time in order to make up a shortfall in their retirement savings, that doesn’t mean it will be possible to do so.

As an alternative, a person could also make up this shortfall by adjusting their anticipated retirement lifestyle, thereby reducing their retirement expenses. While there is likely to be a minimum amount that an individual or couple will need to retire with reasonably stability and security, chances are this amount is less than what they were hoping to live off of.

If you’re not willing to downsize your retirement plan, then you’re only left with one real alternative, and that’s to maximize your rate of retirement savings every single year, and to begin doing so immediately. You might also investigate the advantages that a Roth self-directed IRA could provide you, in terms of the tax-free distributions you can take, as well as the fact that you could let a Roth account continue to grow even after you reach age 70, such that you’re not subject to the rules on required minimum distributions.

Contact Quest Trust Company to learn more about how you can open a self-directed IRA and strengthen your financial future.

Circumstances Under Which You Might Consider Taking

Posted on August 3, 2015December 9, 2019 by questadmin

Estimated reading time: 3 minutes

Early Withdrawals from Your Self-Directed IRA

The IRA was created to give individuals a tax-advantaged option to save for their retirements, and exercise more control over such accounts than workers traditionally had with employer-sponsored pensions. In exchange for such benefits, however, the IRS requires that the accounts truly be for retirement purposes, so an individual who takes funds out of their account will be faced with a 10% penalty on the amount of the withdrawal, on top of whatever taxes might otherwise be due.

But there are a few situation in which the IRS will waive that 10% penalty, and these can potentially provide you with the opportunity to make financially sound early withdrawals from your self-directed IRA.

To Pay Down High-Interest Debt. This isn’t necessarily a good idea for everyone. But if having too much high interest debt is impacting other areas of your personal finances, then it could potentially be worth taking an early withdrawal from your self-directed IRA — although the amount of that withdrawal should be as small as is necessary to accomplish your goals.

For example, if you find that servicing your credit card debt is preventing you from being able to afford adequate health insurance, or that your credit score has dropped to the point where it’s become more expensive to take out car loans or get a new mortgage, then an early withdrawal from your self-directed IRA might make sense.

To Improve Your Career. You may already be aware that you can take penalty-free early distributions from your self-directed IRA to pay for so-called “qualified educational expenses.” These expenses include not only tuition, but also room, board, and other expenses that are a necessary part of attending a qualified educational institution (not just traditional colleges and universities, but also vocational schools and other organizations that are eligible to participate in federally guaranteed financial aid programs).

This exemption is normally pitched as a way to pay an IRA account owner to pay for their child’s educational expenses. Many financial experts would advise that it’s usually better not to sacrifice one’s retirement future to help their child pay for college, and that a better path forward would involve a greater contribution from the child, taking on student loans, and perhaps even considering less expensive educational options.

But you can also use this penalty-free exemption to improve your own education, and to boost your career in the process. Again, you should investigate other financial options (such as low-interest federally guaranteed student loans if you’re eligible) before taking a distribution from your retirement account.

To Buy a Home. If you’re a first-time homebuyer (which simply means that you haven’t owned a home at any point during the last two years), then you can take an early withdrawal of up to $10,000 to help you cover the purchase of that property. This type of early withdrawal can be a great financial choice if it’s the difference between you being able to purchase a suitable home versus continuing to rent.

Any action that reduces the size of your retirement nest egg should be done only with caution, and after considering all your alternatives. But in some circumstances taking an early withdrawal from your self-directed IRA might make good financial sense.

Why It’s Important To Coordinate Your Taxable Investments With Your Self-Directed IRA Investments

Posted on July 20, 2015December 6, 2018 by questadmin

Estimated reading time: 3 minutes

Your self-directed IRA can save you a lot of money in taxes, both in the short term as well as in the long run. If your IRA is set up as a traditional account, then (depending on certain aspects of your financial position) you may be able to take a tax deduction for those contributions. And contributions in traditional IRAs will grow on a tax-deferred basis, while the investment gains within a Roth IRA will never be subject to taxation. Many individuals are well-versed with the various tax implications on this level.

But there’s another perspective from which you may want to consider your self-directed IRA tax analysis, and this is the way that your taxable investment accounts, and investment decisions, can impact your self-directed IRA investments.

Let’s first examine just how valuable your self-directed IRA can be. Consider two hypothetical portfolios of $100,000, one a taxable account and the other a self-directed IRA. Let’s further assume that each portfolio is comprised of stock that pays dividends at a 3% rate annually (with those dividends being reinvested), and that the stock price appreciates 5% annually.

