Retirement Goals: A Cool Mom’s Guide to Retirement

 

Women are at greater risk of spending all or part of their retirement in poverty than men. The gender pay gap and the difference in life expectancy are two main reasons for this discrepancy. Over their lifetime, the average woman makes less, works less, and is less likely to have full-time employment than the average man, which can directly affect her retirement savings.

Additionally, life insurance data shows that women live an average of five years longer than men. A longer expected lifespan may equate to the likelihood of spending more time in retirement and this is exactly why the topic of retirement planning for women is seemingly more important than ever before.

So, when it comes to retirement goals, women may want to consider a different strategy than their male counterparts.

Retirement Planning for Women

You may have likely heard the arguments on all sides about the gender pay gap. This brought forth the formation of many organizations to help close the gap, but that might not immediately help female investors currently juggling family responsibilities and their retirement savings.

Some retirement portfolio management services often elicit similar advice to all genders, overlooking the issues women face, which could potentially leave them more susceptible to impoverishment than men. While this is not intentional, it’s important for women to keep these differences in mind when planning for their future.

Because female investors are statistically more likely to live at least five years longer than men, a good option would be to have their retirement goals reflect this. A good way to prepare is to save a little extra cushion for any unplanned expenses in retirement.

One of the higher unforeseen costs in retirement is medical expenses. Some investors believe that Medicare programs are designed to cover all their costs. In some cases, retirees may need extra cash or a supplemental plan to have everything covered. Unforeseen healthcare costs may become a more significant problem for women because of their potentially longer lifespan.

Meet Your Retirement Planning Goals on a Limited Budget

Some studies have found that women with families are more likely to prioritize the family’s financial needs—like groceries and college funds—before putting money aside for later. When investors consider putting savings ahead of disposable income spending, they are often better able to save for the future. It may take a little getting used to, but paying for the future first reduces the risk of potential poverty later.

Women at all stages of investing should consider using every retirement savings vehicle available. For example, investors can contribute to both a 401(k) and an IRA simultaneously, both of which utilize pre-taxed money.

Mothers who take time off to have or adopt children and are married can consider saving in a spousal IRA while they are out of work. A self-directed IRA account could allow for more diversification which might accrue wealth faster by investing in alternative assets.

Meet Retirement Goals with Alternative Investments

Digital Trust offers women a way to invest their retirement savings or parts of it into alternative assets, like real estate, precious metals, LLCs, and digital currencies.

Investing in alternative assets allows you to diversify outside of traditional market-based products. Some tangible items may be at less risk of losing value in a market meltdown. Take control of your future as you learn more about the retirement possibilities with Digital Trust.*

 

* Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The accountholder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.

Retirement Goals: 5 Retirement Planning Myths Debunked

 

It can be challenging for investors to wade through all the tips and suggestions from friends, family, co-workers, and the internet regarding planning for retirement. Although you may have been told 1,001 things you should and shouldn’t do, there’s a good chance that some of these ideas aren’t true.

In fact, some of these ideas might significantly harm your goals or the outcomes you may have envisioned for a peaceful and abundant retirement lifestyle. Here are five retirement planning myths for you to consider

Myth 1: I can wait to save for retirement.

Daily or monthly financial planning isn’t always the easiest task, especially for a young adult who may have other priorities. Sometimes, the thought of it may even feel  depressing, having to withhold 6% of your income when you have rent and credit card bills to pay as well as student loans, anda night out with friends. Juggling bills and other financial priorities may lead some young adults to think, “it will be fine to wait until I make more.”

While this line of thinking might afford you some reprieve at the moment, it may also put a damper on retirement goals over the long run.

For example, you can only contribute a limited amount of money to a tax-deferred retirement account each year. So, you may be limiting the total amount of tax-deferred earnings you can contribute to your retirement, even if you choose to only contribute a fraction now compared to what it will be later when you might be making more money.

Putting off retirement contributions also means that more money will need to be contributed later. It may end up that it is not easier to contribute larger amounts later.

Myth 2: My tax bracket in retirement will be lower.

Investors may assume that their income will be lower in retirement. This understanding leads people to think that they may need less money in retirement to cover things like income taxes. At the start of retirement—before investors may have to take Required Minimum Distributions (RMDs)—they may find that navigating a lower income is possible. On the other hand, once RMDs are incurred, there is the possibility of making more money than you had while working.

Some investors choose to offset potential tax-bracket changes by opening after-tax retirement accounts like a Roth IRA rather than a traditional tax-deferred IRA. Another option to consider would be investigating qualified charitable distributions, and other solutions when the time rolls around.

Myth 3: I can rely on Medicare when I retire.

Medicare often pays about 80% of medical costs. Therefore, some retirees choose to pick up supplemental or gap insurance or pay out of pocket for the remaining expenses.

