Mega Roth IRAs Explained
A mega Roth IRA and the related mega backdoor Roth IRA conversion comprise a strategy to build retirement wealth with a supersizing feature (the “mega” part). Taxpayers must meet certain income eligibility requirements for contributing to a Roth IRA and the mega backdoor IRA became a way for high-net-worth or highly compensated employees to do so, through a Roth conversion.
Roth conversions – the foundation of the mega Roth IRA strategy
Doing a Roth conversion (rolling over funds from a Traditional IRA into a Roth IRA) is the basis for the mega Roth IRA strategy.
A Roth conversion occurs when the taxpayer converts pre-tax money in a Traditional IRA (funds that will be taxed upon distribution from that retirement account) into after-tax money in a Roth (since funds are taxed going into the Roth IRA and are withdrawn tax free).
Account owners may opt to convert some portion of their existing Traditional IRA to a Roth IRA every year (depending on the account balance and one’s overall financial picture). You will likely pay some taxes on the money that’s rolled over. This may make financial sense based on prevailing tax rates that year or your income.
As always, we recommend you consult with your CPA or tax advisor about executing this type of transaction, as well as determining which account will cover the tax payments (to maximize what is in the Roth IRA).
Backdoor Roth IRA
Money that is rolled over to a Roth IRA can also be from an employer-sponsored retirement plan into a Roth IRA or the plan’s Roth “bucket.” This generally involves 401(k) plans (including self-directed solo 401(k)s).
Taxpayers who build wealth through the figurative backdoor generally have income that is too high to qualify for making annual contributions to a Roth IRA or take advantage of the deductibility of Traditional IRA contributions. Even so, there are ways to shift money to the Roth IRA with the potential for tax-free withdrawals later.
Participants in a 401(k) can put up to $20,500 (or $27,000 for those over age 50) into their account. The employer may make matching or flat contributions to the employee’s account. This can be done on either on a Traditional or Roth basis. Some employers also offer the Roth 401(k) option so the employee’s contributions can be made with post-tax money and grow tax free.
The Roth conversion can be for any amount of money but again, since it could trigger a taxable event, account owners should consult their trusted advisor before doing so.
The Mega Backdoor Roth IRA
The mega backdoor Roth IRA occurs when the 401(k) participant:
- a) makes an extra non-deductible, after-tax voluntary contribution to the plan (up to the maximum annual limit), and;
- b) converts that amount to the Roth IRA or keeps it in the plan’s Roth portion.
It also requires that:
- a) the plan design offers this feature to add after-tax contributions to the 401(k);
- b) the plan allows either an in-plan Roth conversion (employee’s after-tax contributions are rolled into the plan’s Roth bucket), or;
- c) the employee is permitted to roll the funds out of the plan into a Roth IRA.
How is “Mega” Status Achieved?
If the employer plan offers the option, eligible taxpayers can put away up to $40,500 in after-tax dollars in a Roth IRA or a Roth 401(k) in 2022. This amount is on top of the regular 401(k) contribution limits of $20,500/$27,000 this calendar year. That means a total contribution of $61,000-$67,500 (depending on age) in 2022.
These additional voluntary contributions can be made each year, with an annual Roth conversion.
Beware: Mega Roth IRAs May Be in Danger
Some investors have notably created portfolios valued in the hundreds of millions or billions through their mega backdoor Roth IRAs. This wealth-building strategy for very high-net-worth individuals caught the attention of federal legislators last year as they crafted the Build Back Better (BBB) Act. BBB has a provision to:
- Limit the size of these tax-free investment portfolios
- Require minimum distributions regardless of the account owner’s age
- Prohibit the transfer of after-tax assets starting this year
- Cap high-income taxpayers’ aggregate retirement account balances in 2029
- Prohibit backdoor IRA and 401(k) conversions into Roth accounts after 2031
However, when the BBB Act stalled in Congress, President Biden announced last month that the U.S. Senate will take it up again in 2022, so for now, the mega backdoor Roth strategy is still in play. Therefore, solo 401(k) taxpayers can still make voluntary after-tax contributions in 2022 for the 2022 tax year and subsequently convert the contribution to a Roth IRA or the Roth solo 401(k) in 2022.