At the end of 25 years, the value of the taxable account would be approximately $525,000, while the self-directed IRA is worth over $630,000. This difference in value is attributable solely to the fact that the owner of the taxable account has to pay taxes on the dividends they receive, even if they choose to reinvest those dividends.

If the self-directed IRA is a traditional account, then you will have to pay taxes on those gains, but they’re likely to be at a lower tax rate (because you’re in retirement and perhaps no longer working full time), and they’ll only be taxed when you take the distribution. If your account is a Roth IRA, then you’ll realize the full value of the investment gains.

So one common tax optimization strategy is for an individual to place income-generating investments that would otherwise incur a tax liability into an IRA in order to avoid that liability.

On the other side of the equation, it’s important to note that there are certain tax advantages that are actually disallowed within an IRA. For example, investment interest (such as borrowing funds to purchase a stock investment, or taking out a mortgage to buy a piece of real estate) can be used to offset gains in a traditional account. But borrowing funds is considered to be outside the scope of permissible activities for self-directed IRAs, and the tax benefit of those expenses will be lost inside the retirement account.

It’s the same situation for investments that have tax advantages built in, such as municipal bonds. Because these investments would already be tax-advantaged outside of an IRA, there’s no reason (and it’s actually a missed financial opportunity) to keep these types of assets inside a retirement account.

Understanding the interplay between your taxable investment accounts and your self-directed IRA will put you in the best position to make the optimal investment decisions.

Using Your Self-Directed IRA To Invest Outside the U.S.

Posted on April 17, 2015August 12, 2019 by questadmin

Estimated reading time: 3 minutes

Even though self-directed IRAs held with a custodian such as Quest Trust Company are generally recognized as the most flexible retirement savings option, most investors choose to limit themselves to assets or companies located within the United States. In fact, many countries have well-developed investment markets, so looking outside the U.S. may be just the key to helping you find the perfect investment for your needs. If you choose to consider investing abroad, here are some of the biggest issues to keep in mind.

Foreign Taxation Issues.

You should not assume that everything you know about U.S. tax law when it comes to property held within an individual retirement account holds true abroad. It may be possible that certain types of investing activities, even if they happen within a self-directed IRA, will subject you to a foreign tax liability.

Real Estate Considerations.

Let’s take a closer look at one of the more popular foreign investment types; real estate. The first thing to remember is that all of the IRS rules prohibiting self-dealing continue to apply even for real estate outside the U.S. That means if you’re investing your account in a vacation property abroad, you and your family (and other related parties) are prohibited from using it – even for a single day – when it is still held within your account.

Foreign Ownership Restrictions.

It’s not uncommon for foreign countries, or regional or local government bodies, to impose restrictions or limitations on foreign ownership of real property. In some cases a foreigner is prohibited from owning property outright, which means that your investment options would be limited to some type of minority stake. This may or may not help you achieve your investing goals, depending on precisely why you’re investing.

In some countries, similar restrictions may also apply to owning manufacturing facilities or other types of business as well.

The Investment Process.

If this will be your first time investing abroad, you’ll also need to familiarize yourself with whatever the local investing process may be. Continuing with our real estate example, you’ll need to know and understand which local agencies need to be involved in the process, what types of taxes, fees or assessments need to be paid as part of the transaction, and how the documentation for the transfer of ownership needs to be recorded or otherwise formalized. The best approach will almost certainly be to do your homework before you spend a lot of time looking for investment opportunities.

Consider a Partnership.

In many instances, the best way to address many of these issues is to partner with a local investor and approach the investment opportunity jointly. Again, you will have to do your homework in identifying potential partners that suit your needs, but in some cases choosing not to undertake the investment by yourself can make the process much easier.

Regardless of the investment opportunities you’re considering pursuing abroad, it becomes essential that you understand all the limitations, restrictions and risks that may be unique to the investment you are considering.

Increase Your Private Investment Allocation With Your Self-Directed IRA

Posted on March 23, 2015October 31, 2018 by questadmin

Estimated reading time: 3 minutes

Individual retirement accounts are perhaps the single most powerful tool you have in your retirement planning arsenal. You have greater control and flexibility over your retirement funds as compared to an employer-sponsored 401(k), and a Roth IRA can provide significant benefits for tax savings and estate planning purposes.

Self-directed IRAs take things a step further. Having an account with a custodian such as Quest Trust Company will allow you to invest in an even wider range of asset types, including a variety of private investments. Here are some ways to increase your portfolio allocation into these investment types by using a self-directed IRA.

