Self Directed Archives - Quest Trust Company

The Three Situations Where You Might Consider an Early Withdrawal From Your Self-Directed IRA

Posted on September 28, 2015December 6, 2018 by Ingrid Chavez

Estimated reading time: 3 minutes

It’s important to understand that the default IRS regulations regarding early withdrawals from an IRA. In general, taking a distribution from your account before age 59½ will subject you to a 10% penalty on the amount of the distribution, plus whatever taxes may be due.

In each of the situations below, there are specific requirements that need to be met in order to avoid having to pay the 10% penalty, but in all cases you still may owe taxes on the amount of the distribution. Pay close attention to all the requirements. If you make a mistake in the distribution process it could prove to be quite costly.

To Purchase a First Home. The IRS regulations allow you to take a distribution of up to $10,000 to pay for a down payment on your home if you are a first-time homebuyer (which is defined to mean that you haven’t owned your own home in the past two years). You can also use this penalty free provision to assist a child or grandchild with their down payment, if having access to these additional funds would make the difference between getting a home and not – but it may be worth forgoing future growth of those funds
For Certain Uninsured Medical Expenses. There are actually two situations in which you can use your self-directed IRA in order to pay for some of your medical expenses. The first is in situations where you need to pay for certain unreimbursed medical expenses. The second situation is to pay for medical insurance premiums for you and your family when you are unemployed. one reason taking this type of early withdrawal can be so important is that it eliminates any temptation that might otherwise exist for you to underinsured or yourself or otherwise not seek necessary medical care.
Higher Education Expenses. The third exception we’ll discuss is taking an early withdrawal in order to pay qualified educational expenses. Generally this means paying tuition or room and board for your child, but you can also make such a withdrawal for your own educational expenses, those of your spouse, or those of a grandchild.

There are no limits for how much you can take out of your account early for these purposes. However, given that an early distribution means that you’re losing out on the long-term growth potential of those funds, you may wish to explore other funding options first, including student loans (which in some cases can involve interest and that’s tax-deductible).

In fact, in each of these three situations, it’s always important to consider other alternatives prior to taking an early distribution from your self-directed IRA. Just because you’re authorized to do so doesn’t mean there isn’t a better way.

In addition to losing out on future investment growth, there are other ways in which taking an early distribution can be a bad financial decision. For example if you need to liquidate certain investments early, then the effective loss you experience by taking the early distribution is effectively much greater than the amount of the distribution.

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.

Should You Set Up A Separate Self-Directed IRA For Your Real Estate Investments?

Posted on April 4, 2015December 6, 2018 by questadmin

Estimated reading time: 3 minutes

Real estate is a popular investment choice for people who have a self-directed IRA, but it’s a much different asset class than investments like stocks or bonds. Real estate requires a much greater level of planning and monitoring throughout the holding period of the investment, and for this reason some individuals choose to create separate self-directed IRAs for each of their real estate investments. Here are some factors to take into account when you’re faced with that decision.

Carrying Costs. As you consider whether to set up a separate self-directed IRA for a particular piece of real estate, you will need to plan for how you’re going to cover the maintenance and upkeep of that piece of real estate. These expenses and fees will include annual property taxes, physical upkeep and repairs of the property, insurance premiums, plus any other expenses that you’ve agreed to bear on behalf of your tenant.

You can cover these costs with whatever income the property itself generates, or with your permitted annual contributions to an account, or some combination of both. But you are not allowed to use any outside or personal funds to pay any expenses or fees related to your real estate investment.

Distribution Matters. It’s also worth considering that, depending on whether your self-directed IRA is set up as a traditional account or not, you may be responsible for a significant tax liability upon taking a distribution of the property in retirement. If your self-directed IRA is set up as a traditional account, you’ll have to pay taxes on the full amount of the distribution – i.e., fair market value of the property. If your account is set up as a Roth self-directed IRA, then you’ll have no tax liability upon distribution once you reach retirement age.

Furthermore, a traditional IRA will be subject to the IRS rules on required minimum distributions, and this can be particularly difficult to comply with if the only asset in the account is a single piece of real estate.

Prohibitions on Self-Dealing. But even if you set up a separate self-directed IRA to hold a piece of real estate, you still need to be aware of and have respect for the IRS prohibitions on self-dealing. This means you cannot engage in any personal use of your investment property while it’s still in your account, nor can any of your family members or other related parties make use of the property. You can only use the property after you take a distribution of it from your account.

There is no minimum threshold for this rule, and even a single day of personal use can open you up to a risk that the IRS would consider you to have taken an early distribution of property.