Self-directed Roth IRAs (of any size) at Next Generation
If you have a self-directed Traditional IRA, the same rules apply if you wish to convert some of those funds into after-tax dollars by converting funds into a self-directed Roth IRA. As the administrator and custodian of self-directed retirement plans, Next Generation will issue Form 1099-R to the IRS to report the conversion from Traditional IRA to Roth IRA or from the solo 401(k) to the plan’s Roth IRA feature. Our team also manages all the account paperwork and required reporting for our clients’ plans.
While we do not provide investment advice, our team does provide client education about the many aspects of self-direction as a retirement strategy. This includes answers to your questions about Roth conversions and the types of alternative assets allowed through self-direction. You may schedule a complimentary educational session, or contact our team directly at NewAccounts@NextGenerationTrust.com or 888-857-8058.
Don’t Put Your Self-Directed IRA LLC at Risk for Prohibited Transactions!
An IRA LLC (or “checkbook IRA”) is when the account holder of a self-directed IRA gains direct control over the IRA funds. This is achieved when the individual sets up and manages a self-directed IRA LLC, which in turn, as a business entity, establishes a checking account (for purposes of making/managing investments). The LLC is funded with cash from the IRA, which can then be deployed from the LLC’s checking account.
This approach allows self-directed IRA holders to manage their cash and account assets directly as the LLC manager, with total signing authority over an account with access to the retirement funds.
There are certain investments that may require an IRA LLC, such as cryptocurrency or foreign real estate investments, or an investor may choose to use one as a matter of preference. While a self-directed IRA LLC offers enhanced freedom, there are important rules to follow to maintain the account’s tax-advantaged status.
What NOT to do with your IRA LLC
As detailed in a recent article, the U.S. Tax Court in McNulty v. Commissioner, 157 T.C. No. 10 (Nov. 18, 2021) concluded that an individual who purchased gold coins using her IRA received a de facto distribution of those coins when she took physical possession and stored them at home (rather than a precious metals depository as outlined in this blog article). The individual did not buy the coins directly through her IRA, but used a separate bank account in the name of an “IRA LLC” created and held by her IRA.
While the court found that she had “unfettered command” over her IRA assets, it also found there was no “independent oversight” by the custodian, resulting in a deemed distribution of those assets.
The entire transaction was conducted via the IRA using cash from the retirement plan to a bank account in the name of the LLC, so the court found that the IRA custodian “did not have any role in the management of [the LLC], the purchase of the (American Eagle) coins.” The custodian filed annual Forms 5498 reporting the value of the IRA assets, but relied solely on the owner’s reported valuation for the LLC.
What this ruling means
Even with “checkbook control” (another term for this type of investment strategy) over the funds in a self-directed IRA and an account owner’s right to fully direct the investments, according to the court in McNulty v. Commissioner, an IRA trustee must be a bank or IRS-approved non-bank custodian that will “administer” the trust in accordance with the requirements of Internal Revenue Code section 408.
The court’s ruling stipulates that a self-directed IRA custodian (like Next Generation Trust Company) is responsible for the management and disposition of the property held within a self-directed IRA. However, using an IRA LLC places more responsibility on the account holder to ensure that they NEVER take personal possession of ANY assets (whether precious metals or not) directly from their IRA LLC. If they wish to take a distribution, they must work with the custodian to deploy funds from the LLC back to the IRA itself, and then request a distribution directly from their custodian.
Mitigating risk for IRA LLCs
As you can see, checkbook control over IRA assets offers investing freedom but carries with it an element of risk regarding compliance and prohibited transactions.
It is the responsibility of self-directed investors to conduct full due diligence on their investments and their retirement plans. However, as custodians for our clients’ self-directed IRAs, we provide guidance with respect to prohibited transactions associated with use of funds through an IRA LLC—transactions over which we do not have the same level of oversight as compared to those that are held directly in the name of the IRA.
When it comes to IRA LLCs, prohibited transactions and potentially improper use of IRA funds are often not discovered until account owners are required to provide fair market values and statements from the LLC itself.
At Next Generation, we want to make sure our clients with IRA LLCs protect their retirement plan’s tax-advantaged status by avoiding prohibited transactions. That’s why we require them to:
1 – Establish and maintain the IRA LLC with an ERISA attorney (ERISA stands for Employment Retirement Income Security Act of 1974, a federal law that sets minimum standards for most voluntarily established retirement and health plans), and
2 – Sign a disclosure acknowledging what they cannot do with the LLC, per IRS guidelines regarding prohibited transactions.
