Kids and Roth IRAs – Start Them Early on Saving for Retirement
When it comes to a Roth IRA, it turns out a person is never too young to put their earnings into this type of retirement account—even teenagers with summer jobs.
Sure, a teen or younger child won’t be thinking about the need for retirement savings—but as we adults know, the longer the time those funds can earn interest, the better. And let’s face it, that 0.1% APY on their savings account just isn’t cutting it.
With a Roth IRA, the contributions are taxed going in, grow tax free, and can be withdrawn tax free as well (when certain criteria are met). Although the Roth account owner doesn’t get a tax deduction on the contributions, most teens don’t earn enough to pay taxes on their earnings anyway. Regardless of their earning level, young workers can invest their money in a Roth IRA and get an early start on long-term savings.
Roth IRAs for minor
There is no minimum age to open a Roth IRA; the one rule that applies to anyone is that the person must have earned income. Therefore, as soon as your child is old enough to start earning money—whether as a W2 employee or as a babysitter—he or she can open an account and start making contributions. At Next Generation, we recommend you consult your trusted tax advisor regarding any self-employment income your child earns and the best recordkeeping practices in case of an audit.
Children cannot open a Roth IRA in their own name until they become legal adults at age 18 or 21, depending on the state of residence; therefore, a parent or guardian must open a Roth IRA for minors and serve as the guardian who maintains control of the account. This includes making decisions about contributions, investments, and distributions (if applicable). The guardian will also receive the account statements. However, the funds in the Roth IRA are for the benefit of the young person only. Upon reaching legal adult status, the assets are transferred to a new Roth IRA in their name.
Young savers don’t have to fork over all their earnings to build up their Roth IRA funds. Parents and other relatives can match the contributions or make a deposit equal to the entire amount your child has made up to the annual contribution limit of $6,000.
Using contributions for education
If your child plans to attend college and completes the FAFSA (Free Application for Federal Student Aid), rest assured the form does not look at the money in the child’s Roth IRA, so this will not affect his or her eligibility for financial aid. The CSS profile also excludes the IRA holdings from eligibility considerations.
However, if your child plans to tap some of the IRA contributions to defray college expenses, be aware that the distribution counts as income on subsequent FAFSAs. Therefore, the student should be careful about timing a withdrawal; the FAFSA uses financial information from two years earlier for a given academic year.
For those interested in saving for college or other education expenses, you can also open and self-direct an Education Savings Account (ESA).
Building a more robust Roth IRA through self-direction
Adults who are versed in the ways of self-directed IRAs, or the investments that can be held within them, can help their children invest in more than just stocks, bonds, and mutual funds with a self-directed Roth IRA. In today’s volatile market, some lessons on how to build a hedge against that volatility will serve them well in the future.
Guardians on the account will have many opportunities to teach their kids about the benefits and rewards of disciplined saving, and how investments work. They will also be able to share the many diverse types of alternative assets allowed in these and all other self-directed retirement plans—and develop the next generation of savvy, self-directed investors.
When it’s time for your child to take charge of their self-directed Roth and their financial affairs in general, they will see how the habit of saving money now serves them well into their adulthood. They’ll also have some firsthand experience investing in alternative assets, thanks to their parents’ investment lessons. If they remain disciplined about making retirement plan contributions and continuing to invest in alternative assets they know and understand, they will build up an impressive and diverse nest egg over the course of many decades.
Opening a self-directed Roth IRA at Next Generation
At Next Generation, we’re all about helping individuals build their retirement savings through self-direction—and that includes teens and young adults who are decades away from retirement.
If you wish to open a self-directed IRA for a minor, the Next Generation team will make sure the account is set up properly, and when your child reaches legal adult age, we will transfer account ownership and the assets into his/her name. As a full-service self-directed retirement plan administrator and custodian, we custody the assets and provide all necessary recordkeeping and tax reporting, as well as comprehensive account and transaction support.
If you’d like to set up a complimentary educational session for you and your child, we’d love to share the many options and benefits of self-direction as a retirement wealth-building strategy, and can answer your questions about how to make contributions (for you and your child). Alternatively, you may contact us directly via email at NewAccounts@NextGenerationTrust.com or call us toll-free at (888) 857-8058.
