Coverdell ESA & Partnering Accounts

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You asked:   “Quincy: RE: A Coverdell ESA, if an individual has contributeed to a Coverdel on behalf of his child for the last 3 years, $2,000 each year for a total of $6,000, can he withdraw the $6000 in contributions, leaving the accumlated gains? If so are there any tax related consequences? 2nd question: can my ROTH and HSA partner to buy or option a note and share in the profits. Or can say the ROTH buy option and … Continue reading

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Increase Your Private Investment Allocation With Your Self-Directed IRA

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.

Seller Financed Real Estate

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You asked:   “Hey Quincy – wife and I met you on IRA Fun Cruise in January. This is a rookie question. Sceanario: we buy an investment property through one of our Roth self directed IRAs. We plan on putting 20K down and getting seller financing for the balance of purchase price. The property is tenant occupied with a Property Manager in place. The property is currently in a land trust and I believe seller wants to use a land … Continue reading

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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.