Coming Friday, October 5th at GreenLightREInvesting.com!
What is a Self-Directed IRA?
Lance Edwards recently hosted Quincy Long, President of Quest IRA, on his Greenlight podcast, and Mr. Long spoke in detail about one of his specialties, Self-Directed IRAs. Some people will tell you that standard brokerage accounts are self-directed in the sense that you can buy any old stock, bond or mutual funds you want. That’s not what we mean by self-directed, however. What we mean is, you can buy anything you want that can be properly titled, that is not collectibles or life insurance contracts. As long as an item can be held in a title situation, it’s almost certainly available to have in a self-directed IRA.
The Internal Revenue Code doesn’t tell you what you can do with an IRA. It only tells you what you cannot do. Therefore, everything else is permissible. Common investments include real estate, real estate secured notes, unsecured notes – the latter only if you’re crazy, and I don’t make judgments about that. Others include limited liability companies, limited partnerships, corporations that are not S Corp, Corporation trusts, and a whole bunch of other things. It’s really amazing the variety of things you can actually own in your IRA. That’s why you need a company like Quest to help you administer these non-traditional assets.
We have seven varieties of self-directed accounts at Quest, starting with the traditional IRA. That is, of course, the one that most people understand. You just put the money in and generally receive a tax deduction. That’s commonly where former employer plans go to die. You leave the employer and your work plan can be rolled over into a traditional IRA. That’s an important factor if you’re looking for money for your deals. You should understand that’s where employer plans go because if you know somebody that has been downsized voluntarily, that person may be a good source of funding for your real estate deals.
Then of course, you’ve got the Roth IRA, which everybody loves because under the right circumstances, you can draw money from it tax free – always a good thing! Then there’s the SEP IA, which many believe is a simple IRA but is actually the most complicated form of IRA. If you’ve got an individual 401K plan and have self-employment income and no pesky things like employees, then you’ve got the two, “Would you like fries with that account?” That’s what we call them on the Health Savings Accounts (HSA) and the Coverdell Education Savings Account. Those are awesome because you get to deduct the money you put in, yet you pull it out tax free for a wide variety of medical or educational expenses.
So by now, you’re probably asking, “Which is the best one to have?” The best one is the one you qualify for! Obviously, the ROTH IRA has tremendous benefits but so does the HSA, the Coverdell and the Roth 401K. The key is to make sure you qualify for them so you can get yourself in a great situation where you can pull money out tax free. That’s the best situation of all. Perhaps the king of all kings is what we call the Inherited Roth IRA, which you can draw money from at any age, without taxes or penalties.
The Benefits of a Health Savings Account (HSA)
Lance Edwards recently hosted Quincy Long, President of Quest IRA, on his Greenlight podcast, and Mr. Long spoke in detail about one of his specialties, Health Savings Accounts (HSA).
An HSA, or health savings account, is a tax-advantaged savings plan for people who are enrolled in a high-deductible health plan (HDHP). You can use the accumulated funds for medical expenses, such as prescriptions, eye care, dental, and some over-the-counter medications. The funds contributed to your HSA are tax-deductible, reducing your taxable income. One of many advantages of an HSA is that you don’t have to use your contribution amount in any particular year. Instead, the funds continue to accumulate until you need them. You do not pay taxes on the earnings, and withdrawals are tax-free (as long as they are used for qualified medical expenses). Another advantage of an HSA is that you do not lose the funds if you change health plans. Additionally, once you reach the age of 65 you can withdraw the funds without penalty and use your savings however you see fit.
An HSA is an Individual Custodial Account, and unlike a flex spending account, it is not “use it or lose it.” Contributions are made in cash and are “pre-tax,” account earnings are tax deferred, and distributions for Qualified Medical Expenses (QME) are tax free. HSAs can invest in assets (stocks, real estate, gold, etc.) on a tax deferred basis. To open one and make contributions, you must have a high-deductible health plan, not be claimed as a dependent, and not be enrolled in Medicare.
I know most of you love ROTH IRAs, and I do too. But the HSA is actually the first account I found every year for myself personally. Why? Because despite being in a high income tax bracket, I can still deduct that money off my taxes, and then when I pull it out for a qualified medical expense, I get to fill it out tax free. That is the best of both worlds! It’s really the only way you can do both tax free contributions and tax free distributions without being any particular age. You just have to have the right kind of insurance plan, and incur medical expenses which are broadly defined to include eyeglasses and doctor and hospital visits. You might be interested to know it covers psychiatric care as well.
Some who have a high deductible plan and who pay for a lot of their care out of pocket may decide to put money into their HSA that they could deduct to cover their tax free deductible. To me, that would be the craziest use of it because if you just put it in and take it back out, you’re effectively paying for your Medicare medical care with pre-tax dollars instead of after tax dollars. That’s not what I used my self-directed HSA for. I use it as an investment vehicle. I want people to realize that it’s a health savings account but it is still a self-directed account which you can use for all the same applications as other types of IRA-related accounts. Money goes in tax free and comes out tax free.