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Why Self-Direct? Diversification Types of IRAs Peace of Mind

Why Self-Direct?

Most traditional IRAs and 401ks limit retirement investments to traditional assets like stocks, bonds, and mutual funds. A self-directed IRA (SDIRA) empowers you to invest in alternative investments of your choosing. An Alternative Investment is anything that is NOT a publicly traded stock, bond, or security.

As a self-directed IRA custodian, Preferred Trust enables individuals to break free of conventional investing, direct their own retirement strategies, and grow tax-protected retirement wealth through self-directed alternative investments.

What are Self-Directed IRAs?

Self-Directed IRAs were permitted in 1974 as part of the Employee Retirement Income Security Act (ERISA). Unlike conventional IRAs, self-directed IRAs empower depositors to select and control the investments in their retirement accounts. The term ‘self-directed’ means that you, as an individual, have complete control over selecting and directing the investments in your account.

With a self-directed IRA, you can use your personal knowledge and experience to identify high-yield investments, take advantage of niche opportunities, and explore investment options like real estate, digital currency, clean energy, oil and gas, agriculture, private placements, precious metals, and more. Or you can be the bank, providing private money loans and earning interest on loaned funds. A self-directed IRA can open the door to a wide array of high-yield alternative assets, provide a way to diversify your retirement portfolio, and potentially increase investment returns through tax-deferred growth.

To self-direct your IRA, you must work with a custodian who is licensed to “custody” the account, hold alternative assets, and administer account transactions. Working with a licensed, regulated SDIRA custodian like Preferred Trust is critical for maintaining the tax-protected status of your account.

Diversification

Diversifying your retirement portfolio is a smart investment strategy that can reduce risk, enhance stability, and improve returns. Alternative assets have the potential to outperform traditional assets like stocks, bonds, and mutual funds, and with a low correlation to traditional investments, can act as a powerful buffer during market downturns.

Tax-Deferred or Tax-Free Income

Investment gains and income generated within the self-directed IRA can be tax-free (Roth IRA) or tax-deferred (Traditional IRA). Because a self-directed IRA claims 100% of the income generated by the investments in the account, your retirement funds can grow without restriction.

A self-directed IRA permits tax-free withdrawals of contributions, interest, and earnings after the age of 59 ½.

Offset Higher Tax Rates

Consult your tax professional about the possibility of reducing your taxable income based on your filing status and income.

2023 Traditional IRA Maximum Annual Contribution Limit – under 50 years $6,500, over 50 years: $7,500.
2023 Roth IRA Maximum Annual Contribution Limit – under 50 years $6,500, over 50 years $7,500.
2023 SEP IRA Maximum Annual Contribution Limit – lessor of $66,000 or 25% of compensation.
IRA allows all taxpayers under 72 years to contribute to an IRA.

If you file a joint return, both you and your spouse can 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 the joint return, regardless of which spouse earned the compensation. If neither spouse participated in a retirement plan at work, all contributions may 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.)

Consult with a qualified CPA or tax specialist to verify your maximum contribution limits. You can also find additional details here, in IRS Publications 560 and 590.

Asset Protection

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 be subject more income and estate taxes than necessary.

Beneficiary Options:

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

Traditional IRA

Traditional IRAs are tax-deferred, which means they are funded with pre-tax dollars. You can choose to fund your Traditional IRA by making a contribution, or transferring funds from an existing qualified retirement plan, such as 401k, pension plan, or other traditional IRA.

Contributions to this account are tax-deductible, with assets of your choice earning tax-free profits.

BENEFITS OF A TRADITIONAL IRA INCLUDE:

By contributing to a traditional IRA, you may be able to lower your current tax bracket as your contributions are tax-deductible.
A traditional IRA will allow you to invest more money because taxes are not deducted from the original investment capital.
Investors in tax brackets that are too high to qualify for Roth IRAs can still contribute to traditional IRAs.
Investors should consider a traditional IRA if their anticipated tax rate at retirement will be lower than their current tax rate.

Roth IRA

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.

BENEFITS OF A ROTH IRA INCLUDE:

If you satisfy the requirements, qualified distributions are tax free.
You can make contributions to your ROTH IRA after the age of 72.
Minimum distributions are required only after the original IRA owners death.
You should consider choosing a ROTH IRA if you anticipate your tax rate at retirement to be higher than your current tax rate.

SEP (Simplified Employee Pension) IRA

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.

BENEFITS OF A SEP IRA INCLUDE:

Easy to administer, no government reporting required and no annual fund requirement.
Contributions allowable for employer and on behalf of employees as a substantial tax-free benefit.
Employers may contribute up to 25% of compensation or $66,000, whichever is less. (An increase from the 2021 IRS limit of $61,000)
Eligibility provisions stated in SEP plan document must apply equally to owners and employees.

SIMPLE (Savings Incentive Match Plan for Employees) IRA

A SIMPLE IRA plan provides small employers with a simplified method to contribute toward their employees’ and their own retirement savings.

BENEFITS OF A SIMPLE IRA INCLUDE:

Allows both employees and employers to contribute to a retirement plan set up specifically for employees.
It is an ideal start-up retirement savings plan for modestly-sized businesses of less than 100 team members not currently sponsoring a retirement plan.
Simple IRAs can be rolled over to a traditional or Roth IRA.
Employees can contribute up to $15,500 for 2023 (an increase from 2022 at $14,000) if under 50 years, with a catch up contribution of $3,500 if over 50 years old.
Employers can match up to 3% of employee’s compensation per year.
Employees may elect to hold account at custodian of choice, if permitted.
Compare a SEP vs. SIMPLE plan

Licensed, Regulated SDIRA Experts

Preferred Trust is a fully licensed, regulated, and audited financial institution headquartered in the State of Nevada. Operating as both an administrator and custodian of self-directed IRAs, Preferred Trust has served thousands of clients across the U.S. and custodied over $3.4 billion in alternative assets.

Our mission is to enable individuals to make sound alternative investments through guidance, support, advocacy, and education, and we are committed to integrity, care, and service excellence.

Our clients enjoy peace of mind with full transparency, up front disclosure of fees, and 24/7 account access.