Qualified vs. Nonqualified Roth IRA Distributions
Traditional and Roth IRAs – which can both be self-directed – help individuals to build retirement wealth. However, these retirement plans handle contributions and withdrawals differently:
- In a Traditional IRA, the funds grow tax-deferred, meaning the account owner pays taxes on the withdrawals, but not the contributions; the contribution amount may be fully or partially tax deductible.
- In a Roth IRA, the contributions are taxed going in and the earnings grow tax free, meaning the account owner does not pay taxes on the distributions—so long as they are qualified (as explained below).
The Roth IRA’s tax-free distribution status is applicable only when the distribution be considered “qualified”; otherwise, the account owner will pay tax on the amount. We break down what makes a Roth IRA distribution qualified or non-qualified here.
Qualified Roth IRA distributions
A qualified Roth distribution means that two conditions have been met:
- Five-year waiting period – the Roth IRA owner’s first contribution (including a Roth conversion) was at least five years ago. This waiting period begins on the first day of the taxable year in which the contribution was made.
- Age, disability, death, or first-time homebuyer – the Roth IRA owner is at least 59 ½ years old, has become permanently disabled, has died (and a beneficiary or the estate takes a distribution), or funds will be used to buy, build, or rebuild a first home (up to $10,000 maximum).
Both conditions must apply for the distribution to be tax and/or penalty free. However, the account owner can withdraw his or her contribution amounts any time, regardless of age, without paying taxes or penalties (this exception does not apply to earnings).
Nonqualified Roth IRA distributions
If a distribution is taken before the five-year waiting period is over or one of the qualifying reasons noted in #2 above is not met, the Roth IRA distribution is considered nonqualified. In that case, doing so may trigger a taxable event and/or withdrawal penalty.
This is also “legislated” by a set of rules called Roth IRA ordering rules. These rules govern account contributions, earnings, and distributions and determine the taxes and penalties of nonqualified distributions (they are outlined in IRS Publication 590-B and Form 8606).
The ordering rules dictate the order in which Roth IRA assets are to be distributed, which is as follows:
First: regular contributions. These are not subject to tax or a penalty tax because they were taxed going in.
Second: conversions and retirement plan rollover assets. These funds are distributed by year, with taxable assets distributed before nontaxable assets (based on the separate five-year waiting periods):
- Any taxable conversion or retirement plan rollover that is distributed before that five-year period is met incurs a 10% early distribution penalty tax.
- In the case of a Roth conversion, the five-year clock starts on January 1 of the year the conversion was made. For inherited Roth IRAs, it begins when the original owner made the first contribution.
- The account owner may qualify for a penalty exception (detailed below).
Third: earnings on contributions and conversions, aggregated. Any earnings on a nonqualified distribution are taxed as ordinary income and may be subject to penalty tax unless an exception applies.
Exceptions to the 10% penalty
Roth IRA account owners may avoid paying the 10% penalty on what would otherwise be a nonqualified distribution if they meet one of these withdrawal reasons:
- To cover the cost of childbirth or adoption (up to $5000)
- To pay for qualified education expenses
- To pay for a qualified disaster recovery matter
- Due to an IRS levy
- Medical insurance premiums after losing a job, or unreimbursed medical expenses that exceed 10% of your adjusted gross income
- Qualified reservist distribution
- A series of substantially equal distributions
As with all things related to one’s retirement plan and personal finances, the team at Next Generation encourages account owners to consult their trusted advisors for guidance on these rules and requirements.
Self-directed Roth IRAs
An individual can open a self-directed Roth IRA to have full control over the investments within the account. Contribution limits and distribution rules are the same as with Roth IRAs that are not self-directed. At Next Generation, we are happy to answer your questions about self-directing your retirement plan, and about the many alternative assets allowed within a self-directed IRA of any type. You may set up a complimentary educational session with one of our knowledgeable representatives or contact our team directly via email at NewAccounts@NextGenerationTrust.com or call (888) 857-8058. Alternatively, you can also text us from your mobile phone using the number (848) 233-4076.
How COVID-19 Has Affected Retirement Readiness
Workplace shutdowns and layoffs; business closures; the Great Resignation; intense stock market volatility. The COVID-19 pandemic has had a powerful effect on Americans’ ability to save adequately for a comfortable retirement and put themselves in a positive retirement readiness zone. Add to that the recent world events that are contributing to high inflation and deeper market losses and it’s no wonder people are concerned about their ability to retire with enough money.
Financial concerns began at the start of the pandemic
As far back as two years ago when the pandemic hit, many taxpayers’ financial futures were already in jeopardy.