If you have questions about how IRA LLCs work, what it means to have checkbook control, best practices when using an IRA LLC, or any other questions about self-direction as a retirement wealth-building strategy, Next Generation is here to help. You may schedule a complimentary educational session, or contact our team at NewAcounts@NextGenerationTrust.com or call 888-857-8058.
Retirement Plan Contribution Limits for 2022 are Announced
The IRS has issued its 2022 contribution limits for IRAs and qualified retirement plans. The IRS notice also includes limits on elective salary deferrals for 401(k) and 403(b) plans as well as many 457 plans.
Note that as always, there are phaseouts for deductible contributions to Traditional and Roth IRAs and workplace retirement plans based on income.
Earning income at any age? You can contribute to your IRA
Thanks to the SECURE Act, there is no age limit for anyone with earned income to make regular contributions to their tax-deferred IRA (including, of course, a self-directed IRA, which carries all the same contribution rules and tax advantages of their regular counterparts).
This rule also applies to individuals aged 72 and up; 72 is the age at which one must start taking required minimum distributions from Traditional IRAs and other retirement plans, but they are now still able to make contributions. Note that there are no RMDs for Roth IRAs, which can continue to grow tax-free earnings until the owner’s death.
Basic retirement plan rules for 2022
Certain amounts will not change in 2022; among those is the deductible amount for an individual making qualified retirement contributions to IRAs, which remains at $6,000 (and $7,000 for those age 50+ who can make catchup contributions). Remember, this amount is an aggregate allowed limit across all Traditional and Roth IRAs.
- The annual contribution limit for SIMPLE retirement accounts is increased from $13,500 to $14,000; the catch-up contribution for those ages 50 and up remains at $3,000
- The compensation amount regarding simplified employee pensions (SEPs) remains unchanged at $650
- The limitation on deferrals for 401(k), 403(b), and most 457 plans is increased to $20,500 (up from $19,500 in 2021)
- The adjusted gross income (AGI) limit for the saver’s credit goes up to $68,000 for married couples filing jointly, $51,000 for heads of household, and $34,000 for single taxpayers and for married individuals filing separately
- For workers with a 401(k) plan, the 2022 contribution limit increases to $20,500 (up $1,000)
- IRS Notice 2021-61 provides guidance for pension plans and other qualified retirement plans
Roth IRA income phaseouts
Single taxpayers and heads of household have different income phaseout ranges for contributing to a Roth IRA. In 2022 these figures rise as follows:
- Single taxpayers from $129,000 to $144,000, up from $125,000 to $140,000
- Married couples filing jointly, $204,000 to $214,000, up from $198,000 to $208,000
- NOTE: There is no cost-of-living adjustment for a married individual filing a separate return and who contributes to a Roth IRA; that remains $0 to $10,000
Income phaseouts and contributions – covered or not covered by a workplace retirement plan
There are rules and limitations regarding tax deductibility of contributions for people who are covered by a workplace retirement plan, those with an IRA but who are married to someone with a workplace retirement plan, and taxpayers filing jointly or separately. It gets a bit complicated depending on one’s filing status and modified adjusted gross income (MAGI), but the IRS provides various charts for taxpayers in different retirement plan situations. Here is the complete chart for those covered by a workplace retirement plan.
If you are a taxpayer who is not covered by a retirement plan at work (but may be married to someone who is), use this chart for information on MAGI and deductible contributions.
Updates for 2022 also apply to certain plans and accounts, with increases in the phaseout ranges by several thousand dollars as follows:
- For single taxpayers and heads of household covered by a workplace retirement plan, the phaseout range for deductible contributions to a traditional IRA will be $68,000 to $78,000 (it was $66,000 to $76,000 in 2021)
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the 2022 range will be $109,000 to $129,000, up from $105,000 to $125,000
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $204,000 and $214,000, up from $198,000 and $208,000
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phaseout range remains $0 to $10,000.
HSA contribution limits
In 2022, individuals with a health savings account (HSA) with self-only coverage may contribute up to $3,650 (an increase of $50) and for those with family coverage, the 2022 annual limit is $7,300 (up $100 from 2021). The catchup contribution for people age 55 and up remains at $1,000 over the annual limit.
Need help sorting out your self-directed retirement plan in 2022?