Think about the entire time-frame of your real estate investment, from acquisition to holding, to eventual disposition. You don’t necessarily need to have a detailed or inflexible plan for this type of investment, but it’s important to consider the issues that you’re likely to face along the way.

Now Is The Time To Investigate Oil And Gas Investments With Your Self-Directed IRA

Posted on April 1, 2015December 5, 2018 by questadmin

Estimated reading time: 2 minutes

From a consumer perspective, one of the biggest stories from the latter parts of 2014 and early parts of 2015 is the drop in gasoline prices. While this seems to suggest that making investments now in the oil or natural gas industries would be poorly timed, in fact the current state of the market might actually indicate that this is precisely the time to start investigating further.

Low Prices for Some Assets. The sharp decline in oil and gas prices has resulted in what may be a good buying opportunity for related investments. You may wish to consider not only stock in publicly traded oil and gas exploration companies, but also private investments as well.

Having a self-directed IRA with a company such as Quest Trust Company gives you the opportunity to use your retirement funds to make these types of investments. Because the laws relating to the exploration and development of natural resources are sometimes arcane and complicated, these investments can take many different forms – forms that may not be familiar to even relatively experienced investors.

Seek Professional Assistance. If you don’t have familiarity investing in oil and gas companies, particularly private investments, you may wish to seek professional assistance before committing any funds from your self-directed IRA. Certain types of investments in the industry may carry additional tax benefits – benefits that would be lost or redundant if done within a retirement account. You may wish to leave these investments to your taxable accounts, and use your self-directed IRA for those oil and gas investments that would otherwise generate a significant tax bill (and which you’d therefore avoid by having the investment in a tax-advantaged account).

Local Legislation and Politics. One way to come up with new investment opportunities in the oil and gas industry is to pay attention to your local legislative and political scene. Hydraulic fracturing (or “fracking”) has become a hot button issue in many jurisdictions, for example, so the direction that your city, county, or state takes with respect to allowing fracking – and under what circumstances or regulatory restrictions – could significantly change the investing landscape.

Volatile Markets Create Opportunities. The recent price volatility for oil and gasoline has demonstrated that even as consumer demand remains relatively steady, the underlying commodity markets themselves often move in unexpected and sometimes hard to explain ways. However, generally speaking, volatile markets create more investment opportunities. Remember that for practically every bullish investment opportunity there is someone on the other side of the coin willing to take a bearish position.

Your self-directed IRA can be a great opportunity for you to invest in assets and investment types that you’d never be able to make with your 401(k) at work or a traditional IRA. Now just might be a great time to take a closer look at oil and gas investments.

Kick Off Your 2021 Retirement Investment Planning With A Bang

Posted on March 27, 2015April 13, 2021 by questadmin

Estimated reading time: 2 minutes

Retirement planning never really stops. From the moment you first begin to understand the importance of taking charge of your own financial future, you’re likely to be engaged in retirement planning to some extent.

Retirement planning continues even once you reach traditional retirement age and stop working full time. You need to continue investing to make sure you have enough in your account to last throughout your retirement years, and by the same token, you need to calculate how much to withdraw each year.

You’ll certainly employ a long-term strategy, but you’ll also make important retirement decisions on a year-to-year basis as well. Successful retirement investing, for example, is a mix of long-term focus and adjusting your holdings to reflect changing market conditions and your changing financial scenario. Here are some tips for considering how you can start your 2021 retirement investment planning off with a bang.

Make Your Investment Contributions Immediately. This may not be an option for everyone, but you can start your year off right by making your annual self-directed IRA contributions immediately. For whatever reason, far too many individuals wait until the end of the calendar year (or even into the next year, prior to when they file their tax return) to make their annual contributions. This means you’re missing out on top to a full year (or more) in which those contributions could be growing. And given how your account balance compounds over time, the ultimate price for losing out on this time could be significant.

Be creative with your current budget to find ways to make all, or at least part, of your self-directed IRA contribution right away. The sooner you can kick off this year’s investing, the better off you’ll be in the long run.

Open a Self-Directed IRA. If you don’t currently have a self-directed IRA, then consider making this the year you finally open one. Self-directed IRAs provide you with the broadest possible range of investment options, which means that you’ll have the best possible chance of getting exactly the right investment to suit your portfolio diversification and profile needs.

Consolidate Your IRAs. Once you have a self-directed IRA, you can consolidate your other IRAs into that account this year. With a larger account balance, you’ll have more investment opportunities available to you, including assets that you may not otherwise be able to afford investing in, such as multi-family residential housing developments, or investments in private companies.