Planning for these costs out of pocket might seem scary if you are far from retirement because it could be possible for medical care inflation to run higher than the average inflation rate. Today, Fidelity estimates that a healthy retired couple could plan to spend $300,000 on additional medical costs.

Myth 4: I can hit my retirement goals with my home equity.

There are many ways to use your home equity as part of your retirement plan. Still, it isn’t easy to gauge precisely how much equity you will have accumulated the further you are from retirement.

The housing market is just like any other market and can experience volatility with unexpected dips or surges. It is difficult to anticipate a bubble, a bust, or even accurately predict how the real estate market will change the value of your home at retirement age.

Myth 5: My spouse, social security, or inheritance is my retirement plan.

Relying on others for your future may seem like a comforting or convenient idea, but know that it may not always work out as planned. For example, if you are waiting for an inheritance from your parents, it’s possible that something may come up that could cause them spend the money on something else, such as their own medical bills or other care before it reaches you. In addition, it’s important to note that social security alone may not cover all of your future needs or retirement goals.

Prudent future planning is best done when you actively participate in the solution.

Planning for Your Retirement

DigitalTrust* offers a multitude of ways to help you begin planning for your future. This technology-driven, self-directed approach to retirement portfolio diversification can help bring peace of mind to investors, who seek to learn what their options are when it comes to traditional and alternative investments, while planning for their golden years.

 

Sign up with Digital Trust today!

 

* Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The accountholder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.

Why More Investors Seek Alternative Retirement Options

 

During the Global Financial Crisis from 2007-2009, the mechanics of the underlying market began to change. Central banks implemented quantitative easing (QE) programs worldwide to keep banks afloat and the markets on the up and up.

These programs worked wonders initially, spurring a long-standing bull market that was met with continued QE any time the market threatened to pull back. The most recent QE program was initiated as the 2020 pandemic settled in.

While other sources can cause temporary market downturns, there is no question about it; the world revolves around money. So, what happens when unprecedented amounts of cash are poured into the system to solve relatively small problems compared to what the world faces today? The answer is volatility and high asset prices.

 

How Volatility is Driving Alternative Retirement Investment Options

Simply put, the more volatile a market, the more diversification your portfolio may require. Volatility can introduce risk in the form of price fluctuations. So, retirement portfolios holding the traditional 40/60 ratio of bonds to stocks may be at risk of losing more money in a downturn than ever before. The mechanics behind this added risk can be complicated and may involve the flood of money into these traditional assets, raising their prices, and increasing their volatility.

One way to think about the situation is if a share of the S&P 500 was valued at $2,000, a 1% move would change the value of $20; and, if a value of the share reaches the $4,000s, a 1% move would be twice that amount. So, a $100,000 investment in the S&P 500 today may be more likely to lose twice as much as it would just a few years ago in a standard 5-10% correction. Then, if you take into consideration the volatility factor, it could potentially be a recipe for disaster in a retirement portfolio.

 

Alternative Retirement Investment Options

While some investment advisors continue to make the recommendations they have been pushing for decades, more investors are learning that alternative investment products can be invested in IRAs and other tax-advantaged1 accounts.

In an effort to reduce the risk of being involved in the volatility, many people are moving money out of the stock markets and into alternative retirement options, like real estate, precious metals, private equity, cryptocurrency, and other growth vehicles.

Unlike the S&P 500, a real estate investment is less likely to get a 50% haircut if you are invested in a sought-after area. Additionally, by moving your assets away from the traditional market structure, you may be able to diversify your holdings further.

An option you may want to consider is asset diversification. Using alternative retirement options can serve as a good way to hedge your portfolio against the likelihood of a market downturn that may not resolve itself in time for retirement.

For example, your portfolio could include options like timber rights. Commodities tend to do well when the market goes south; should tech stocks plummet, the income that could be made off of timber rights could potentially increase with the price of lumber.

There are so many ways to get creative with your portfolio using alternative retirement options. Digital Trust offers a range of alternative retirement plan options, including self-directed IRAs and solo 401(k) plans for self-employed business owners with no employees. Plus, easy sign-up options help you begin pursuing alternative investments to diversify your IRA2.

 

Sign up with Digital Trust today!

 

1Some taxes may apply. We recommend you consult your tax, legal, and investment advisor.

2Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The account holder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.

5 Tips to Diversify Your Retirement Portfolio

Portfolio diversification is a popular topic that has different meanings to different people. What most people can agree on, though, is that the aim of a diversified portfolio is to maintain overall positive growth through market fluctuation.

So now you may be wondering how to diversify your retirement portfolio. Typically, one could start with an S&P 500 index fund that provides exposure to 500 stocks because that number may feel like diversification. The catch is that S&P 500 holdings are weighted. The largest index weighting is information technology, making up 28.7%—meaning that almost 30% of your portfolio would be invested in tech.

These “weighty problems” may be avoided by thinking beyond the Index. Consider these five tips that will help you manage your own diversified retirement portfolio.

