Why You Might Consider A Non-Deductible Self-Directed IRA

Estimated reading time: 3 minutes

Tax deductibility of annual contributions has always been one of the biggest selling points of traditional IRAs, self-directed IRAs included. This tax break is often the deciding factor that gets some individuals to adjust their budgets or forego discretionary spending in order to save for their own retirement future.

But the Roth IRA, even though contributions to it can never be deducted, can still be extremely valuable (and for some individuals, even more valuable). Even non-deductible contributions to a traditional account can provide you with significant long-term tax savings. If you’re faced with the prospect of having to make a non-deductible IRA contribution this year, here are some reasons to go ahead and do so.

Tax-Free or Tax-Deferred Investment Growth. It’s important to understand that while there’s unmistakable value to the current year tax break you might get from a deductible contribution, you may get greater value from the tax-free investment growth that a Roth IRA can provide.

Consider that even though you don’t have to pay income tax on the investment gains you realize within a traditional self-directed IRA, you will eventually have to pay taxes on those gains when you take a distribution of those funds. And that total tax bill can be significant, given how much your account can grow over time.

In contrast, distributions that are taken from a Roth IRA never incur a tax liability, provided you’ve reached full retirement age. This is a unique situation in the tax law – never having to pay taxes on investment gains – and the financial benefit can be quite substantial.

To Maximize Your Retirement Savings. The more money you can accumulate for retirement, the better. When you make a non-deductible contribution to a self-directed IRA (whether it’s a Roth or even to a traditional account), you’ll still be able to invest and grow that money on a tax-deferred (in the case of a traditional account) or tax-free (in the case of a Roth account) basis.

Just remember that if you make both deductible and non-deductible contributions to a single traditional account you’ll face some potentially challenging record keeping obligations in order to determine what portions of your future distributions are subject to tax, and which are not. Some retirement savers choose to get around this administrative headache by simply having a Roth account as well as a traditional self-directed IRA.

So, when are you likely to be faced with having to make non-deductible contributions? You may find that you’re ineligible for the tax deduction if your income is too high in a particular year, and that income threshold will be lower if you participate in a 401(k) through your employer. Whatever the reason, the best way to build your retirement nest egg is to save the maximum amount you can to your self-directed IRA every single year, whether you can take a tax deduction for the contribution or not.

Why It’s Important To Open A Self-Directed IRA This Year

Estimated reading time: 3 minutes

The unfortunate truth for many retirement savers is that they aren’t able to accumulate large nest eggs merely because they never got started. It’s a simple fact that a person that already has a self-directed IRA set up is much more likely to contribute to it in a given year than a new saver is to set up an account in the first place.
But that’s just one of the reasons why it’s important to open a self-directed IRA this year if you don’t already have one.

The Power of Time. It might not seem intuitive, but the contributions a person makes to their self-directed IRA each year are not likely to comprise the bulk of the account value after a number of years.

For example, let’s look at an individual who makes $5,000 contributions to their self-directed IRA each year, and who makes investments that grow at an annual rate of 8%. Let’s further assume that this individual makes these contributions every year from the age of 25 until they’re 45, and then doesn’t make any additional contributions to their account after age 45.

By the time they reach age 65, their account will have a value of over $1.1 million, even though they only contributed a total of $100,000 of that amount. The rest of their account balance is attributable to earnings, interest, and compounding on those amounts. The best way to increase the chances of accumulating the largest possible amount for retirement is to give your money time to grow.

More Investment Choices. A self-directed IRA will give you a much greater range of investment options for your retirement account. These include real estate, precious metals, private equity, private debt instruments, and more. IRAs with traditional custodians (such as banks and discount brokers) don’t permit you to make these types of investments. Having more investment choices will let you save for retirement in a way that exactly matches your investment philosophy.

To Build Good Habits. Once you open a self-directed IRA, you’ve already established a precedent for yourself. You can more easily build future contributions into your budget (which will greatly increase the chances that you’ll actually make them) because you already have an account set up to accept them.

Remember that you don’t have to make your entire annual contribution to your self-directed IRA all at once. It’s also possible to break it down into monthly amounts (or whatever frequency you wish) and make them over the course of the year. But you have to have an account set up in order to do so.

The amount of time you’ll need to fill out the necessary paperwork for a new self-directed IRA isn’t as much as you might think, and it’s worth completing that paperwork sooner rather than later. Contact a self-directed custodian such as Quest Trust Company today in order to get started.