SHRM quoted results from an April 2020 survey by Betterment, noting that 52 percent of respondents said they’d need to access their long-term savings within a year, and 43 percent said it would take six months or longer to financially recover from the pandemic. A MoneyRates survey conducted that March found that 36.4 percent of Americans within 20 years of retirement expected the COVID-19 crisis to delay their retirement (and that they planned to work longer).
In 2022, we are seeing less unemployment but higher levels of uncertainty among many Americans. Retirement plans are also affected:
- During the pandemic, people took loans from their workplace retirement plans to cover living expenses.
- SHRM noted that many employers and their workers have stopped contributing to 401(k) plans.
- Bloomberg reports that 22% of people approaching retirement age said they’ll have enough money to maintain a comfortable standard of living, down from 26% a year ago, according to the 2022 Schroders US Retirement Survey.
- Additionally, 56 percent of Americans reported they expect to have under $500,000 saved by the time they retire—at a time when they estimate they will need $1.1 million to retire comfortably.
Diversifying your retirement portfolio with a self-directed IRA
As we know, 2022 has been a year of market downturn and inflation, two factors that eat away at retirement assets. This compounds concern that COVID-19 hindered individuals’ ability to work, earn, and contribute to one’s retirement plan.
Self-directed investors—those with self-directed IRAs and other self-directed retirement accounts—already know that one way to hedge against inflation is through portfolio diversification. And there’s little out there that gets more diverse than a self-directed IRA that allows for a broad array of alternative assets.
Including these alternative assets—such as real estate, precious metals, cryptocurrencies, notes/ loans, and private equity—in a retirement plan allow investors to build a more diverse retirement portfolio with investments they already know and understand. Including these in one’s self-directed retirement plan avoids stock market volatility since these nontraditional investments tend to not correlate with stock market performance. Also, account owners can take advantage more nimbly of investment opportunities that arise within these asset classes.
Beating the COVID retirement outlook blues
No one can predict what will happen in the coming months with the stock market, world affairs, or the rising prices of goods on a global scale. Nor do any of us know when supply chain issues will ease, which is another factor in price increases. But at Next Generation, we know that taxpayers who are still working and can contribute to a retirement plan can do better than watch their stock portfolios drop along with the market.
Perhaps you already have an IRA and are comfortable making your own investment decisions. You may even be investing in alternative assets outside of your existing retirement plan. If so, talk to us about opening a self-directed IRA. We are here to answer your questions about self-direction as a retirement strategy, and you can schedule a complimentary educational session with a knowledgeable member of our team.
Alternatively, you can contact us directly via email at NewAccounts@NextGenerationTrust.com or call (888) 857-8058 for more information. We’re all about retirement readiness and providing investor education about the many options and benefits of self-directed IRAs.
Inherited IRAs and Their Significances for Beneficiaries
Part 1: How the New 10-Year Rule Affects Beneficiaries of Inherited IRAs
Have you inherited an IRA from a loved one? Or do you, as an IRA account owner, have a beneficiary noted on your paperwork, who you intend to inherit your IRA?
When someone inherits an IRA, there are tax and financial implications on the inherited assets. Age, financial need, account type, and whether the deceased had already begun taking required minimum distributions are common factors to be aware of.
In these situations, the beneficiary transfers the inherited IRA funds/assets into their own newly created inherited IRA. However, because the rules can be quite complex, the beneficiary would be wise to work with a trusted advisor (a tax attorney, financial planner, or accountant) to minimize tax liability. You can read more about what to do with an inherited IRA in Part 2 below.
Enter the 10-year rule for IRA beneficiaries
A critical matter all IRA owners and beneficiaries should be aware of is the “10-year rule,” which was enacted as part of the SECURE Act. Enacted in 2020, this provision eliminated what had been referred to as the “stretch IRA,” in which all beneficiaries (spouses, children and others) could stretch the payout period over their own lifetime (life expectancy payouts).
The new 10-year rule mandates that most non-spouse beneficiaries now must now distribute the entire IRA account balance within 10 years—technically, by December 31st of the year in which the 10th anniversary of the account owner’s death takes place. Certain “eligible designated beneficiaries” are still permitted to take life expectancy payouts if they wish.
SECURE Act 2.0 proposes raising the age at which an IRA owner must start taking required minimum distributions (RMDs) again—this age was raised from 70½ to 72 in 2020 and the new provision is age 75. The 10-year rule affects account owners and beneficiaries regarding the required beginning date (RBD) for those distributions.