 

1.  Think beyond stocks and bonds

The traditional diversification mantra postulates the best investing formula as a 60/40 split between stocks and bonds. But there are many other ways to spread and grow one’s wealth. For example, in the realm of non-tangible assets, one may look to invest in money markets, REITs, convertible notes, crowd investing, cryptocurrencies, non-fungible tokens, peer-to-peer loans, and much more.

Some investors like to invest chunks of their portfolios in tangible items, like real estate, precious metals,  and more. The point of thinking beyond stocks and bonds is that it moves parts of a portfolio outside of one specific financial class. By diversifying asset classes, investors can try to avoid the impact of negative swings that can happen within the market.

 

2.  Consider correlations

Assets with prices that move similarly are considered highly correlated. If every asset inside a retirement portfolio is moving up, that’s great, but realize that they could potentially all move down together as well because of their correlation.

When seeking diverse investments, you may want to look for assets that do not move in conjunction with one another. You can start by researching various assets to get a better understanding of intermarket relationships. Then, you could look intoto investment products that do not trend in tandem.

 

3.  Don’t get too personal

Believe it or not, one’s employment and location can affect his/her portfolio diversity. Let’s say your company offers and matches your contribution for stock options. You may want to consider your sector when you start your research for diversification. For instance, if you work for Amazon, your portfolio is already heavily exposed to tech, so you may want to evaluate other asset classes or alternative investments.

Other factors you may want to consider are possible events that could have either a positive or negative portfolio effect in the geographical locations of your investments. For example, the number of companies on the S&P 500 that tagged “wildfire” as a risk factor has jumped in the last decade due to the increased frequency of fires in California.

 

4.  Expand your horizons

The U.S. is a great place to invest, but it’s a big world out there. You can consider investing in some global or regional index funds. Countries grow at different rates. Thus, you may want to consider taking advantage of high growth periods in other countries, while also diversifying the risk of any negative impact events occurring in the U.S.

 

5.  Stay dynamic

Keep in mind that markets and assets are constantly evolving and that they very rarely travel in a straight line. Planning and reallocating money is critical to making the most of a retirement portfolio. Rebalancing can be especially important after significant growth in one portion of a retirement portfolio.

For example, investors could consider which sectors will provide the next round of big growth after a stock boom. And you may want to weigh in on how you’d like the money made from the boom to be reallocated to new locations to take advantage of new growth in other areas.

 

How to diversify your retirement portfolio

There are many ways to diversify your retirement portfolio. One option may be to start by telescoping out and thinking about your actual risk exposure. From there, you may be able to formulate a plan to achieve better diversification and seek out platforms and services that fill those needs. Digital Trust allows retirement portfolio investors one easy place to hold, track, and trade alternative assets within a self-directed IRA.

Open up a retirement account with Digital Trust* and start diversifying your portfolio today.

 

* Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The accountholder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.

Important Tax Dates & Deadlines for 2022

Whether you’re just getting started or you’ve been investing with a self-directed account for years, being aware of upcoming tax dates and deadlines should help you stay ahead in the 2022 tax year. 

   

JANUARY 31 

Digital Trust mails all account owners the following: 

  • Forms 1099-R, 1099-INT, 1099-Q, and 1099-SA (as applicable) 
  • 2021 Annual Account Statements 
  • Notice for Required Minimum Distributions (“RMD”) for Traditional, SEP, and SIMPLE IRA clients age 72 or older 

  

MARCH 15 

  • Deadline for Partnership LLC and S Corps to set up and contribute to a Solo 401(k)* 

 

MARCH 31 

  • Digital Trust electronically files the Forms 1099-R, 1099-INT, 1099-Q, and 1099-SA (as applicable) with the IRS 
  • Last day to request corrections to your Annual Account Statement 
  • Completed Fair Market Value (FMV) Forms and supporting documents due to Digital Trust for updates/corrections 

  

APRIL 18 

  • IRS deadline to make contributions to your IRA for the prior year (Individuals in Maine and Massachusetts will have until April 19) 
  • Deadline for Single LLC and C Corps to set up and contribute to a Solo 401(k) for 2021** 

  

MAY 31 

  • Digital Trust electronically files Form 5498 and 5498-SA (as applicable) with the IRS and mails Form 5498 and 5498-SA to Account Owners/ Beneficiaries 

  

SEPTEMBER 15 

  • Contribution recharacterization requests due to Digital Trust 

  

OCTOBER 17 

  • IRS deadline to remove excess IRA contributions that occurred in the prior year (For IRA owners who timely filed their federal income tax return or otherwise received an extension of time to file) 

   

DECEMBER 1 

  • Completed Fair Market Value Form requests due to Digital Trust for guaranteed processing for 2022 annual statements 

 

DECEMBER 15 

  • Completed RMD requests due to Digital Trust for guaranteed processing for In-Kind RMD requests 

  

DECEMBER 19 

  • Completed RMD requests due to Digital Trust for guaranteed processing for cash RMD requests 

 

If you have IRA questions, or simply want to learn more about how you can get started investing with a self-directed IRA, our team of experts are here to help. Call us today at (800) 777-9878 or email us at support@digitaltrust.com. 