If you’re a self-directed investor, we know you’re already comfortable doing your own research about the alternative assets allowed in self-directed retirement plans. You may be contributing to a self-directed Traditional, Roth, SIMPLE, or SEP IRA, or self-directing the investments within a health savings account (HSA) or education savings account (ESA) and taking advantage of investment opportunities outside of the stock market. Or, even as a savvy investor, you may have questions about the many nontraditional investments allowed in a self-directed retirement plan. As you look ahead to 2022, we’re here to help.
Contact Next Generation Trust Company for answers to your questions about the many options and benefits of self-directed IRAs, insights about this retirement strategy, or to schedule a complimentary educational session about self-direction. If you prefer, you may email us at NewAccounts@NextGenerationTrust.com or call 888.857.8058 to speak to a Next Generation representative—about 2022 contribution limits, IRA rollovers, and including alternative assets without your retirement plan.
Due Diligence Best Practices on Precious Metals Held in a Self-Directed IRA
It seems fraud is everywhere these days; we’ve all gotten questionable email messages or have read news stories about employees embezzling or misusing corporate funds). Con artists are in no short supply and can be found in every industry, including financial services and wealth management. According to the Association of Certified Fraud Examiners (ACFE):
“In its broadest sense, the term fraud encompasses actions that are meant to deceive for financial or personal gain. It’s any intentional or deliberate act to deprive another of property or money by guile, deception or other unfair means.”
The ACFE sponsors International Fraud Awareness Week, which occurs this year during the week of November 14-20. The week is a global effort to minimize fraud’s impact on consumers by promoting anti-fraud awareness and education.
It isn’t only seniors being scammed by bad actors on the phone or internet; self-directed investors are also prey to fraudulent schemes that can wipe out their retirement savings. Precious metals—gold, silver, platinum, and palladium—are commodities that comprise a popular alternative asset class in self-directed IRAs, but these are among the investments that can expose uninformed investors to fraud. The Commodity Futures Trading Commission (CFTC) has a lot of valuable information about precious metals investments that all self-directed investors should heed.
Precious metals investment fraud
Anyone can invest in precious metals; most individuals with self-directed IRAs have their retirement plan purchase bullion bars or coins produced by government mints or private companies. Unlike other alternative assets, precious metals are tangible assets that must be held off-site in special third-party depositories (if you own metals in your IRA, you cannot store them in your home, for example).
Owners of self-directed retirement plans make all their own investment decisions and are responsible for conducting their full due diligence on any nontraditional investments they wish to include in their IRA. However, even the savviest of investors can fall for a fraudulent investment scheme.
As an administrator and custodian of self-directed IRAs, Next Generation shares the CFTC’s fraud warnings for investors who are including precious metals in their self-directed retirement plans:
- Always remember that precious metals transactions are regulated by the CFTC or the National Futures Association, and sellers need to be licensed or registered.
- Note that investors should avoid unsolicited investment offers—whether advertised on TV, radio or online, by cold calls by email or phone, or from any IRA administrator (self-directed IRA administrators are prohibited from making investment endorsements, offers, or solicitations).
- Beware of any sales pitches that promise guaranteed returns, or of anyone posing as a metals dealer or merchant who claims, “you can’t go wrong with me” or tries to rush you into an investment decision.
- Never give anyone you do not know your personal information that can lead to identity theft or hacking into your accounts.
- Research your depository, where your metals will be stored (it should be certified or regulated in some way). Know where that storage facility is located and include this information in your instructions to your IRA administrator that will execute the transaction.
- You should be able to verify the metals dealer’s licensure and location.
- Check all transaction documentation and your account statements for accuracy regarding these investments.
Be on the alert for fraud!
You can contact the CFTC at 866.366.2382 or the National Futures Association to check a broker’s registration status, business background, and disciplinary history. If you suspect fraudulent activity or believe you have been defrauded, call the CFTC or file a tip or complaint.
If you have questions about how investments in precious metals work in a self-directed IRA, or want more information about the many options and benefits of self-direction as a retirement wealth-building strategy, our team is available by email at NewAccounts@NextGenerationTrust.com or by phone at 888.857.8058. Alternatively, you may schedule a complimentary education session with one of our representatives to learn more about self-directed IRAs and the nontraditional investments these plans allow.
