Self-directed IRAs put you in the driver’s seat to make smart investments with your individual retirement account savings
Utah banks and credit unions offer multiple solutions for folks preparing for eventual retirement. Among the savings options is a product known as a self-directed IRA. It’s a great tool, but it doesn’t fit every situation and every potential saver’s wants and needs.
Is a self-directed IRA for you? Answer these four easy questions and find out:
1. Are you looking for a way to use your long-time business expertise to make wise investments to save for your retirement?
2. Are you hoping to get a tax advantage on contributions you make in early 2020 that you can deduct on your 2019 taxes?
3. Are you a hands-on kind of person who likes to make your own investments grow?
4. Do you have an existing individual retirement account (IRA), Roth IRA or 401(K) that you wish you could use to make other smart investments?
If you answered yes to these four questions, then you should learn a little bit more about the advantages of investing in a self-directed IRA.
First, how does a traditional IRA work? You can walk into a bank or credit union any time, quickly set up an IRA and then allocate money from your monthly paycheck to go into that account. You won’t be taxed on the money you invest or the interest that is accrued until you withdraw the funds. You can also allocate gains from traditional investments such as stocks, bonds and mutual funds into your traditional IRA. After reaching age 59 1/2, you can begin withdrawing funds from the account. Distributions are taxed at your regular income tax rate without the additional 10 percent early withdrawal penalty.
A Roth IRA works in the opposite way, in that you make annual contributions to the account with after-tax funds. When you retire or need additional income, you can begin withdrawing funds after age 59 1/2, tax-free.
OK, now that you have that basic information, here’s the fun part. You can roll one or more of your existing IRAs into a self-directed IRA and grow your money using some very creative, non-traditional investment strategies. Even if you set it up early in 2020, you have until April 15 of next year to fund it and have it count as a 2019 contribution. Also, depending on your income bracket, your contribution may be tax-deductible.
With a self-directed IRA, you, the owner, have full discretion to choose the investments in your account (following the regulations, of course). Self-directed IRAs let you diversify your investments with options such as CDs, stocks, bonds, mutual funds, real estate, notes receivable, trust deed notes, private company stock, LLCs and partnerships.
If you’re nervous about investing in stocks right now, you might feel safer investing in something in which you have expertise, such as real estate. With a self-directed IRA, you can buy property — a house or a rental — and rent it out or fix it up and sell it for a profit.
If you know someone with a private company or an LLC and you think it’s a worthy investment, you can loan them money from your self-directed IRA and make a return on your investment through the interest they will pay on their loan.
Here’s a tip: If you send money directly from your IRA to a business for your transaction, you will likely not have to pay capital gains taxes. You only pay taxes when you pull money out of the IRA account for your personal use.
Here’s an example of an unusual investment that paid off for a recent saver. The investor used some of his self-directed IRA savings to purchase restaurant equipment for a company he knew well. The owners paid the loan back with interest. Another investor with a self-directed IRA bought a semi-truck for the purpose of renting it out.
Investing your self-directed IRA savings in a variety of options is completely your choice, but you will probably also want to seek help from a trusted financial professional who specializes in self-directed IRAs. The people can help you through the processes by managing your investments according to your wishes, filing reports in compliance with IRA regulations, issuing bank statements and providing expert advice to help you benefit from all of the tax advantages.
With a little help from qualified experts, you can reap the benefits of your smart investments using a self-directed IRA when you’re ready to retire.
Roger Christensen is the senior vice president of marketing, communications and business development at Bank of Utah in Ogden. Lisa K. Mariano is vice president and personal trust manager at Bank of Utah.