 


 

Disclaimers 

*If you request and receive an extension, you may have until September 15, 2022, or until you file your taxes. 

**If you request and receive an extension, you may have until October 17, 2022, or until you file your taxes. 

Please note: If a plan is adopted in 2022 for 2021 you cannot make pre-tax or Roth deferrals, but you can still make employer contributions. 

Portfolio Rebalancing Dos and Don’ts

Building a portfolio over time takes patience, interest, and investment knowledge. But letting it sit could mean missing out on opportunities to take advantage of better returns with different allocations. The longevity of an overall investment hinges on understanding what is a risk profile and personal portfolio balancing strategies.

 

What is Portfolio Rebalancing?

Portfolio rebalancing is essentially the act of moving money from one investment to another to implement a strategy within the portfolio. ETFs, mutual funds, institutions, and more tend to rebalance on a regular schedule; while this typically happens on a quarterly basis, sometimes they don’t rebalance for a longer period than that.

Portfolio Rebalancing Don’t: Don’t rebalance a portfolio too often. Moving assets around every time an account is opened can be detrimental for returns. Typically, it is recommended for one to make a reasonable timeline for premeditated rebalancing (depending on your investments) and only to make one when implementing a strategy requires it.

Portfolio Rebalancing Do: Create a strategy for investing and rebalancing. Then, stick to it.

 

Portfolio Rebalancing Strategies

A rebalancing strategy should be based on the amount of risk an investor is willing to take. Commonly, investors below the age of 50 have time to take on more risk while those closer to or in retirement pare their risk back.

There are many ways to assess and mitigate risk in a portfolio. For example, many portfolios include stocks or asset risk. The best way to mitigate asset risk is to diversify the stock portfolio. This way, someone with a higher risk portfolio may hold stocks in a consolidated industry, while someone with lower risk parameters holds stock in multiple sectors.

The difference between risk tolerance levels is that investors are allowed different risk types, which have an array of strategies for asset purchases. After you figure out your risk tolerance, your next step is to construct an investing strategy. It’s best for this strategy to include a plan for choosing assets as well as a plan for when to exit them.

Let’s say that a long-term strategy is to pare back risk allocations over several years; this means that the portfolio rebalancing strategy is clear. However, an alternate rebalancing strategy could be to move a percentage of money from riskier assets, like stocks, into safer assets, like money market accounts. Another potential option would be for an investor to also diversify a portfolio continuously over time to reduce risk by distributing money into different alternate investment options or across various mutual funds.

Portfolio Rebalancing Do: Diversify a portfolio by investing across industries and products that follow a risk schedule. Consider alternate investment options, such as cryptocurrency, real estate, private equity, and precious metals.

Meanwhile, some industry experts recommend checking on the state of investments quarterly or every two to three months to identify individual assets that might be impeding goals. Doing this may help to mitigate risks by executing unplanned maneuvers that don’t follow an intentional investment strategy.

Portfolio Rebalancing Don’t: Do your best to not become complacent, as this may result in missed prime opportunities for securing a healthy financial future.

 

The Importance of Rebalancing a Portfolio

Rebalancing a portfolio is one of the best ways for investors to achieve investment goals over time.

Portfolio Rebalancing Dos:

  • Create and stick to an investment and rebalancing strategy
  • Only take on the amount of risk appropriate to your means
  • Diversify a portfolio to mitigate risk
  • Learn about the products in a portfolio

Portfolio Rebalancing Don’ts:

  • Don’t rebalance too often
  • Don’t become complacent with investments or investing strategies
  • Don’t take on more or less risk than is appropriate for you

 

Digital Trust offers a variety of retirement account investing options, including alternative investments. Our platform offers investors access to a wide array of investment options for self-directed IRAs, including real estate, stocks, mutual funds and cryptocurrencies. Digital Trust is the one-stop-shop that gives self-directed and professional investors endless opportunities.

Looking to learn more? Check out our Frequently Asked Questions page.

Sign up with Digital Trust today.

How Does Inflation Affect Saving and Investing

Recent upticks in the United States Inflation Rate have brought attention to the economic term: inflation. It’s easy to notice that everyday items like a gallon of gas and a loaf of bread cost more than they did a year ago, but what does that mean for a typical consumer’s investments? The inflation and investing relationship can get complicated as different investment vehicles price inflation in varying ways—begging the question, what is the inflation and investing relationship? 

 

What is Inflation? 