Next Generation Trust Company Forms Educational Alliance with Purse Strings
Two Women-Owned Financial Services Companies Come Together to Offer Valuable Resources and Promote Women’s Financial Health
ROSELAND, N.J. (PRWEB) NOVEMBER 11, 2021
Jaime Raskulinecz, CEO of Next Generation Trust Company, announced that her firm has formed an educational alliance with Purse Strings LLC, a female-centric platform that provides financial resources for women. As a Purse Strings Approved™ Professional, Next Generation shares insights into self-directed retirement plans with the Purse Strings audience, comprised of women who are seeking resources and education to become financially independent. Both Next Generation and Purse Strings are woman-founded, woman-owned businesses committed to educating consumers about their financial options.
Next Generation is a custodian and administrator for self-directed retirement plans, designed for investors who wish to include alternative assets within a tax-advantaged retirement vehicle. Some of these investments might include real estate, private equity, private lending, partnerships, hedge funds, cryptocurrency and more. Purse Strings offers straightforward financial advice and an available-for-hire network of vetted insurance and financial services professionals who specialize in serving women.
“As a woman-owned business with a passion for empowering women in finance, we are excited to engage with the Purse Strings community. Our mission to help women control their financial futures aligns nicely with Purse Strings’ commitment to connect women in all stages of life with the right resources and financial professionals to help them succeed,” said Brittany Melville, Next Generation’s Director of Marketing and Sales.
Barbara Provost, founder of Purse Strings, added “We are a one-stop shop for female-centric financial knowledge, know-how, and professional resources. We’re available to any woman who wishes to design a fearless financial future that’s full of choices.”
Next Generation also offers educational webinars and articles on its blog about various aspects of self-direction as a retirement wealth-building strategy. Individuals may also schedule a complimentary educational session with Next Generation to find out more about self-directed IRAs and the many nontraditional investments these plans allow.
About Next Generation
Founded on the philosophy that every person should have control over their own retirement plans, Next Generation Trust Company educates consumers and professionals about self-directed retirement plans and nontraditional investments, a strategy at one time reserved only for the very wealthy. A custodian of self-directed retirement plans, it is a trust company chartered in South Dakota, with its sister firm, Next Generation Services, providing comprehensive account administration and transaction support for all accounts. The neutral third-party professionals at Next Generation expertly guide clients and their trusted advisors as part of their white glove, personalized service for a seamless transaction experience from start to finish. Contact: 888.857.8058 or NewAccounts@NextGenerationTrust.com.
For more information, visit http://www.NextGenerationTrust.com.
About Purse Strings
Founded in 2015 by Barbara Provost, Purse Strings provides resources and services to help prepare women to become more financially independent and master their relationship with money. The website offers free financial education resources, guidance, and support including events and a database of Purse Strings certified professionals that have been vetted, trained, and are committed to addressing the specific financial needs of women. The organization also provides training, insight, promotion, marketing, and an established certification for insurance and financial professionals, plus access to the Purse Strings member community as an established and trusted resource. More information is at https://pursestrings.co.
Financial Independence: It is Possible with a Self-Directed IRA
You’re in a rewarding career, you enjoy what you do, and you have a professional development path laid out… GREAT! But while working towards a promotion, more responsibility and a pay raise is only part of the picture for people in the early years of their careers. Working toward financial independence should be part of your life plan as well.
Jamila Souffrant, founder of the Journey to Launch podcast, Budget Bootcamp and the Money Launch Club, is not yet 40 years old, but she and her husband have unlocked saving and investing strategies that helped them save a significant amount of money in just two years.
We’ve written before about FIRE—Financial Independence, Retire Early. Souffrant counsels that her model is not so much about retiring early, but more about enjoying the flexibility that financial independence offers. She says that focusing on that first part of FIRE—the financial independence—led her and her husband to explore new ways to get smarter with their money. Having the option to not work for other people and the ability to explore entrepreneurial avenues of interest are among the benefits of that financial freedom. Her “Journey to Launch” program includes five steps on that path:
- Explorer – targeting financial stability and identifying opportunities to improve finances
- Cadet – working on your consumer debt
- Aviator – debt is reduced, financial stability is attained, and you have more discretionary income to save and invest
- Commander – work-plus-stability, in that you have some freedom around when to work, how much, or where to spend some of your budget differently
- Captain – financial independence to the point where if you don’t want to work again, you can live off investments and passive income
Souffrant also recommends getting a start on investing as early as possible. And with a self-directed IRA, you can become the captain of your own financial ship in more creative ways beyond simply investing in the stock market.
Put a self-directed IRA on your path to financial independence
Anyone can get started with a relatively small amount to fund a self-directed retirement plan—and you may already have the insights and know-how about investing in alternative assets, which is the foundation for building a more diverse (and potentially more powerful) retirement portfolio.