- The IRS interpretation of the 10-year rule states that if an account owner dies on or after the RBD, beneficiaries who are subject to the 10-year rule must also take annual distributions during the first nine years.
- These distributions are based on the longer of the deceased account owner’s age or the beneficiary’s age.
- In the case of IRA owners who pass away before their RBD, their beneficiaries (who are not yet of age to begin taking required distributions) can wait the 10 years to distribute the entire inherited IRA balance.
Because this matter can become complicated and has tax implications based on the distributions, account owners and beneficiaries are wise to seek counsel from a trusted tax or financial advisor.
Inherited IRAs and spouse beneficiaries
The rules are different for spouses who choose to transfer the remaining inherited assets into their own IRA – one that would not need to be labeled as “inherited.” It is best to consult a tax advisor to calculate any distribution amounts that may or may not have to be taken before the survivor reaches his or her RBD for required distributions. The beneficiary may have to take a hypothetical distribution before transferring the remaining balance into their own IRA.
The new RMD starting age of 75 is not yet legislation (it was supposed to become effective on January 1, 2022). The IRS is taking public comments through May 25 on the proposed regulations and there will be a public hearing on June 15. That said, it could take months more before the IRS releases its final regulations. Therefore, now is a good time to review your current RMD status and how the 10-year rule may affect you, if you inherit an IRA.
Part 2: What to do with an Inherited IRA
Spouses and Traditional IRAs: Surviving spouses who inherit a Traditional IRA may transfer the assets over into their own newly created or existing IRA, or open an inherited IRA, which keeps those funds separate from other IRA assets. A surviving spouse under the RMD age must retitle the deceased spouse’s retirement plan to an inherited IRA to avoid the 10% penalty for early withdrawals. The 10-year rule does not apply to spouses.
If there is an immediate need for funds, the surviving spouse can take a lump sum distribution as well, but bear in mind this carries significant tax implications for the beneficiary.
Spouses and Roth IRAs: If the retirement plan is a Roth IRA and the survivor takes a lump sum distribution, there will not be taxes owed if the assets have been in the account for five years following the contribution. The survivor is not required to retitle the Roth IRA.
Children and/or non-spouse beneficiaries: These beneficiaries may not retitle the IRA in their own names but can transfer the funds into a new “inherited IRA.” They may cash out the IRA with a lump sum distribution (and pay taxes on the withdrawals from the Traditional IRA) if they need the money. They must adhere to the 10-year rule regardless of age, so adult children who inherit an IRA, and whose life expectancy far exceeds 10 years, will have to do some financial planning around the distributions from their inherited IRA. Whether the deceased had died before his/her RBD or had already begun taking required minimum distributions are other factors to consider.
NOTE: Previous employer 401(k) plans are subject to the same rules as IRAs when it comes to retitling. Although most individuals roll over funds from their 401(k) to an IRA upon retirement, it is important to know what types of retirement plans the deceased held.
Part 3: What to do When an IRA Beneficiary Rejects the Inherited Assets
If the IRA beneficiary does not want the assets, he or she can disclaim their entire or partial interest in the IRA. There is a limited amount of time in which to do this. Internal Revenue Code Section (IRC Sec.) 2518 allows for this disclaimer, which relieves the beneficiary of any financial benefits (and associated tax benefits) of receiving the assets.
This beneficiary disclaimer is done in writing and it is permanent, so beneficiaries must be certain of their decision. The written disclaimer must be presented to the financial institution holding the assets within nine months of the date of death, or in the case of a minor, within nine months of the date on which the beneficiary attains age 21. The beneficiary is not permitted to direct how the disclaimed assets are transferred or to whom. If these conditions are not met, the inherited IRA goes to the beneficiary (whether they want it or not).
What if There’s More Than One Beneficiary?
When a sole primary beneficiary rejects the inherited IRA, the assets are distributed to contingent beneficiaries. In the case of two primary beneficiaries, all IRA assets would then go to the other who did not disclaim. If no beneficiaries are named, the late IRA owner’s estate becomes the beneficiary unless there is a default provision in the IRA plan agreement. The issues of RMDs, regardless of the beneficiary, still stand.
NOTE: At Next Generation, we strongly recommend that all self-directed IRA owners designate at least one beneficiary to their retirement plan(s), just as they do on life insurance policies or other financial assets. If no beneficiary is designated, the account will be left to the estate.