Inflation changes the prices people and businesses pay for goods and services. The government tracks consumer inflation and producer inflation through the CPI (consumer price index) and PPI (producer price index). During inflationary periods (economic growth), we experience a positive inflation rate, and during recessions (economic contraction), the inflation rate is usually reduced. Right now, the United States is in a high inflation environment not experienced since the 1980s.   

Economists consider a core inflation rate of 2% to be optimal for price and employment stability. When the inflation rate deviates from 2%, institutions such as the Federal Reserve step in to bring the rate back to normal. 

Sophisticated analysts use indicators like the difference between short-term and long-term future bond rates to gauge where the economy is headed and what inflation will look like in the future to invest accordingly. But how does the average investor protect their portfolio in the wake of the high inflationary environment we see today? 

 

How to Invest in a High Inflation Environment    

By searching “investing during inflation,” it’s easy to learn that real estate, commodities, and inflation-indexed bonds are common traditional hedges against inflation. The first two are tangible assets that, like goods and services, increase in value as inflation increases. Inflation-indexed bond returns rise with inflation because, like an adjustable-rate mortgage, the bond rate increases with inflation maximizing returns as inflation rises. The same goes for investment vehicles that contain adjustable-rate loans of any sort.     

However, it is important to remember that we live in an ever-changing world. What worked well 100 years ago may not work today. For example, the relationship between inflation and investment products has changed because the way the financial system works is very different from even 20 years ago. 

Right now, the rate of inflation is causing the Federal Reserve to step in and reduce accommodations provided for the pandemic and talk about increasing interest rates. This is causing large investors to pull money out of certain sectors, like tech 

Historically speaking, high-tech stocks would be a great hedge against inflation because of their consistent growth. The problem today with that sector is the amount of low-cost funding it takes to keep companies afloat. As inflation rises, tech companies will have to pay more to borrow the money they need to carry on operations as normal, hurting their bottom line.  

For investors looking to diversify a portfolio for changes in inflation, it’s essential to understand how the sector of interest will react to those changes. And when it comes to today’s high inflation environment, investors have been moving money out of tech and into alternative investments, like real estate, precious metals, and other asset options, as well as utilities stocks, commodities. 

 

How Does Inflation Affect Saving and Investing 

In general, inflation affects the cost of goods, services, and money. Usually, inflation tracks around 2% on an annual basis. Under normal circumstances, the standard 60/40 model does well to account for inflation.  

However, under extraordinary circumstances, inflation affects markets differently. Diversifying an investment portfolio with real estate, commodities, inflation-indexed bonds, and alternative investment vehicles like cryptocurrencies can help to protect investment portfolio from the calamity of inflation. Digital Trust enables investors to keep and track many types of investments, including real estate, stocks, and cryptocurrencies, all in one place.  

Start building portfolio diversification and sign up with Digital Trust today 

 

 

 

 

10 Common Self-Directed IRA Questions

The world of self-directed investing with a SDIRA can seem complicated at first, but it can also be well worth the learning curve once your account is set up and running. Whether you’re just getting started or you’ve been investing with a self-directed account for years, it’s helpful to know the basics.

To better serve you, we’ve put together 10 of the most commonly asked questions we’ve come across regarding Self-Directed IRAs:

 

1. What is the difference between a Self-directed IRA (SDIRA) and an IRA at your local bank or brokerage?

Technically, there is no legal distinction between a self-directed IRA and any other IRA. “Self-directed” is simply a term used to help describe an account that allows the investor to have full control over his/her investment choices.

The difference between them is that with a truly self-directed IRA, investment options can seem almost boundless, just as long as you steer clear of the IRS’s prohibited assets. With an SDIRA, you’ll have access to alternate investments in addition to just the institution’s given selection of assets.

 

2. What are the benefits to utilizing a self-directed IRA?

There are many benefits when it comes to self-directed IRAs. First and foremost, are the tax protections that they can provide. Depending on the type of account you have, you can either defer tax (through a Traditional IRA) until you retire and take distributions or pay the tax up front (with a Roth IRA) and enjoy years’ worth of potential tax-free growth.

An SDIRA can encourage or even empower you to diversify your portfolio by expanding your investment choices beyond stocks, CDs, and mutual funds, providing you with more control over the investments you choose. This enables you to invest in the things you may know and understand as opposed to things you may not be as familiar with.

 

3. What types of IRAs are there?

Of the commonly asked IRA questions is the one regarding the types of IRAs available. There are several retirement account options available to you. While some offer larger annual contributions, others allow for potential tax-free distributions. Here’s a brief overview on how they differ:

Traditional IRA
In this type of account, contributions are typically tax-deductible because taxes on IRA earnings are not incurred until the account holder takes a distribution of funds from the IRA. At that time, IRA withdrawals are taxed as income.

Roth IRA
With a Roth IRA, contributions are made with after-tax funds, as they are not tax-deductible. Earnings and withdrawals are tax-free, however.

SEP IRA
A simplified employee pension (SEP) IRA enables an employer, usually a small business or self-employed person, to make retirement contributions through a traditional IRA that is in the employee’s name.

