Guest columnist John Bowens is a senior manager at IRA custodian Equity Trust Company. John draws from his 15 years in the real estate industry and his experience as an active real estate investor. In his travels across the U.S. and virtually, he has trained 50,000 investors during more than 300 workshops and classes, spreading the message about the power of building tax-free wealth and leaving a lasting legacy by investing in what you know best.
With uncertainty in the stock market amidst the coronavirus pandemic, retirement accounts that rely on Wall Street have taken a hit over the last few months. At times like these, it can feel as if your financial future is out of your control.
In September, SimplyWise published a survey that revealed that 58 percent of Americans are more concerned about retirement today than they were a year ago. Many Americans are interpreting the current crisis as a call to postpone retirement.
According to the same survey, 29 percent of people in their 50s are now planning to postpone retirement given the current economic climate.
To help investors regain control of their financial future and possibly accelerate their retirement timeline, individuals should consider self-directing their individual retirement account (IRA). By taking control of your IRA, you can invest in assets that you know best.
A self-directed account is technically the same tax-advantaged account you may find at any brokerage firm, custodian or bank. The difference with a self-directed IRA is that individuals can invest in a wide range of alternative assets, such as real estate, promissory notes, cryptocurrency, precious metals and private equity, in addition to traditional investments such as stocks, bonds and mutual funds.
A self-directed IRA follows five steps:
1. Identify an investment and perform due diligence
With self-directed accounts, you can invest in a variety of assets as long as IRS rules are followed. Always consult with your tax, legal and financial advisers to determine whether an investment is right for you.
2. Request funds and direct your investment
Your IRA custodian -- the financial institution that manages an account’s investments -- provides you with a Direction of Investment (DOI) form, which includes instructions and details about your investment, such as:
• The amount to invest
• Where to send the funds
• If the documentation requires signing
3. Your IRA custodian processes your investment
Your investment is processed based on your direction to complete the investment purchase. After the purchase and closing are final, your IRA owns the asset.
4. Manage the investment within your IRA
Once your IRA owns the investment, all expenses and profits related to the investment must come from and return to the IRA. You are in control of your investments and perform ongoing due diligence to determine if your investments are the right fit for you.
5. Act on your exit strategy and plan your next steps
Options include:
• Sell the asset and earn proceeds from the sale to your IRA without being taxed
• Take a distribution -- assuming you meet eligibility requirements, you may be able take a distribution from income earned from the asset or distribute the asset in-kind.
• Leave your IRA/account to beneficiaries after death -- with little or no tax, you can create a tax-advantaged legacy for loved ones or charity.
Self-directing your IRA comes with tax-advantaged diversification and control benefits. Unlocking diversified accounts combines the tax advantages of retirement accounts with nearly unlimited investment options to create a portfolio that truly works for you.
Equity Trust Company is a directed custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.
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