If you have any questions regarding the above information, please contact our office. You can reach us directly via phone at (888) 857-8058 or via email at NewAccounts@NextGenerationTrust.com. Alternatively, you can sign up for a complimentary educational session to speak with a representative 1-on-1, or chat with them via text at (848) 233-4076.
What You Need to Know About SECURE 2.0
On March 29th, the U.S. House of Representatives passed the Securing a Strong Retirement Act of 2022 (SSRA) by a 414-5 vote. Also known as “SECURE 2.0,” the bill includes over 50 retirement plan provisions—some of which could significantly affect taxpayers with retirement plans, and employers who offer workplace retirement plans. The U.S. Senate is expected to take up a similar bipartisan bill later this year.
By the end of the current decade, about 21% of the country’s population will be 65 or older,
according to forecasts by the U.S. Census Bureau. Most non-retired adults have some type of retirement savings, but only 36% think their savings are on track. Congress is aiming to bridge the retirement savings gap with many changes that should help.
Key SSRA/SECURE 2.0 Provisions
This legislation has extensive reach and provisions that affect employers and employees who participate in workplace retirement plans as well as those with IRAs. You can read the full list of provisions and details here, however, we highlight some of the objectives below:
Get more workers signed up. Employees would be automatically enrolled in 401(k), 403(b) and SIMPLE IRA retirement plans, however, they’d be able to opt out of coverage if they wish to do so. In addition, enrolled workers’ contribution rates will automatically increase each year by 1% until their contribution reaches 10% annually. Some exemptions and grandfathering guidelines apply.
Reduction in service period requirement for long-term, part-time workers. The current requirement is three years, however, the bill will drop the requirement down to two years. Typical current eligibility requirements allow employers to exclude workers with less than 1,000 hours of service in a year; this provision would require those with at least 500 hours of service in two consecutive years to become eligible to defer income into a 401(k) or 403(b) plan.
Delay the age for mandatory distributions. The required beginning date for taking required minimum distributions (RMDs) from retirement plans would be raised gradually from 72 (the new age implemented in the original SECURE Act) to 75.
Help locate old retirement plans. When workers switch jobs, they often leave behind old retirement plans. About $1.35 trillion are in “forgotten” 401(k) plans by more than 24 million participants, according to a recent study by Capitalize. This provision would create a national database to help reunite taxpayers with money that’s rightfully theirs. **Fun fact: did you know that money from old 401(k)’s can be rolled over into a self-directed retirement plan?
Make it easier to get an employer match. Typically, to get an employer matching contribution to your workplace retirement account, employees need to contribute via salary deferrals. Some people can’t afford to defer a portion of their salary because they’re paying off student loans. Under the new proposal, student loans repayments by the employee would count as elective salary deferrals, allowing the employer to make a match.
Increase “catch-up” amounts. The current 401(k) catch-up contribution limit would be increased from $6,500 to $10,000 for workers who are 62, 63 or 64 years old by the end of the taxable year.
More tax credits to encourage more small employers to offer plans. An enhanced retirement plan start-up tax credit of 100% for the first three years—as opposed to the current 50% of qualified start-up costs—would provide a bigger tax break for small employers (50 or fewer employees) who establish retirement plans for their workers. Another proposed credit represents a percentage of contributions small employers make to their qualified retirement plan (maximum of $1,000 per employee), for 401(k) and 403(b) plans, and SEP and SIMPLE IRAs.
Domestic abuse victims could make non-penalized withdrawals. They could withdraw the lesser of $10,000 or 50% of their account balance without being subject to the early distribution penalty tax. Participants could self-certify that they were victims of domestic abuse; the funds would need to be repaid to the plan over three years.
Extended period for discretionary amendments. Employers would now have until their business’s tax return due date, plus extensions, to adopt such amendments for the preceding year that increase benefits to participants (other than matching contributions). Individuals who wholly own an unincorporated business would have until their business’s tax return due date, without extensions, to make elective deferrals.
As with any legislation that affects one’s tax scenario, anyone with a retirement plan should read up on all the SSRA provisions. Discussing these proposed changes with your trusted advisor will help you prepare for updates that may affect your retirement savings strategy. If you have questions about your self-directed IRA, or wish to open a self-directed IRA to take more control over your retirement savings, contact Next Generation at NewAccounts@NextGenerationTrust.com or (888) 857-8058. Alternatively, you can register for a complimentary educational session with one of our knowledgeable representatives, or text them at (848) 233-4076.