SIMPLE IRA
This type of IRA is similar to an employer-sponsored 401(k). It’s offered to small businesses, which lack a retirement savings plan. A Savings Incentive Match Plan for Employees (SIMPLE) IRA lets both an employer and an employee make contributions. Simple IRAs sometimes considered to be less complicated than 401(k) plans and also entail lower contribution limits.

 


 

Check out our Self-Directed IRA Plan Comparison chart  for more insight on how each type of IRA differs.

 


 

 

4. Which types of investment assets are prohibited in a self-directed IRA(SDIRA)?

Essentially, only the IRS can determine which assets are prohibited within an IRA.

Under current law, a retirement account is restricted from investing in the following:

  • Collectibles such as: Art, stamps, coins, alcoholic beverages, or antiques (IRC 408(m));
  • Life insurance (IRC 408(a)(3));
  • S-corporation stock, (IRS Letter Ruling 199929029, April 27, 1999, IRC § 1361 (b)(1)(B));
  • And, any investment that constitutes a prohibited transaction pursuant to ERISA and/or IRC 4975 (e.g. purchase of any investment from a disqualified person such as a close family member to the retirement account owner).

 

5. What are the most popular self-directed retirement investments?

As listed above, there are only a handful of asset types that account holders cannot invest in through their self-directed IRAs. Thus, these assets aside, you are left with a nearly endless array of investment options. The most popular assets with our clients are:

  • Real estate & rental properties;
  • Secured loans to others for real estate (trust deed lending);
  • Private small business stock or LLC interest; and
  • Precious metals, such as gold or silver.

 

6. Which supporting documents do I need to purchase an investment in my account?

The supporting documents needed to purchase an investment vary based on the type of investment being purchased. Here are a few examples that showcase the required documents for various types of assets:

Real Estate
All documents associated with the purchase of real estate: Purchase Agreement, Appraisal / Broker Opinion Letter, etc.

Limited Partnerships
Copy of Tax ID, Certificate of Limited Partnership, and Limited Partnership Agreement signed by all Partners

Private Stock / C-Corporation
Copy of Tax ID, Articles of Incorporation, By-Laws, Subscription/Stock Purchase Agreement; All original stock certificates must be physically held by Digital Trust

Promissory Note / Mortgage
Copy of Promissory Note/Mortgage and Security Interest; I.e., Deed of Trust, Deed of Mortgage, and Security Agreement

Limited Liability Company
Copy of Tax ID, Articles of Organization, and Operating Agreement signed by Members

Private Placement Memoranda (“PPM”)
A copy of the PPM, Operating Agreement, and Subscription Agreement

 


 

The investment possibilities with a Self-Directed IRAs are virtually endless. Take a moment to check out a wide variety of investment options that are available through a self-directed IRA.

 


 

7. Can I live in or work on a house that my IRA owns?

No, unfortunately not. You, or any other disqualified person, may not have any personal use or benefit of the property while it is held in your IRA account. The property is to be purchased for investment purposes only.

 

8. Can my account invest with other partners, including myself?

Yes, your IRA can invest with other partners and yourself, individually. However, it is important to consult legal counsel in these situations to be made aware of formalities and rules, such as Prohibited Transactions and Disqualified Persons, that may be associated with the shared investment.

 

9. What is a Prohibited Transaction?

The Internal Revenue Code Section 4975 defines a prohibited transaction as any improper use of your retirement account. Additionally, a transaction between your IRA account and a disqualified person is a prohibited transaction.

 

10. What is a disqualified person?

Disqualified Persons are defined to be the account owner, other fiduciaries, certain family members (lineal descendants and spouses of lineal descendants), and businesses under the account owners or disqualified person’s control. Generally, a “disqualified person” includes, but is not limited to:

  • Yourself
  • Your lineal ascendants and descendants
  • The spouse of a lineal descendant
  • Your spouse
  • Any entity that is owned 50% or more by disqualified persons
  • An entity that is controlled 50% or more by disqualified persons

 

Please review the code for specific information and definitions. Other useful IRS resources are:

  • Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
  • Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
  • Publications 560 – Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)

 

(Bonus) 11. Do I need an LLC to purchase investments in a self-directed IRA?

No, you do not need to create any LLC when using an IRA to invest. When using your IRA to purchase alternative investments, you can simply provide the custodian with the requisite purchase documents to let them know what asset you would like to purchase. Your custodian will then process the paperwork to purchase the investment in the name of your IRA.

 

Conclusion

While self-directed IRAs may not be the easiest thing to understand, at first, they can be with a little help and a bit more time. And after this article and perhaps, more articles like this, you can be better equipped to get started with confidence. That said, it’s important to have a knowledgeable investment professional or a certified IRA custodian/specialist that can help answer questions when needed!