A big part of successful investment planning is simply taking a more active role in your financial future. This doesn’t necessarily mean trading in and out of investments more frequently. Rather, it means keeping yourself better informed of your portfolio investments and your potential investments. And it means making contributions to your self-directed IRA at the beginning of the year, rather than waiting until the end.

How To Save On Investment And Management Expenses Next Year With Your Self-Directed IRA

Posted on March 16, 2015April 21, 2021 by questadmin

Estimated reading time: 2 minutes

There’s no such thing as a free lunch, or so goes the saying. Even in the context of saving money for retirement, you’re going to have to pay for the various services provided by your account custodian. Even if you have a “free” account at a discount brokerage, you’ll still pay transaction based fees for buying and selling investments.

All other things being equal, the more you spend on fees, the smaller your retirement nest egg will be. With that in mind, here are some suggestions for saving on investment and management expenses next year in your self-directed IRA.

Understand Your Baseline. The first step to reducing the fees you pay is to understand what you are paying now. Take a look at your prior account statements and identify all the fees and expenses you paid. It may be helpful to separate them out by investment type, so that you can compare appropriate categories going forward.

It’s important to acknowledge and understand that when it comes to fees and expenses, you’ll need to pay more in order to get a higher level of involvement and service. The fees and commissions applicable to buying a few hundred shares of a publicly traded stock are always going to be significantly less than those for purchasing a piece of real estate or for other custodial services..

Leverage Your Own Investment Experience. The next step is to examine those areas in which you have substantive investing experience, and consider cutting back on the professional management. For example, if you’ve accumulated years of experience investing in real estate with your taxable accounts, then you may be able to use that knowledge and expertise to make real estate investments with your self-directed IRA.

Professional Management. On the other side of the equation (and this might seem a bit counterintuitive), bringing in outside help in the form of professional active management might end up being a positive for your account. A professional may be able to identify areas in which your investment is underperforming and thereby increase your overall net return even once their fees are taken into account.

Evaluate Your Options. You may have more options available to you when it comes to structuring the fees you pay than you realize. For example, some custodians let you choose how your annual account maintenance fee is structured, whether that’s based on a percentage of your total account value, an asset by asset calculation, or even a flat fee that covers your account as well as the accounts of your immediate family members. You may be able to save a significant amount of money next year simply by going back to your custodian’s fee schedule and taking another look.

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.

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.

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.

Five Steps for Using Your Self-Directed IRA to Buy Your Future Retirement Home Today

Posted on July 8, 2014October 31, 2018 by questadmin

Estimated reading time: 3 minutes

One reason self-directed IRAs are becoming more common is that individuals are using them as a way to buy their future retirement homes. This lets them have a productive investment now, and also have a place to live in once they enter retirement. Here are five steps for turning that into a reality.

1. Evaluate Your Current Self-Directed IRA. The first step is to take a look at what your self-directed IRA currently looks like. How much do you have available to invest in a piece of real estate? What would owning real estate in your account do to your overall diversification and investment mix? Evaluate not just what your account looks like today, but what you think it’s going to look like in the near future.

2. Prepare Your Purchase Plan. The next step is to prepare your plan for purchasing your future retirement home. With the information you collected in step one, decide how much you can afford. Unless you are able to pay for the property and cash, you may find that having to take out a loan can reduce some of the tax benefits you’d otherwise receive. Also be sure to plan for whatever maintenance or carrying costs the property will incur. All expenses relating to the property need to come from your self-directed IRA. Paying those expenses with personal funds is not permitted.

3. Find an Appropriate Home. Only after you have a plan drawn up is it time to go shopping for a home. Consider not only the place you think you want to retire to, but also the type of lifestyle you want to lead. Your ideal retirement home might not even be something that’s currently built – you may want to purchase land that you’ll use to build your dream retirement home on later.

4. Have a Contingency Plan. As part of your planning and home shopping, it’s always important to have a contingency plan. If your retirement plans change and you decide to live in a different part of the country, or your retirement budget changes, what will you do with the property you now hold? Will you be able to sell it or use it as an income property?

5. Don’t Use it Before You Retire. The last step is actually an ongoing one. The IRS rules on Individual Retirement Accounts clearly prohibit self-dealing. This means that an IRA owner and his or her family members may not benefit in any way from their account until the account owner retires. When it comes to retirement real estate, this means that you can’t use the property yourself, even for a single day, and even if you pay your IRA whatever amount you were charging to other renters.

If you violate this rule the IRS can potential in force you to take a distribution of this property from your account right away, which would mean you’d have to pay taxes on the fair market value as well as a 10% penalty because of the early distribution.