A Beginners Guide to Investing with IRA Assets
One of the best things about an IRA is that the retirement plan provides a much larger selection of investment options available within the account. In most IRA accounts, you can pick individual stocks or choose from a long list of mutual funds. You can even leave those decisions to an expert by choosing a low-cost robo-advisor — a computer-powered investment manager — to do the work for you.
Our non-recourse loan lenders take great care in assisting our clients to make educated decisions about their investments. We are passionate about helping our customers find routes that work best for their situation. One of our specialties involves providing non-recourse loans and helping our clients leverage their IRA assets with a non-recourse loan so they can discover a world of investment opportunities. To learn more, give our team a call.
What You Can’t Do With Your SDIRA
Before diving in, let’s first discuss what you cannot invest in with your self-directed IRA. The IRS outlines Prohibited Transactions, but for clarity, we will discuss it here briefly as well. Prohibited Transactions are transactions that your self-directed IRA is not allowed to make. There are two parts to each of these transactions: the who and the what. The who is the investor and any linear relative, like a child or parent. The what is giving or getting benefit to the account. Here’s an example:
Your father may not make a donation, cash or work-related, to your self-directed IRA, or personal benefit.
In self-directed IRAs, all contributions and Required Minimum Distributions must be made to the IRA itself, and not to the IRAs’ checking account. But to keep it simple, here are some examples of what you cannot do as a self-directed IRA holder:
- Borrow money from the IRA
- Sell, exchange, or lease property to the IRA
- Receive compensation for managing property held by the IRA
- Use the IRA as security for a loan
- Transfer IRA money to disqualified persons
- Extend credit on the IRA to disqualified persons
- Furnish goods or services to disqualified persons
- Allow disqualified persons to use plan assets
Understand Asset Allocation
Even the words “asset allocation” may sound complicated, but they are not. They simply mean how your money is divided among different types of investments. On a larger scale, that means stocks, bonds, and cash. On a smaller scale, it gets specific and can mean large-cap stocks versus small-cap stocks, corporate bonds versus municipal bonds, and so on. If you invest $10,000 in an IRA account and $6,000 of it is in stock funds and $4,000 is in bond funds, your asset allocation is 60/40.
Consider Your Tolerance for RIsk
When it comes to understanding investing, you need to first and foremost understand how much risk you are able to tolerate. You want to take enough risk that your money will grow, but not so much that you’ll bail out or lose all your hair when the market gets rocky. One rule of thumb is to subtract your age from 100 (or 110 if you want to entertain more risk). The resulting number is the percentage of your portfolio that should be allocated toward stocks.
Under this rule, if you’re 30, you’d direct 70% to 80%. You may find that you want more or less equity exposure than the rule dictates, so it’s fine to use as a starting point and then edge the numbers around until they suit your needs.
Your age matters because you generally want to take more risk when you’re young and then taper down as you inch towards retirement. That doesn’t mean you shouldn’t invest in stocks in retirement, just that people may choose to dial it back a bit so there’s a greater fixed-income allocation from which to take distributions.
Understand Your Financial Situation
If your goal is to retire in 20 years, your ability to take risks in a retirement account would be higher than in the account you use to pay your monthly bills. Your retirement account has time to recover from setbacks, and any immediate losses could be recovered. In your bill-paying account, a loss could very well jeopardize your ability to pay rent next month. If the outlook for your financial situation seems uncertain, it can make sense to have a relatively lower allocation to stocks.
Get Real About the Type of Investor You Are
If you don’t have the time, expertise, or interest it takes to choose investments and maintain an appropriate mix of investments in your IRA you may want to consider a professionally managed target-date or asset allocation fund.
Target date funds let an investor pick the fund with the target year closest to their expected retirement. The target-date fund manager then selects, monitors, and adjusts the investment mix over time. Asset-allocated funds can be another simple way to diversify your portfolio using a single fund. In these funds, the manager sets and maintains a fixed asset mix.
For those IRA investors that are doing it on their own, a diversified mix of investments is important. That way, a portfolio isn’t dependent on any one type of investment, although diversification does not ensure a profit or guarantee against loss. If you want to do it yourself, consider funds that hold a mix of investments in companies both big and small and in different industries and sectors.
Consider Mutual Funds for the Base of Your Portfolio
You might be tempted to fill your IRA with individual stocks and bonds, but it is much easier to get diversification and, in the long-run, better results from a portfolio composed of mutual funds or exchange-traded funds, otherwise called ETFs.
Index funds are among our favorite investment options. Through one of these funds, you’re buying a basket of investments rather than the stock of just one company. An S&P 500 index fund, for instance, invests in some of the largest U.S. companies and is classified as a “large-cap” fund for the reason (“cap” refers to “capitalization,” which refers to the valuation of the companies).
In most cases, you’ll want to allocate more of the equity portion of your portfolio to the biggest asset classes, like large-cap funds; and less to smaller classes, like small- and mid-cap funds. Choose index funds and ETFs to meet your asset allocation, with the help of a fund screener. This is a tool offered by many online brokers that can help you sport by expense ratio, fund type, performance, and other factors.
Create a Diverse Portfolio With the Help of First Western
Once you have chosen an IRA custodian and have established your SDIRA, then reach out to the non-recourse loan lenders at First Western Federal Savings Bank. Our non-recourse loan lenders take great care in providing our clients with important information so they can make informed decisions about their investment opportunities. To learn more about how to leverage your Self-Directed IRA with a non-recourse loan to invest in rental properties, give our team a call today!