Perhaps your current job has provided you insights and experience in real estate, private equity, hedge funds, precious metals, cryptocurrency, or any of the myriad nontraditional investments allowed through self-direction. Or perhaps you are already investing in these assets outside your existing retirement plan, so you already know and understand how those investments work. If so, self-direction can be a way to fast-track your way to financial independence.
Be the captain of your financial ship
Self-direction enables individuals to take control of their financial futures by choosing their own investments of interest. Through alternative investing in a retirement account, these individuals also maintain a hedge against stock market volatility by investing in real estate, precious metals, private equity, notes/loans, cryptocurrency, and many more alternative assets. And a self-directed IRA is a tax-advantaged vehicle, so earnings grow either tax-deferred or tax-free (if using a Roth IRA). If you are a business owner, you may even be able to self-direct a workplace retirement plan, such as a 401(k)or other qualified plan.
While you may wish to work for decades more, why not consider ways to reach your financial goals on the earlier side of retirement age? If you have questions about self-direction as a wealth building strategy, the team at Next Generation is here to help. You may can schedule a complimentary education session with one of our specialists; or contact us by email at NewAccounts@NextGenerationTrust.com or by phone at 888.857.8058.
Need a New Self-Directed IRA Custodian? Here’s Everything You Need to Know
From time to time, financial institutions close or terminate certain programs. In some instances, that may mean that an IRA custodian—the entity that is holding your retirement assets—is shutting down its business.
When that happens, the account owner must find a new custodian for purposes of transferring the IRA funds to a new “home,” or possibly face taking an early distribution.
While at a glance, taking an early distribution seems to be the easy choice, but depending on your age and the health of your account, you could be facing potentially steep consequences. If you are not at least 59½ years old, you are typically not eligible to take a distribution from your IRA without being penalized and having to pay taxes on the amount distributed. We strongly encourage you to consult a trusted tax advisor before electing to take an early distribution.
The other option is to find a new IRA custodian. If you were happy with your prior custodian and have to transfer your account to a new custodian, this may seem daunting. It is important to choose a custodian that prioritizes its clients, first and foremost, but there are several things to consider.
Shopping for a self-directed IRA custodian
Just as you take care to find the right accountant or financial planner, you want to make sure you are comfortable with your new IRA custodian. Investors with a self-directed IRA (or any type of self-directed account that allows alternative investments) require a firm with experience in these types of retirement plans and the many alternative assets they can hold. While the tax advantages associated with self-directed IRAs are the same as their “regular” counterparts, the investment options are far broader, enabling investors to build more diverse retirement portfolios.
When considering a new custodian, you should look for one that:
- Understands IRS regulations and other aspects of self-direction as a retirement strategy, and offers educational resources to its clients and potential clients
- Reviews transactions thoroughly to mitigate the risk of a prohibited transaction, which could endanger the account’s tax-advantaged status
- Simplifies the transfer process by providing easy access to all account opening documentation, and employs representatives to walk you through the setup and funding processes
- Prioritizes customer service and has live representatives available via phone and email, sans voice prompts and auto-replies
- Offers transparency about their administrative and transactional fees
A company that provides both custodial and administrative services offers the ideal scenario, since that firm will manage all your account paperwork, generate all required statements, and handle required tax reporting with the IRS under one corporate umbrella. You’ll find this arrangement at Next Generation with our two sister companies- Next Generation Trust Company as custodian and Next Generation Services as administrator – working in tandem on behalf of our clients.
Transferring cash from like account to like account
Account owners will not incur IRS tax penalties when transferring cash from one IRA to another—from like account to like account. That means from Traditional IRA to Traditional IRA, Roth IRA to Roth IRA, and so on. The new custodian will ask for certain documentation to ensure the funds are coming from the same account type and that the funding amount is available to execute that transfer.
Note: Although a custodian that is closing its business will not (or should not) charge you any account closing or transfer fees, you may incur these if you are making the move for personal reasons. Be sure to thoroughly review the fee schedule so you are aware of this upfront.
In-kind asset transfers
If you are transferring public securities from a regular IRA at a brokerage to a self-directed IRA, some receiving custodians may require that those assets be liquidated before conducting the transfer. However, alternative assets can be transferred in-kind to from one self-directed IRA to another. These assets may include real estate, private equity, precious metals, cryptocurrency, or any of the other asset types that can be held in self-directed IRAs.
