The basics of investing are by now familiar to most – keep your money where it has the potential to earn the greatest returns, appropriate to your goals, risk tolerance and financial situation. Self-directed investing with an IRA or Health Savings Account (“HSA”) is no different. Beyond the basics of investing, however, these accounts also enjoy considerable tax benefits on contributions and earnings. And as the most sophisticated investors know, it’s what’s remaining after-tax that matters most.
Like many things, it all begins with that first step, in this case contributions, but it doesn’t end there. Funding your HSA or self-directed IRA can take many forms, some of which may better accomodate a particular investment or situation.
Here we describe a few of the more popular ways to fund self-directed accounts:
Whether you begin with an employer-sponsored 401(k) in your 20s or a self-directed plan later in your career, contributions get the ball rolling when it comes to planning for your future. A contribution is a deposit of your personal money into your tax-advantaged plan. Contributions can occur via payroll deductions (401(k)s, SIMPLE IRAs, etc.) or at the direction of the account holder (self-directed accounts).
By making regular contributions, account holders can:
Over time many investors may find themselves owning multiple retirement accounts. Even with all these accounts from various providers, however, if an investor decides to invest directly in rental real estate properties, the investor may need a self-directed account that allows alternative assets, as relatively few plans offer this flexibility.
Funding an account with just such flexibility can be as simple as completing a form. Keep in mind that while the terms “transfer” and “rollover” are often used interchangeably, they are in fact distinct transactions:
As an example, if a prospective real estate investor owns two IRAs and a 401(k) held by three separate custodians, she can transfer the two IRAs into one IRA with New Direction Trust Company and roll her 401(k) into that same account. Upon completion she will have consolidated the assets of three retirement plans into one, allowing her to direct some (or all) of her capital into her rental property investments.
In summary, transfers and rollovers allow investors to:
To transfer or roll funds into your New Direction Trust Company account, please submit our Transfer/Rollover Form. Once completed and signed, you may scan and e-mail this form to firstname.lastname@example.org or fax it to 303-665-5962. Some resigning custodians require wet-ink signatures on original paperwork for transfers, in which case the Transfer/Rollover Form will need to be mailed to our office (see our mailing address above).
If you’re initiating a transfer, our office will forward the Transfer/Rollover Form to your resigning custodian. If you’re initiating a rollover, please contact your plan administrator to request a rollover distribution.
Should someone with a Traditional IRA or other pre-tax retirement account seek the post-tax benefits of a Roth IRA, he or she may elect to convert the account to a post-tax holding. While the details are beyond the scope of this post (investors should discuss them with their tax advisors), upon doing so the converted balance would be taxed as income in the year of the conversion. Afterwards these accounts would obtain the tax advantages afforded by the Roth IRA, namely tax-free withdrawals.
Once in an account holder’s lifetime he or she may roll funds from an IRA to an HSA. If, for instance, the holder incurs a significant medical expense that the existing HSA balance cannot cover, he or she has the one-time opportunity to fund the HSA with IRA assets. The rolled balance would count toward the account holder’s annual HSA contribution limit.
While not necessarily falling under the category of “funding” an account, it’s important that investors understand that transfers and rollovers need not occur exclusively in cash; assets may be transferred or rolled in kind.
This is true of assets like real estate but also of stocks, mutual funds, ETFs, and many other types. Although New Direction Trust Company specializes in alternative assets, you can transfer or roll publicly traded assets into your self-directed account with us. From there, you may hold your positions indefinitely or liquidate them to fund a real estate deal, promissory note, or any other investment you deem proper for your account.