Private Mortgages. Regardless of the state of the economy, people are always going to want (or need) to buy and sell homes. The IRS regulations permit you to use a self-directed IRA in order to issue private mortgages. Provided you understand the process fully, follow all legal requirements and evaluate your risks accordingly, you may find this to be a significant boost to your portfolio.

In fact, when prevailing interest rates increase and it becomes more difficult for the average home buyer to get a loan from a bank, you may have even more opportunities for making private mortgages.

Private Equity. Similarly, a self-directed IRA can be used to make private equity investments as well. Depending on the size of your portfolio and your overall financial situation, this can be a way to gain a completely unique risk/reward exposure that wouldn’t be available in any other investment you could make.

Some private equity investments will require that the investor be a so-called “accredited investor”. This is a legal term defined by the SEC to mean a person who either (1) has a net worth of at least $1,000,000 (not including the value of their primary residence), or (2) has an annual income of at least $200,000 over each of the last two years (or has a joint income of $300,000 in each year with their spouse) and a reasonable expectation to achieve the same income this year.

Note that even if you’re looking to invest with your self-directed IRA and your account meets these standards, you’ll still need to meet those standards individually.

Private Partnership Interests. You can use your self-directed IRA to invest in various types of private partnerships. These may include traditional businesses as well as natural resources development opportunities such as those that can be found in the oil and gas industries.

Remember that when you invest your self-directed IRA in a private partnership, you’re prohibited from benefitting from it individually while the investment is still held within your account. So if the partnership invests in vacation real estate properties, neither you nor your family or any other related parties can stay in the property while you’re still invested.

Regardless of the private investments you’re considering making, be sure to do your research and understand all the risks before you commit your account funds.

Why You Should Start a Self-Directed IRA as Early as Possible in Your Life

Posted on November 11, 2014December 9, 2019 by questadmin

Estimated reading time: 3 minutes

Many young adults tend to focus on the immediate year tax benefits of making contributions to an IRA. This is certainly one important factor in maximizing the potential of an individual retirement account, but it might not be the most valuable one.

Perhaps the biggest benefit from having an IRA is that all investments income and gains that are kept inside the account (that is, not taken as a distribution by the account holder) occur on a tax-deferred or tax-free basis. The upshot of this tax-advantaged growth is that young adults should be working very hard to start a self-directed IRA as early as possible in order to maximize their benefit.

Let’s take a closer look

Consider two individuals, one of whom makes their first $5,000 contribution to a self-directed IRA at age 25. The other individual makes their first $5,000 contribution at age 35. By the time each of these individuals reaches age 55, the value of their investments will be very different. Assuming an 8% annual rate of return, the first individual’s contribution will be worth a little over $50,000. The second individual’s same $5,000 contribution, made a bit later in life, will be worth less than half that – just over $23,000. Giving your contributions as long as possible to grow will be the key to a prosperous retirement, and that means starting an account and making annual contributions as early in life as possible.

Let’s now take this hypothetical scenario one step further and compare the long-term differences between a Roth self-directed IRA and a traditional self-directed IRA. Let’s again look at what happens to a contribution to each type of account after 30 years of growth. We’ll use the same assumptions (an 8% annual return and a 30% tax rate) for a $5,000 contribution.

After 30 years, that contribution to each type of account will have grown to just over $50,000. But because distributions from a traditional IRA are subject to tax, the value of that $50,000 account will actually be $35,000 once the distribution is taken and the taxes are paid. Distributions from a Roth IRA can be made tax-free during retirement, so that $50,000 is actually worth $50,000 to the account holder.

But what about the tax deduction that may have been available for the traditional self-directed IRA in the year of contribution, you might ask. At a 30% tax rate, that deduction will be worth $1,500. Assuming the account holder invests all of hat money (and that’s a big assumption) in a taxable account, the $1,500 will grow to approximately $15,000 after 30 years. (Note that this is a best case scenario representing all capital gains, as any reinvested dividends would be taxed, thereby reducing that amount). But that investment growth will be subject to tax, so the after tax value would be much less.

This second example helps demonstrate why, for many account holders, a self-directed Roth IRA may be preferable to a traditional account.

Why You Should Consider Consolidating Multiple Retirement Accounts Into a Single Self-Directed IRA

Posted on September 4, 2014April 13, 2021 by questadmin

Estimated reading time: 3 minutes

Over time, many of us accumulate a number of different financial accounts. For example, we might start a new 401(k) or other employer-sponsored retirement plan each time we change jobs. Or we might open a new IRA in order to receive the benefit of a promotional offer that our broker is sponsoring.