When transferring assets in kind, note that the new/receiving custodian will typically require additional documentation (including an updated asset value) depending on the asset type. The assets are then re-registered, with the assets vested in the name of the new self-directed IRA.
The new custodian will contact the resigning custodian, provide funding instructions to initiate the transfer, and follow up on required documentation (which includes a letter of resignation from the existing custodian). It’s also important that the account owner follow up with the current custodian to provide authorization and prevent any processing delays.
You’ll find more details about the steps required to execute an asset transfer between self-directed IRA custodians in this blog post. Of course, if you have questions about how to transfer cash and/or assets from your current IRA custodian to Next Generation, don’t hesitate to contact us at NewAccounts@NextGenerationTrust.com or 888.857.8058. As always, you can also schedule a complimentary educational session with one of our representatives if you’d like to discuss your unique situation.
How Can Women Leaving Corporate America Still Save for Retirement?
We’ve all been hearing about the Great Resignation (or the Big Quit), which was thought to be a result of the COVID-19 pandemic. Throughout 2020 and 2021, many Americans have confronted how they felt about their jobs, many deciding it was time to quit what was no longer satisfying and seek more fulfilling career paths—including self-employment/business ownership.
According to the Bureau of Labor & Statistics, there were nearly four million voluntary separations (quits) in July 2021.
For women specifically, this decision may have been motivated by family or childcare issues and homeschooling when classes were remote. Purse Strings has called this the “she-cession,” and shared that 1.8 million women left the workforce entirely. In September 2021, women who left the workforce outnumbered men by more than five to one (863,000 women compared to 168,000 men).
Further, Market Watch reported that a March 2021 U.S. Census Bureau population survey found that 80% of Americans who left the workforce since the start of the pandemic were women. Plus, a McKinsey study on women in the workplace reported that:
- Women are stepping up as leaders and taking on leadership roles, but their contributions are not recognized or rewarded
- Women are even more burned out than they were a year ago; burnout is escalating much faster among women than men
- One in three women say they have considered downshifting their careers or leaving the workforce this year, compared to 1 in 4 at the start of the pandemic
- Additionally, 4 in 10 women have considered leaving their employer or switching jobs—and high employee turnover in recent months suggests that many of them are following through
Goodbye Corporate America, Hello New Retirement Plan
Leaving behind the “golden handcuffs” of Corporate America can be a daunting decision for many women but when done, it opens the door to an exciting future with many options for taking more control.
Have you left, or considered leaving, a corporate position at a well-paying job with benefits such as a qualified retirement plan? If so, you may be well positioned to take time off and consider a shift that will bring meaningful personal and professional rewards.
If you decide to dabble in entrepreneurship, you will have many things to think about. That also means considering what to do with your workplace retirement plan—and as a self-employed person, thinking about a new retirement savings strategy. Here are a couple of tips we have if you’ve left the workforce or decided to go solo:
1 – Don’t abandon your retirement money! The funds left in your old employer-based 401(k), or other workplace retirement plan, are yours. Contact your former employer to find out about rolling over those funds into a new retirement plan. Depending on your age and financial situation, a rollover IRA can ensure the money in your old employer plan ends up in a new account for continued growth.
2 – Consider opening a self-directed retirement plan. If you’re now self-employed and launching a new business, you’re already a person who is comfortable being in the driver’s seat—making your own decisions about your future. A self-directed retirement plan could be a powerful option for your retirement savings strategy—especially if you know and understand certain alternative assets, which these plans can hold.
What is a self-directed retirement plan?
As the name implies, a self-directed plan is one in which the account owner makes all her own investment decisions. You can open the same types of plans that you could at any other financial institution, such as a Traditional/Roth IRA, SEP, SIMPLE, Solo 401(k), and even HSAs and ESAs.
As a self-directed investor, you are also responsible for conducting full due diligence on any investment, so being comfortable doing that research is important—or having the experience with investing in a certain asset class outside of your existing retirement plan already.
All income and expenses related to the assets flow through the retirement plan (such as management fees for an investment property, or the rental income derived from that asset; the loan amount to a borrower, and the repayment with interest).
What types of assets may I include?
