Self-directed IRAs are becoming more widely known and appreciated. In fact, some report that self-directed accounts are evolving into quite the trend among savvy investors. However, investors that use these accounts to build tax-free or tax-deferred income for retirement would probably tell you these accounts are not merely a trend—but a solid tool used to diversify their portfolios and gain control of their own investing funds and decisions.
From the elite investor class to those just beginning to establish retirement funds, self-direction is becoming increasing popular. Those familiar with the process know that they can self-direct several different retirement accounts such as traditional, Roth, SEP and SIMPLE IRAs, and individual(k) plans. However, there are two other tax-advantaged accounts that can be self-directed to build income for other purposes—health and education expenses.
Health Savings Accounts (HSAs)
These accounts allow you to make tax-deductible contributions (reducing your overall taxable income) to amass funds for qualified health care expenses.
The many benefits include:
- No yearly minimum contributions are required.
- There are no required yearly distribution rules—funds not spent are carried over year-to-year until you need them.
- Distributions are not taxed provided they are spent on qualified medical expenses, dental and eye care, prescriptions and even some over-the-counter medications.
- At the age of 65, you are allowed to withdraw funds for non-qualified expenses and use them as you wish, without penalties. However, you will be taxed on these distribution types in the year they are withdrawn.
- Earnings grow tax-free.
The caveat in self-directing your account is the ability of investing in alternative assets—providing ample opportunity to capitalize on the growth of those tax-free earnings in the account.
Understand that there are certain qualifications you must meet in order to use an HSA: you must be a participant in a high-deductible health care plan with no other health coverage, you may not be enrolled in Medicare, and you cannot be a claimed as a dependent on another person’s tax return. Find detailed information regarding health savings accounts in the self-directed plans section on our web site.
Education Savings Accounts (ESAs)
These accounts are established for the purpose of building tax-free education funds for your child. Unlike HSAs, contributions are not tax-deductible, but, all earnings do grow on a tax-free basis. Funds can be used for qualified education institutions including elementary, middle, and high schools, as well as higher education expenses. You are able to make contributions to the account until the child turns 18 years old, and funds must be spent before the child turns 30.
The advantages of ESAs:
- You can contribute up to $2000 annually per child.
- Contributions can be made until the beneficiary’s 18th birthday.
- There are exceptions for children with special needs.
- Contributions can be made as late as the contributor’s tax filing date.
You are able to self-direct ESAs just as you can HSAs to take advantage of investing in the same alternative investments that all self-directed accounts offer. Doing so can potentially increase the wealth of the account at a faster pace than traditional methods may. You can read more about education savings accounts and learn about the requirements in establishing one by visiting our web site, or feel free to contact Advanta IRA if you have questions about getting started.
Self-directing IRAs and other accounts like HSAs and ESAs gives account owners total control in investing in things they know and understand. Alternative investments permissible in these accounts offer an incredibly wide range of assets besides the traditional stock, bond, or mutual fund. For example, a short list of popular alternative investments include:
- Real estate (residential, commercial, rentals, rehabs, improved and unimproved land)
- Private lending opportunities (notes and mortgages)
- Tax liens and deeds
- LLCs and LLPs
- Oil and gas options
- Private placements and private stock
- Foreign exchange and futures trading
- And much more…
When you gain control of your own investment funds and decisions, make your own choices based on your knowledge and experience—you have the potential to achieve higher returns on your investments in less time than you might when using more traditional options. Of course, as with any investment, you must perform proper due diligence of each asset you choose. While nothing ensures sure-fire success, being well informed and choosing wisely are great determining factors that can help you achieve your goals.
If you have questions about this article or would like to learn more about self-directing your retirement and savings plans, please contact us.