What’s Your Self-Directed IRA Investing Plan For The New Year?

Estimated reading time: 3 minutes

Many of us tend to think about our “big picture” financial issues relatively infrequently. A once a year review is often all the time we’re able or willing to spend, so it’s important to get the most out of our planning. Here are some tips for helping you formulate your investing plan with your self-directed IRA next year.

1. What Has Changed Since Last Year?
The best starting point is probably to evaluate what has changed since last year, or the last time you updated your self-directed IRA investing plan. Consider personal circumstances such as a marriage or divorce, the birth of a new child, or a child going off to college. Also consider any professional changes, such as moving to a new job, a promotion, or going back to school in order to switch careers. All of these factors can have direct impacts on your investing plan.

2. Do Your Investing Assumptions Still Hold True?
Also go back and review the reasons and assumptions you had when you first meet each portfolio investing in your self-directed IRA. Do those same reasons still hold true? In many cases, determining whether or not to hold on to your existing investments can be as simple as simply asking yourself the question “would I choose to buy this asset today at this price?”

3. Consider Transaction Costs.
Of course, deciding that you don’t want to hold a particular investment anymore doesn’t mean that you have to sell it right now, regardless of cost. It’s generally a good idea not to churn through your portfolio and trade in and out of investments too quickly (very few individuals are actually doing this successfully on a long-term basis). But you should not ignore any additional costs that you may incur, or market fluctuations that you have to bear, trying to dispose of a portfolio asset right now. For example, you might hold a single family home as an investment property, and determined that the market for sales in your area is generally much better in April or May that it is in December or January.

4. Know Yourself.
Finally, it’s important that you know yourself, in the sense that you understand your own personal investing philosophy. Individuals who choose investments that are outside of their comfort zone can often make bad decisions when they come face-to-face with significant market volatility or other macro level events. By taking a look at your past investing behaviors – most notably whether you are prone to selling market lows or buying at market highs – you can match directed IRA investments to your own investing sensibilities.

If possible, don’t make the mistake of only thinking about your portfolio on a yearly basis. The new year is a great time to take a look at things, but you probably want to consider doing that again before the next new year rolls around.

Using A Self-Directed IRA To Move Beyond Stocks And Mutual Funds

Estimated reading time: 2 minutes

Setting up a new self-directed IRA with a custodian such as Quest Trust Company can be one of the best ways to retirement planning efforts to a host of new investing options. With a self-directed IRA you be able to move beyond investments in stocks and mutual funds, and explore asset classes that might be a much better fit to your investing personality and needs.

First things first – there’s not necessarily anything wrong with incorporating stocks and mutual funds into your retirement portfolio. These types of investments can be a great cornerstone for many individuals’ retirement portfolios.

The potential issues arise in that there are other individuals who want additional options – options to target other investing markets and potentially secure a much higher level of return for themselves. Let’s take a closer look at the self-directed IRA.

Real Estate. There are a variety of methods through which you can invest in real estate with your self-directed IRA. The most accessible type of real estate investment is probably the single family home. These may be the easiest real estate investments to manage yourself (assuming that you don’t want to incur the expenses of an outside professional).

But you can also use your self-directed IRA to invest in multifamily properties, farmland, commercial real estate, undeveloped land, or any other type of real estate interests that a non-retirement account investor has available to them.

Private Investments. The IRS rules governing IRAs also authorize account holders to invest in non-public assets such as private equity and private debt instruments. Depending on the nature of the investment, you may need to meet the definition of a “qualified investor”, but even non-qualified individuals can still make other types of nonpublic investments, including loans and mortgages.

One of the biggest challenges may simply be acquainting yourself with being able to find these types of opportunities. This is one area of investing in which the Internet can provide you with a great deal of useful information. A number of different private investment exchanges and clearing houses have come online in the past few years, and these can help you find suitable private investment opportunities for your self-directed IRA.

These types of non-stock investments are sometimes unfamiliar to retirement savers, so always be sure to do your research and understand the risks of any investment fully before committing any funds.

Understanding The Self-Directed IRA Annual Contribution Deadlines

Estimated reading time: 3 minutes

The individual retirement account structure – and self-directed IRAs in particular – can be a solid foundation for a successful retirement plan. But in order to build the largest possible retirement nest egg, it’s important to make regular contributions to your account. The rules on IRAs specify limits for how much you can contribute each year, so it’s important to make sure your savings plan and budget are synchronized with the annual limits.