A self-directed IRA or other retirement plan may include a broad array of alternative assets that cannot be held in a typical retirement account, which typically limit you to invest in publicly traded assets such as stocks, bonds, and mutual funds. Self-directed retirement accounts allow you to broaden your options and include things like real estate, precious metals, private equity/partnerships, notes and loans, cryptocurrency, and many more. The only alternative assets you cannot include in a self-directed account are life insurance and collectibles.
Why open a self-directed IRA?
Just as with a new business enterprise, your self-directed IRA and your retirement savings will benefit from your knowledge. Self-directed investors take advantage of what they already know to build a more diverse retirement portfolio and a hedge against stock market volatility. Self-direction also allows for increased control over investment returns, as these assets tend to be non-correlated with the stock market.
Where do I open a self-directed plan?
The account is opened with a self-directed retirement plan custodian/administrator, a firm that specializes in these types of plans. The administrator manages all the paperwork and mandatory filing, executes the transactions on behalf of the account (based on account owner’s instructions), and the custodian holds the assets. In many cases, the custodian/administrator are the same entity. The administrator also reviews transaction documents to ensure there is no risk for a prohibited transaction, which can endanger the account’s tax-advantaged status.
To all the women who’ve bid farewell to Corporate America, we support you! To those who are launching new businesses, we congratulate you. And to those who are shifting their retirement plans to a self-directed version, be sure to work with a custodian/administrator who offers ample client education, stellar customer service, and is available to answer your questions about this exciting strategy.
DON’T MESS WITH OUR IRAS! Let Your Representatives Know the New Rules on IRAs Would Hurt Ordinary Investors
There are major concerns with the proposals recently added to the Build Back Better Act regarding IRAs.
If this is the first you are hearing about this legislation, the U.S. Congress is considering a spending bill that covers many issues. Last week, text of the legislation was made public and concerning language in the tax section proposes changes to IRAs aimed at preventing mega-wealthy investors like Peter Thiel from using Roth IRAs to accumulate massive wealth tax-free. (A recent Forbes piece did a great job of explaining the potential impacts of this bill.)
These proposed changes include:
- Restricting IRA investments to public securities and barring most investments into private equity or startup companies. This includes barring investments into single member LLCs
- Prohibiting the use of IRA funds for investments requiring accredited investor status
- Barring self-directed IRA investments in potentially high-return assets such as startups and private equity
- Forcing IRA accounts with private security holdings, and other newly prohibited investments, to divest and take distributions of 100% of those investments before they are eligible for withdrawal, effectively leading to massive out-of-pocket tax penalties
While the intention of these policies may be to target the ultra-wealthy, the reality is that, if passed, these proposals would hurt ordinary, hard-working investors the most.
We cannot allow this bill to pass as it currently stands. In the days since this language appeared, we have met with policymakers across the aisle to discuss the potentially catastrophic and unintended consequences of this bill, consulted with government affairs consultants, and built a coalition with others in the self-directed IRA space.
But we can’t do this on our own. Your representatives in the House and Senate need to hear from you about why these proposed changes will be harmful to you personally.
To help make your voice heard, we’ve made it easy to look up your representatives, as well as drafted a message you can use to contact them.
Let Your Representatives Know the New Rules on IRAs Would Hurt Ordinary Investors
You can find contact information for your House Representative and Senators here.
If you would like to contact your representative—which is strongly encouraged—a sample message is below:
“I’m a constituent of Representative/Senator [Last name]. My name is ____ and my ZIP code is _____.
I’m calling today to express my concerns with some of the language recently added to the Build Back Better Act. The legislation includes two sections (Sections 138312 and 138314 of the House reconciliation bill) that will restrict my ability—and millions of middle-class Americans like me—from self-directing our IRAs into investments we believe in, like startups.
I understand the goal is to prevent the mega-wealthy from using their IRAs to avoid paying taxes, but this language would impact all of us. I’m in the middle-class and have worked hard to invest money for my retirement. If this goes into law, not only might I be required to divest from these assets, but I may also be forced to take early distributions and be taxed heavily for doing so.
I cannot afford to lose these savings or be taxed on them just because the richest people in the U.S. have taken advantage of this. I’m asking my members of Congress to remove these sections from the Build Back Better Act that restrict or penalize IRA investments.
PLEASE DON’T MESS WITH OUR IRAs.”
Please join us in demanding that these proposed new rules be removed from the final bill.
And believe us when we say that every single voice not only counts in this fight, but any single voice could be the one that makes the difference. So please don’t discount your potential impact here.
Next Generation – as always – will continue to advocate for individual investor choice.