Summertime: A Fine Time to Consider Your Self-Directed IRA
As we slip into summer, our thoughts may turn more to longer days and vacations rather than to our self-directed IRAs (SDIRAs). After all, we usually don’t have to deal with IRA forms, tax returns, and required distributions this time of year. But this season may be an appropriate time to consider several ongoing SDIRA concerns that sometimes get pushed to the margins.
How’s Your Investment Mix?
Self-directed IRAs provide many advantages.
- Access to alternative investments.
- Hedges against typical market performance.
- Nearly unlimited investment choices.
- Enormous upside earnings potential.
Even with all these benefits and more, SDIRAs should usually be considered within a retirement saver’s broader, long-term objectives. Often, alternative assets are one tool in an investor’s tool chest. They are not the only mechanism for gaining retirement security. And so these investments should be regularly evaluated to determine whether they are still the best option for you.
Example: Chase has substantial retirement assets invested in mutual funds and individual securities. He also has numerous certificates of deposit (CDs) in his IRAs, giving him principal protection and a guaranteed return. With sound investment advice, Chase may decide to diversify his investments using an SDIRA and to include some assets that have a negative correlation to his more traditional stock investments.
The concept of “negative correlation” simply suggests that as some investments gain in value, others may move in a different direction, and vice versa. With this in mind, some people may purposely choose certain investments that tend to increase in value as other sectors slump. For instance, an investor may choose to hold precious metals as a hedge against high-tech stocks losing value.
But your investment mix means much more than just diversification. There may be numerous factors that affect how you choose to invest.
- Will you need access to some of your retirement assets in the short term? If you are taking required minimum distributions (RMDs), be sure that you don’t have to “fire sale” assets at a loss in order to satisfy your RMD. Younger savers may be more able to invest in illiquid assets if this fits with their overall objectives.
- Investment expertise. An SDIRA owner may, for example, know quite a bit about real estate investing. In this case, such an IRA investment may be more attractive. Or perhaps the investor has keen insight into assessing the value of closely held companies. Whatever investment expertise you have, you might benefit from using it to your advantage with your SDIRA investments. For most savers, however, seeking competent investment advice makes sense.
- Risk and return. Of course, one of the fundamental concepts in creating a healthy investment mix is understanding your risk tolerance and its connection to investment returns. This tolerance may change with your age (or years till retirement)—or may reflect your overall personality and comfort with risk in other contexts.
Have You Faced a Disaster?
With the increase in natural disasters, Congress has taken a more user-friendly approach to granting relief. Rather than relying on specific legislative action for each disaster, now relief is available whenever there is a federally declared disaster. Not only are those who qualify eligible to take penalty-free distributions from their retirement plans, but they also enjoy other tax benefits (e.g., delayed taxation and repayment options).
Although these qualified disaster distributions may get more attention, other disaster benefits may also help savers. For instance, tax filing extensions may allow you to make a carryback contribution for 2023 well into calendar year 2024. The IRS has helpful, state-by-state resources on disaster relief at this site.
Do You Have an SDIRA that Needs Attention?
Summer is also a good time to assess whether your SDIRA requires additional care. Are administrative fees (e.g., for property management or debt collection) properly scheduled to be paid from your IRA directly? Are rents and dividends being deposited into your IRA according to your direction? And sometimes real estate investments need more care.
Example: Your property manager for your SDIRA real estate investment informs you that recent storms have exposed some leaks in a rental property roof. Prohibited transaction (PT) rules prevent a disqualified person (for instance, the SDIRA owner) from making repairs. Rather, the IRA must pay for the repairs, even if the SDIRA owner could make them better or more cost effectively.
Are You Ready for Year-End?
We mentioned RMDs above. If you need to take a 2024 RMD, make sure that you have enough liquid assets in your SDIRA to satisfy the distribution—or add this amount to the RMD that you take from another IRA. But there are other year-end concerns that might affect your SDIRA. For example, if your SDIRA contains hard-to-value assets, who is responsible for creating an accurate fair market value (FMV) statement at year’s end? The IRS is becoming more rigorous in enforcing the annual FMV reporting requirement, so make sure that you have the proper appraisals in place to satisfy this rule. Arranging for this appraisal now (if needed) may save you some headaches later in the year.
If you have any questions on these or other concerns, please reach out to our Mainstar/Benefit Trust SDIRA experts. We would love to talk with you about how we can use the dog days of summer to keep your self-directed IRA on track.