Hedge Against Inflation with a Self-Directed IRA
America is having an inflation moment. It’s all over the news and our pockets are hurting. While inflation is not forever, those price increases are tough for many people to handle right now. This bodes the question – what can we do to hedge against inflation?
Investors holding alternative assets within a self-directed IRA, or those that wish to do so, may appreciate the “inflationary advantages” those asset classes come with.
Investing in alternative assets through a self-directed IRA can help individuals save on taxes while earning retirement wealth. These investments—such as real estate, natural resources like oil and gas, precious metals or other ‘real assets’ —provide cash flow through the retirement plan, and many do well during inflationary periods as they tend to be non-correlated with the public market.
Benefits of a self-directed IRA – during inflationary periods or any time
According to the Motley Fool, commodities—a class of alternative assets many investors include in self-directed IRAs—can be an effective hedge against unexpected inflation, given that the rise in cost of consumer goods is in part driven by increased cost of raw materials (think timber used for construction). In addition, Worth reports that real estate, private credit, and commodities have often performed well during periods of rising inflation.
Since self-directed investors can take a more agile approach to opportunistic investing, building a hedge against inflation is not their only advantage. Here are some other reasons to consider self-directed IRAs:
Not correlated with the stock market. Public markets and traditional investment vehicles (stocks, bonds, mutual funds) ebb and flow—often with wild fluctuations as we have seen over the past 20+ years. The performance of most nontraditional investments does not correlate with the stock market, so savvy investors can avoid that roller coaster ride.
Tax-deferred (or free) returns. The investment returns a self-directed IRA earns are tax-deferred (and tax-free for Roth accounts), so there are no taxes on capital gains. It’s important to note that “self-directed IRA” is not an account type, and the tax status depends on the type of account an individual opens; Traditional/Roth IRAs, SEP IRAs and Solo 401k’s are all account types that can be self-directed.
Positive cash flow. Self-directed investors are usually knowledgeable of the alterative asset classes they invest in and are comfortable making all their own investment decisions and conducting their due diligence. They know and understand what it takes to earn positive cash flow from their IRA’s investments, and they may already be investing in these asset classes outside of their IRAs. They also understand that, unlike many stock holdings, these are generally long-term investments that are less likely to be affected by temporary inflation.
Generational wealth transfer. In this scenario, the account owner can reinvest their returns and put the funds back into a new or existing investment to grow the account. This wealth can be left to any designated beneficiaries upon the account owner’s death.
The bottom line is that including alternative assets within a self-directed IRA builds a more diverse retirement portfolio—and diversity is a great safeguard against market volatility.
Benefits of a self-directed IRA at Next Generation
Next Generation offers both custodial services and full account administration to individuals who open a self-directed IRA or other self-directed account with us. We offer a plethora of educational materials on our website that not only provide information about the types of investments you can hold within these accounts, but what to expect from the setup and funding processes as well.
You can also schedule a 1-on-1 complimentary educational session with a member of our team so that self-directed investors—new and seasoned—can get answers to their questions about the many benefits and options available through this retirement wealth-building strategy. Alternatively, you can contact us directly via email at NewAccounts@NextGenerationTrust.com, or via phone at (888) 857-8058. You can also text us at (848) 233-4076; we’re here to help!
Explore Reducing Your 2021 Tax Bill with a Prior-Year Contribution to Your Self-Directed IRA
Contributing to your self-directed IRA qualifies as a checkmark on your retirement savings strategy and provides tax advantages as well. If you overlooked making an IRA contribution for 2021 or didn’t max out your 2021 contributions, it’s not too late. Even though the tax filing deadline is right around the calendar corner on Monday, April 18, you may make a prior-year contribution to your self-directed IRA until the filing deadline and potentially reduce your 2021 taxable income (note that Roth contributions are not tax deductible).
TIP: To ensure the funds are applied to 2021 in time to file your tax return, speak to your tax advisor about the best date to submit your contribution.
How much can you contribute and/or deduct?
The annual contribution limit is $6,000 for both a Traditional and Roth IRA ($7,000 for taxpayers over age 50). Note, however, that Roth contributions may be further limited based on your modified adjusted gross income.