The Annual Contribution Period can be up to 15 Months. The period in which you can make a contribution to your self directed IRA for a given tax year is from January 1 of that year until you file your tax return. But in no case can such contribution be made after your filing deadline (i.e., April 15 of the following year).

You May Need to Specify. Even if you only have a single IRA, it’s important to pay attention to how you designate each contribution. Recognize that if you are making a contribution early in a calendar year, before you file your tax return for the prior year, you need to specify the tax year for which your contribution applies.

For example, if you send a contribution to your IRA custodian on January 10, it won’t be clear whether you intend for those funds to apply to the tax year that’s just ended, or to the tax year that’s just beginning. You can clear up any potential confusion by making the appropriate designation in the “memo” line of the check you sent. Or if you make the deposit or transfer of electronically, indicate the applicable tax year in any “note” or “other instructions” field of the submission form. (For electronic transfers, your custodian may even ask you to specify the applicable tax year).

Easing Your Administrative Burden. But note that this contribution calendar overlap also provides you the opportunity to address two years’ worth of IRA contributions in a single sitting. Simply write two checks to your IRA custodian, specifying which check applies to which tax year. Of course, if those two contributions do not meet the contribution limits for either or both years, you can make additional contributions later, provided you are still within the applicable time period.

Use it or Lose it. With a generous contribution period that extends beyond December 31 of each tax year, it’s easy for some individuals to take the contribution opportunity lightly. But because IRA contributions are a “use it or lose it” proposition (meaning that if you don’t make a contribution in a given year – or don’t make the maximum contribution – you can’t make up for it later), it’s important to put yourself in a position to be able to make that maximum contribution year in and year out.

Consider a $5,500 contribution made by a 30-year-old to their self-directed IRA. Assuming an 8% return, that single contribution will be worth well over $80,000 by the time that person reaches age 65. Don’t miss out on this opportunity, and make sure you meet the annual contribution deadlines to the greatest extent possible.

Top Beginning Of The Year Tax Moves For Your Self-Directed IRA

Estimated reading time: 3 minutes

Successful retirement planning is a combination of short-term and long-term decisions and actions. In the short term, you need to decide how to invest your money and how much to contribute to your account each year.

Your long-term focus will touch upon a number of different factors, including how your account will impact your overall tax situation. As you begin to prepare your tax returns for the year, here are some of the top tax moves related to your self-directed IRA.

1. Identify Your RMD Obligations (if any).
Traditional IRAs, including self-directed IRAs that are set up as traditional accounts, are subject to the IRS rules on required minimum distributions. These rules are designed to prevent account holders from letting their funds continue to grow without the holder ever having to pay taxes on that money during their lifetime (remember that deposits to traditional accounts are often made with “pre-tax” income of the depositor).

These rules on required distributions apply to individuals above age 72, regardless of their other income. Therefore, in order to minimize your tax bill, you may wish to plan ahead for the upcoming year’s required minimum distribution and adjust your other income as appropriate. For example, you might wish to delay selling an asset or investment you hold in a taxable account if it would raise your taxable income too high, or perhaps even subject your Social Security benefit to a greater level of tax.

It’s important to note that Roth self-directed IRAs are not subject to the same rules on RMDs. Converting a traditional self-directed IRA to a Roth account – provided that you are able to bear the one-time tax hit with funds from outside the account – could give you a much greater level of flexibility (and tax savings) going forward.

2. Consider a Roth IRA Conversion.
Being able to avoid certain rules on required minimum distributions is only one reason that many individuals find a Roth self-directed IRA to be preferable to a traditional account. The Roth IRA structure also provides you with additional benefits when it comes to estate planning and other financial planning issues.

Therefore, it’s a good idea at the beginning of each year to explore whether converting your traditional self-directed IRA into a Roth account would be a good long-term financial move from a tax perspective.

3. Plan to Maximize the Value of Your Contributions.
If you have both a Roth self-directed IRA and a traditional self-directed IRA, you’ll need to decide how much to contribute to each account, subject to the annual contribution. Some individuals elect to make contributions to their Roth account only when they have a minimal tax deduction from a traditional account contribution, or perhaps aren’t eligible to contribute to the traditional account at all.

Understanding the various contribution options available to you, and weighing them against one another, is an important element to minimizing your tax bill in the coming year.

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.