Have more IRA questions in mind? Or if you’d like to learn more about how you can get started investing with a self-directed IRA, our team of experts are here to help. Call us today at (800) 777-9878 or email us at support@digitaltrust.com.

5 Self-Directed IRA Rules Everyone Should Know

A Self-Directed IRA allows you more investment flexibility than many other retirement plans, but it is of the utmost importance that individuals adhere to self-directed IRA rules. Below, you’ll find 5 Self-Directed IRA Rules every investor should know.

 

Rule #1: Certain Assets are Considered Prohibited Investments

Self-Directed IRAs grant access to a world of investment opportunities away from the traditional marketplace of stocks, bonds, and mutual funds. Indeed, investors can choose from a myriad of alternatives like real estate, LLCs, timber, oil & gas, notes, precious metals, and many others. Additionally, with the emergence of Bitcoin, Ethereum, and other cryptocurrencies, investors are able to diversify into options never seen before.

The IRS only identifies a handful of assets that are prohibited within an IRA. Those items are:

  • Collectibles – This includes, works of art, rugs or antiques, certain metals, gems, stamps and certain coins, alcoholic beverages, and any other tangible personal property that is a “collectible” under IRC Section 408.
  • Life insurance – Per the Internal Revenue Code 408 (a)(3) for an individual retirement account, an IRA cannot invest in life insurance.
  • S-Corporations – Trusts that qualify as an IRA are not eligible to be shareholders of an S-Corporation. (See Revenue Ruling 92-73)

 

Rule #2: IRAs Shouldn’t Interact with Disqualified Persons

Like Prohibited Investments listed above, IRAs also have rules regarding the people you may do business with. These prohibited individuals are referred to as Disqualified Persons. Engaging in direct or indirect transactions between your retirement plan and a disqualified person may cause your IRA to be disqualified, leading to potential taxes, penalties, and may include mandatory distributions from your IRA funds.

Per the IRS, the following people are considered Disqualified Persons for the purpose of your self-directed IRA:

  • You, the account owner
  • A beneficiary of the IRA
  • Your spouse
  • Your lineal ascendants
  • Your lineal descendants (and their spouses)
  • Plan service providers and fiduciaries (including advisors, custodians, and administrators)
  • Entities (corporation, estate, partnership, etc.) in which you own at least 50% of the voting stock, directly or indirectly.
  • An officer, director, or a 10% or more shareholder or partner.

While transactions involving brothers, sisters, aunts, uncles, nieces, or nephews, including in-laws, are not expressly prohibited, it’s best to use caution when engaging in business with these individuals.

For more information regarding Disqualified Persons, please refer to IRS Section 4975.

 

Rule #3: IRAs Should Avoid Prohibited Transactions

According to the IRS, a prohibited transaction is any improper use of your IRA by you, your beneficiary, or any disqualified person. Additionally, transacting with a Disqualified Person or committing a prohibited transaction will most likely void the tax protection of your account, which may lead to costly and serious tax consequences.

Additionally, should a prohibited transaction in connection with an IRA account occur at any time, the IRA will then be considered to have distributed all its assets to the IRA owner (at their fair market values). If the total of those values is more than the basis in the IRA, the IRA owner will have a taxable gain that should be included in his or her income.

Here are a few examples of Prohibited Transactions. You cannot use your self-directed IRA to:

  • Sell, exchange, or lease, property you already own to your IRA as an investment
  • Transfer IRA income, assets, or investment to a Disqualified Person
  • Lend IRA money or extend IRA credit to Disqualified Person
  • Supply goods, services, or facilities to Disqualified Person
  • Allow fiduciaries to obtain or use the IRA’s income or investment(s) for their own interest

Lastly, per IRS regulations, you cannot have “indirect benefits” from assets owned by your self-directed IRA. For example, using a vacation home that you’ve purchased with your Self-Directed IRA is considered a prohibited transaction.

For more information regarding Prohibited Transactions, please refer to IRS Section 4975.

 

Rule #4: Annual Fair Market Valuations Are Typically Required

The Internal Revenue Service (IRS) requires that Self-Directed IRA Custodians/Administrators report the value of the assets in their accounts, annually.

For traditional assets it’s relatively straight forward, as investors have public exchanges to identify their asset’s value. For alternative assets where there is no easily accessible marketplace, individuals must use a Fair Market Valuation (FMV) to assign or change the value of an asset.

Valuation of the assets in your self-directed account must be provided to your IRA Custodian/Administrator on a yearly basis (typically prior to December 31st), to ensure accurate and proper tax reporting with the IRS.

Additionally, an FMV is also required when there is a taxable event, such as:

  • Taking a distribution from your IRA (including “In-Kind” distributions)
  • Demonstrating an asset no longer has value; or
  • Converting assets held in a tax-deferred account to a post-tax account (E.g. Traditional to Roth)

In general, precious metals and publicly traded assets (stocks, bonds, etc.) typically do not require your submission of a fair market valuation because these investment values are determined by the market. However, it is helpful to contact your IRA Custodian/Administrator to verify their individual requirements.

