Most traditional IRAs and 401ks limit investments to traditional vehicles such as mutual funds or stocks. As a passive custodian, Preferred Trust enables investors to break free of the conventional investing and control their retirement wealth. A self-directed IRA (or “SD-IRA”) empowers you to invest in alternative assets of your choosing. Select what you like and know, such as real estate, trust deeds, and precious metals. Or you can be the bank, providing private money loans. With Preferred Trust as your partner, you’re in control of your financial future. Self-Directed IRA’s were permitted in 1974 as part of ERISA, the Employee Retirement Income Security Act. Self-directing your IRA does require selecting a custodian, such as Preferred Trust, who can hold “alternative investments”. An Alternative Investment is anything that is NOT a publicly traded stock, bond or security.
What are Self-Directed IRAs?
Unlike conventional IRAs, self-directed IRAs empower depositors to select and control the retirement account investments they want. With this greater flexibility comes greater control of your financial future. The term ‘self-directed’ simply means that you, as an individual, have complete control over selecting and directing investments in your retirement account.
Self-directed IRA accounts allow investors to expand their investment options to include alternative assets such as limited partnerships, limited liability companies, real estate, deeds of trust, real estate investment trusts (REITs), IRA LLCs, precious metals, promissory notes, closely held private stocks, tax liens, hedge funds, life settlements, and more. Alternatives provide a great way to diversify a retirement portfolio and potentially increase investment returns through tax-deferred growth.
“Don’t put all your eggs in one basket”. Investing 100% in one type of investment asset is potentially disastrous. Imagine if all your investments had been tied up in real estate in 2006, the year over 1,259,118 foreclosures were filed. Or what if all your investments had been in stocks in September 2008 when the Dow nose dived 778 points, leading to losses of approximately $1.2 trillion. Integrating a self-directed IRA into your wealth strategy provides greater personal control over your retirement wealth.
Tax Deferred or Tax Free Income
Income and gains generated by self-directed IRA investments are tax deferred. Therefore, a self-directed IRA claims 100% of the income generated by your investments and grows without restriction.
A self-directed IRA permits tax free withdrawals of contributions, interest, and earning after the age of 59 ½. Opening an account with Preferred Trust and transferring funds to us is NOT taxable – it is a simple transfer from one custodian to another.
Offset Higher Tax Rates
Consult your tax professional about possibly reducing your taxable income based on your filing status and individual or household income.
- Traditional IRA Maximum Annual Contribution Limit – in 2019 and 2020 under 50 years $6,000, over 50 years $7,000
- Roth IRA Maximum Annual Contribution Limit – in 2019 and 2020 under 50 years $6,000, over 50 years $7,000
- SEP IRA Maximum Annual Contribution Limit – lessor of $57,000 or 25% of compensation (which is an increase from 2019 lessor of $56,000 or 25% of compensation)
- IRA allows all taxpayers under 70 ½ years to contribute to an IRA
If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on joint return. It doesn’t matter which spouse earned the compensation. If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. (Roth IRA contributions may be limited based on income level.)
Under US Bankruptcy law, self-directed IRA assets are exempt from bankruptcy in amounts up to $1,000,000.
Build for Your Beneficiaries
Certain self-directed IRAs allow the passing of assets to beneficiaries after death with little or no tax liability.
Properly designating your beneficiary can be an important part of your lifetime plan. Without this designation, your heirs may have to pay more income and estate tax than necessary after you are gone.
- The most common beneficiary designations are spouses, children, grandchildren or other relatives.
- A trust, charity or combination of individuals can also be named.
- Multiple individuals can be named as beneficiaries however additional rules apply as to how the required minimum distribution is determined.
- Name a Living Trust. When you name a living trust as either a primary or contingent beneficiary, work with a professional to ensure the trust agreement is established properly to make certain you have the most advantageous tax results.
- Name a contingent beneficiary should your primary beneficiary predecease you. Without a designated beneficiary your IRA could go into probate and produce unfavorable tax results for your loved ones.
Types of Self-Directed IRAs
A traditional IRA enables you to fund your tax deferred (funded with pre-tax dollars) account by making a contribution or by transferring funds from an existing qualified retirement plan, such as a former employer 401k, pension plan, or another traditional IRA. Contributions to this account are tax deductible and profits earned in your IRA from assets of your choice grow tax-free.
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A Roth IRA allows you to fund a retirement account with after-tax dollars that grow tax-free. Qualified distributions are also tax-free. Investors may set aside after-tax income up to a specified amount each year.
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A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. Any business owner with one or more employees or anyone with freelance income, can open a SEP IRA.
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A SIMPLE IRA plan provides small employers with a simplified method to contribute toward their employees’ and their own retirement savings.
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