Unfortunately there are a number of downsides to maintaining multiple retirement accounts. In most cases, you can benefit from consolidating multiple retirement accounts into a single self-directed IRA.

Investment Options.

Let’s consider two possible scenarios; one in which you have five different IRAs with a $50,000 balance in each, versus a situation where you have a single self-directed IRA with a $250,000 balance. Your nest egg in each of these situations is identical, but your investment options going forward are not.

Given that a self-directed IRA custodian such as Quest Trust Company will not limit your investment choices in the same way that a traditional custodian would, you can use those funds to purchase real estate or to invest in private companies. You can even issue mortgages to real estate buyers or investors.

Those types of investments often require a higher account balance compared to what you would need to purchase stocks or bonds. Simply put, you’ll have more investment choices if you consolidate your multiple retirement accounts into a single self-directed IRA.

Furthermore, if some of your retirement accounts are 401(k)s that you have left at prior employers, rolling these over into your self-directed IRA can open up a new world of investment opportunity. Most employer-sponsored plans are severely limited in terms of available investment options.

Ease of Administration.

Don’t overlook the fact that having to manage multiple IRAs can present you with a significant administrative burden. Even with just four or five separate accounts, you’re going to have to spend a lot of time managing all the paperwork and statements that those various accounts produce. In addition, when it comes time to retire it can be even more of an administrative burden to execute a withdrawal strategy over multiple accounts.

Ease of Contribution Strategies.

If you maintain multiple IRAs, it can be a challenge to decide how to make contributions such that you grow all of your accounts. Remember that the IRS annual contribution limit regarding IRAs is an overall amount, not a per-account maximum. This means that if you’re looking to contribute $6,000 this year, and you have four or five separate IRAs, you need to figure out a plan for how to divide up that contribution amount. In contrast, having a single self-directed IRA simply means that you make the maximum contribution to that one account.

Finally, having a single IRA also makes sense because it allows you a greater level of insight into your investment risk and portfolio makeup. This insight can help you build the largest possible nest egg for your retirement.

Does My Level of Retirement Savings Justify a Self-Directed IRA?

Posted on August 19, 2014 by questadmin

Estimated reading time: 2 minutes

A self-directed IRA can form the foundation of anyone’s long-term retirement savings plan. With a self-directed IRA at a custodian such as Quest Trust Company you can invest in a far wider range of asset types and classes than you could with a traditional IRA.

But because some individuals use their self-directed IRAs to purchase investments such as real estate, it leads some to wonder whether having that particular type of account only makes sense for retirement savers who have high levels of savings. In short, the answer is “no.” Just about anyone can benefit from a self-directed IRA – let’s examine the reasons why.

Self-Directed IRAs are Flexible.

As noted above, self-directed IRAs provide you with the greatest number of options in terms of the kinds of investments you can make for retirement. Savers with relatively small account balances can still benefit from this flexibility. It’s true that you can use a self-directed IRA to make large-scale investments in real estate, such as apartment buildings or commercial developments.

But you can also make investments in much smaller properties, including those in the lower price ranges. Furthermore, you can use your funds within a self-directed IRA to gain exposure to the real estate market in other ways as well, including by issuing mortgages or loans to home buyers.

In addition, the fact that there are a wider range of investment options available in a self-directed IRA doesn’t mean that you can only make those types of investments. If your account balance is still relatively small and hasn’t yet grown to the point where you can comfortably make investments in real estate or private equity, you can still invest in stocks, mutual funds, and more traditional asset classes.

Self-Directed IRAs Can Grow With You

Over time, with maximum annual contributions and good investment decisions, the balance in your self-directed IRA will grow. This will open up new investment opportunities to you over time.

A Self-Directed IRA Can Focus Your Saving Strategy

In fact, having a self-directed IRA can give you a focal point for your retirement investing. Rather than allowing your retirement nest egg to be spread out over multiple IRAs, 401(k)s and other accounts, you can make your self-directed IRA the primary account in your retirement savings strategy. You can roll other accounts into your self-directed IRA, and prioritize making maximum annual contributions to it. This helps your account balance grow much more quickly.

Remember that your self-directed IRA exists to help you pay for a retirement that still may be several decades down the road. By its very nature, your account is always looking forward. You should have that same attitude when it comes to your investment strategy and choice of IRA custodian. Small account balances are still appropriate for a self-directed IRA, and they keep you the greatest flexibility as your account balance grows.