The COVID-19 pandemic has brought change across much of society, and re-surfaced long-standing concerns around the security, accessibility, and volatility of public markets. In addition, beyond identifying the benefits of diversification, COVID-19 has also brought unique opportunities and considerations for self-directed investors to protect and grow their investments.
The economic impact of COVID-19 has been especially hard on small businesses, highlighting the need for local communities to support them. Apart from client patronage, you can give small businesses a significant hand up either by issuing a private loan or purchasing private equity in local businesses with your IRA, 401(k), or Health Savings Account funds.
With a private loan, you can give a financial lifeline to local businesses to enable them to make it through the pandemic. Your self-directed account can “be the bank” by providing the loan principal and thereafter collecting interest. As the account holder you make decisions on interest rates, loan durations, collateral, and other loan details.
Similarly, by purchasing a stake in the business, generally knowns as private equity, you can offer similar assistance by infusing a small business with cash in exchange for partial ownership. As the business recovers your account can be the beneficiary of the cash flows and increased value of the entity.
The CARES Act introduced a series of 2020-specific measures to ease the financial burden presented by the pandemic. For example, the required minimum distribution and the 10% early distribution penalty for withdrawals were removed to offset the hardship experienced by many. As of this writing these changes only apply for 2020, so if you incurred COVID-19 expenses and you’re keen to take advantage of the eased restrictions on early distributions, you have until December 31, 2020 to do so.
Roth conversions are always available, but they can offer a unique benefit at a time when your account value may have dipped from prior levels. With a Roth conversion, you can (as the name implies) convert a pre-tax account like a Traditional IRA to a post-tax status like a Roth IRA. You pay income taxes on the value of the converted balance, but you’ll be able to enjoy the tax-free distributions of a Roth IRA down the road. Should you elect to convert your account while it’s at a lower value your tax bill will be correspondingly less (you are recognizing a smaller gain for tax reporting purposes). Later, as your account, now classified as a Roth IRA, recovers from the value it lost because of COVID-19, you will not have to pay taxes on those new earnings.
Join our upcoming live webinar on Creative Account Strategies to learn how you can optimize your self-directed investments, as related to COVID-19 and beyond.