 

Rule #5: Certain Account Types Have Required Minimum Distributions

For Traditional IRA holders who reach age 72, the IRS requires that those individuals begin taking distributions from their IRA. These types of distributions are referred to as Required Minimum Distributions (RMDs). Individuals with a Roth IRA are not required to take mandatory distributions from their Roth IRA.

The amount required to withdraw each year varies based on several factors, most notably account value. If you have multiple accounts, you will usually need to calculate the RMD for each separately, to determine the required amount. You may then take a full distribution from one account or take an RMD from each. The important thing to remember is that the total RMD amount across all applicable IRAs needs to be withdrawn to avoid tax consequences. It is always wise to confirm your individual needs by using the latest calculation worksheets, which can be found on the IRS website.

There are two methods of distribution from an IRA:

  • Cash Distributions – When an IRA holder requests a cash amount to be distributed from the account and sent via check, ACH or wire directly into their hands.
  • ‘In-kind’ Distributions – Used to distribute non-cash assets from an IRA without selling these assets. This method of distribution changes the ownership of the asset from the IRA’s name to the name of the IRA holder. This type of withdrawal is typically used for illiquid assets like real estate, promissory notes, and private placements. The Fair Market Value (FMV) of the asset is used to report to the IRS the dollar value of the distribution.

Your IRA Custodian/Administrator reports all distributions (as of December 31st of the tax year) to the IRS and the account holder using IRS Form 1099-R.

 

Conclusion

Being aware of the few things that aren’t allowed in your IRA is essential when it comes to protecting yourself and your account. Which is why we recommend that every investor consult with a qualified financial advisor or tax attorney before making any significant financial decision.

Whether you’re just getting started or you’ve been investing with a self-directed account for decades, it’s helpful to know the basics. If you have questions about how the Self-Directed IRA process works, our experts are here to help. Call us today at (800) 777-9878 or email us at support@digitaltrust.com.

How Do Self-Directed IRAs Work?

Self-directing with retirement funds has increased in popularity over the past few years. While they’ve been around since the ’70s, Self-Directed IRAs (SDIRA) are still considered unfamiliar by many.

While all IRAs are prohibited from a short list of investments deemed unfit by the IRS (https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs), Self-Directed IRAs open a world of opportunity-from alternative assets like Real Estate, LLCs, and Precious Metals, to digital assets like Bitcoin, Ethereum, and other cryptocurrencies.

Self-Directed IRAs put you, the individual, in the driver’s seat. While SDIRA custodians cannot give you financial or investment advice, a reputable custodian should be able to provide you with educational materials or next steps on where and how to start your due diligence.

For example, your custodian isn’t going to be able to tell you which piece of rental real estate will make enough money for your retirement. However, they should be able to help you determine which documents are required (as well as how to properly title those documents), or how to put rental income back into the IRA, to help you stay on the right side of the IRS.

 

The Self-Directed Process

From start to finish, the Self-Directed process is relatively straight-forward:

  1. Select a suitable Custodian to establish an IRA that can handle your individual needs.
  2. Fund your account via an IRA-to-IRA Transfer, Direct or Indirect Rollover, and/or new IRA Contributions
  3. Identify the investment you wish to make, as-well-as perform due diligence prior to investing.
  4. Submit the investment’s purchase documents to the IRA Custodian to carry out the desired transaction.

 


 

 

For more info on how the Self-Directed investment process works, please download our Self-Directed IRA Timeline.

 

 


 

Advantages of a Self-Directed IRA

Utilizing a Self-Directed IRA can provide several unique perks to maximize growth of your retirement savings. Here are a few key advantages:

  • Endless investment options to choose from
  • Options for Tax-Deferred or Tax-Free* growth
  • Ability to select investments that are in line with your knowledge, experience, and comfort level
  • A single SDIRA can hold multiple assets – helping to create a diversified portfolio

 *Some taxes may apply. We recommend you consult your tax, legal, and investment advisor

 

Risks of Self-Directed IRAs

Even if thorough research of an asset is done beforehand, investors should be aware of a few disadvantages with self-directed IRAs, which are:

  • The Custodian of your SDIRA cannot provide investment or financial advice
  • Some investments can have higher risk as they are not part of the traditional marketplace most investors are familiar with
  • The IRS prohibits transactions with certain assets or disqualified persons
  • You may incur hefty penalties or taxes if certain IRS guidelines aren’t followed

 

The world of self-directed investing with an IRA can be complicated at times. Whether you’re just getting started or you’ve been investing with a self-directed account for decades, it’s helpful to know the basics. If you still have questions about how the Self-Directed IRA process works, our team of experts are here to help. Call us today at (800) 777-9878 or email us at support@digitaltrust.com.