Why the Self-Directed IRA is the Best Long-Term Savings Vehicle

Being able to save for a financial goal is one of the most valuable skills a person can ever develop. You’ll likely set a variety of savings goals throughout your life, including short-term, medium-term and long-term goals. The ultimate long-term savings goal is saving for your retirement. And the ultimate savings vehicle for retirement is the self-directed IRA.

Let’s look at a few of the reasons why.

Tax-Deferred Growth.

Like other traditional IRAs, the biggest strength of a traditional self-directed IRA is that it provides the opportunity for your investments to grow on a tax-deferred basis. This means that any income you receive from the investments within your account will not be subject to tax for as long as those funds remain in the account. Similarly, any gains from the sale of investments within your account will be free from taxation, provided that those funds (and any investments you make with those funds) remain within your account.

Additional Investment Options.

A self-directed IRA with a custodian such as Quest IRA affords the account holder with investment options that traditional IRA custodian will not permit. For example, you can use a self-directed IRA to invest in assets such as private equity and real estate, and to make loans to businesses or even for real estate mortgages. Many of these asset types have long investment timeframes, which allows you make investment choices to precisely match your retirement goals.

The breadth of investment choices you’ll have with a self-directed IRA is even more apparent when you compare them with any 401(k) plan options that you may have through your employer.

Administrative Advantages.

Speaking of 401(k) plans, you’re likely to accumulate multiple 401(k) accounts over the course of your career. Many plan administrators limit your ability to make new investments once you leave the employer, and having to keep track of multiple accounts can reduce your ability to execute on your retirement plan. Having a self-directed IRA as your sole or primary retirement account can lessen your administrative burden.

Additional Roth Self-Directed IRA Advantages.

If the features we’ve discussed above aren’t enough, then consider the additional benefits you receive by structuring your self-directed IRA as a Roth account.

In addition to having your investments grow on a tax-deferred basis as is the case with a traditional IRA, distributions can also be taken from a Roth IRA on a tax-free basis. Furthermore, Roth IRAs are not subject to the rules on required minimum distribution requirements in the same way that traditional IRAs are. These rules require you to take minimum distributions from a traditional IRA once you reach age 70½.

Finally, eligibility to contribute to a Roth IRA does not end at age 70½ as it does with a traditional IRA. This means that if you have other sources of income during retirement you can continue leveraging the various contributions.

Have You Made a Plan for Taking Distributions From Your Retirement Accounts?

When most of us think about retirement planning, we tend to focus on the saving and wealth accumulation aspects of the process. That is, we plan how much we think we need to have accumulated by the time we reach our desired retirement age, in order to be able to lead the retirement lifestyle we want.

But a truly effective retirement plan also gives a significant amount of attention to what happens after you’ve built your nest egg and reached your target retirement age. You also need to plan how you’re going to take distributions from your retirement accounts during retirement.

Why Having a Plan is Important.

In short, having a plan for withdrawing money from your retirement accounts is important because you don’t want to outlive your retirement savings. Since it’s impossible for anyone to know when they’re going to pass, it’s important to have a plan, and to build some cushion into the timing of how long you’re going to need to fund your retirement.

Furthermore, this cushion can be vitally important if some of the assumptions you’re making now about your retirement don’t hold true. For example, you might not be able to work as long as you think. Or you might not have accumulated as much as you would have liked, either due to sub-maximal contributions or poor investment returns.

In any case, you’re not likely to be able to reach your retirement goals without giving careful consideration to all the factors relating to that retirement, and coming up with a plan for how and when you intend to take money out of your account.

Are You Subject to the Rules on Required Minimum Distributions?

If your self-directed IRA is set up as a traditional account, then you’ll be subject to the IRS rules on required minimum distributions. These rules state that once you reach age 70½, you must begin taking minimum distributions for your account every year for the rest of your life.

Having to make withdrawals from your account every year can require some degree of advance planning, particularly if you’ve used your account to invest in assets such as real estate or private equity, as these assets often require a significant lead time to be able to liquidate.

Roth self-directed IRAs are not subject to the rules on required minimum distributions.

Don’t Forget About Social Security.

Even if you haven’t been relying on your Social Security benefits when doing your retirement planning, there are still ways that the government retirement benefits program can impact your decision making. For example, you may choose to delay taking your Social Security benefits until you’re past your full retirement age, in order to increase the monthly check you receive from the government. Doing so may require you to withdraw a greater amount from your self-directed IRA until you start receiving benefits, but the long-term payout could make for a more comfortable retirement.

Increase Your Private Investment Allocation With Your Self-Directed IRA

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 IRA 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 Might Consider A Non-Deductible Self-Directed IRA

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

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 IRA today in order to get started.

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

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

Setting up a new self-directed IRA with a custodian such as Quest IRA 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.

Precious Metals. In seeking to diversify beyond stocks and mutual funds, retirement savers often seek out investment asset classes that have a low correlation to the stock market – meaning that their prices do not frequently move in the same direction or to the same extent as publicly traded stocks. Precious metals can be a great way to gain this type of investment exposure.

Direct physical investments in precious metals are authorized with a self-directed IRA, provided that you have a third-party custodian actually hold the physical metals on your behalf. Among those who use their self-directed IRAs to invest in precious metals, the most common types of metals are gold, silver, platinum and palladium.

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

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

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 70½, 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 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 the 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

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.