Contributions to a Traditional IRA are tax-deductible up to the limit and grow tax-deferred; the distributions are taxed when you take them. Contributions to a Roth IRA don’t change your adjusted gross income because that money is post-tax; you are taxed on contributions now, but the investment earnings and distributions are tax free.
Therefore, if you’d like to lower your taxable income for the previous tax year, there’s still time to do so by contributing to a Traditional IRA. However, you’ll need to determine which will provide you the greatest benefit on your tax return—current year or prior year. That should be discussed with a trusted tax or financial advisor.
Determining current, or prior-year, contribution
There’s no real right or wrong here; it all depends on your specific financial situation. Two factors to consider are how much you plan to contribute this tax year (2022) to your self-directed IRA, and what your taxable income is for last year and this year.
- Planning contribution amounts. For instance, if you already met last year’s contribution limit, you may only make current-year IRA contributions or would incur penalties for exceeding that limit. However, if you have room for more 2021 IRA funding and you plan to also meet this year’s contribution limits, you can make both prior-year and current-year contributions. For taxpayers who also have a workplace retirement plan (or their spouses have one and they file jointly), the IRS places certain restrictions regarding modified adjusted gross income and the amount they can deduct.
- See where you are in your tax bracket. Taxpayers on the lower end of their 2021 tax bracket may benefit from making a prior-year contribution to reduce their taxable income; this could also result in falling under a lower tax bracket. However, if 2022 is looking good financially in terms of income, you might want that tax break for current-year taxes instead. Your tax or financial advisor can help you determine the strategy that’ best for you
How to make a prior-year contribution to your self-directed IRA
You may make a prior-year contribution and apply it to 2021 without issue if you have not yet filed your tax return. However, if you already submitted your 2021 return and want to make a prior-year IRA contribution, you must file an amended tax return.
Check your statements or contact your IRA administrator to ascertain your 2021 contribution amount to add funds to your self-directed IRA according to IRS regulations.
When you deposit the funds, be sure to tell your self-directed IRA administrator (and note it somewhere) to apply the contribution to 2021; otherwise, it will likely default to 2022 (and will show up on your tax return next year).
How Next Generation can help
At Next Generation, we offer client education about all things related to self-directed retirement plans. Our team is committed to making every transaction a smooth one, and handle each of our client accounts with utmost care, ensuring we maintain its tax-advantaged status. If you have questions about making a prior-year contribution to your existing IRA at Next Generation or would like to get one started, you may email us at NewAccounts@NextGenerationTrust.com, call (888) 857-8058 or text us at (848) 233-4076. If you need insights into how self-direction as a retirement strategy can work for you, we offer a complimentary education session to help you sort it out.
Investing in Distressed Real Estate in a Post-Covid World
As our society moves past the Covid-19 pandemic, the rent relief and mortgage forbearance programs that were in place are coming to an end. The period of leniency and financial assistance due to the lockdown and ensuing economic downturn helped many real estate owners (both homeowners and landlords) get through a difficult time.
Distressed real estate at a glance
A sad fact of post-Covid America is that people are losing homes and landlords are losing buildings.
In the commercial realm, shuttered storefronts are a blight on downtowns. The lengthy shutdown of the travel and entertainment industries has left hotels, theatres, and retail properties whose owners cannot meet their debt payments. Office buildings suffered when tenants shifted to remote working and needed less space (if any at all).
On the residential real estate side, homeowners who lost income and could not make mortgage payments have gone into foreclosure. Compounding that is the fact that foreclosure restrictions put into place in response to the pandemic expired at the end of 2021. Property data powerhouse ATTOM (RealtyTrac’s parent company) released its January 2022 U.S. Foreclosure Market Report last month. That report showed there were 23,204 U.S. properties with foreclosure filings, a 29% increase from December 2021 and a 139% increase from one year ago.
Despite the downward trend, this has created new investment opportunities in distressed real estate assets.
Post-Covid alternative assets: distressed real estate for self-directed investors
Owners of self-directed IRAs have tremendous potential to build retirement wealth by investing in distressed properties. Real estate is the most popular alternative asset class held within self-directed IRAs, and there are many avenues to include distressed real estate in a self-directed retirement plan:
Fix & flip: Many savvy real estate investors are already engaged in the busy fix & flip market—purchasing, renovating, and reselling homes for a profit. These homes may be heading into foreclosure or are already REO (real estate owned—as in, bank owned) properties. Or they could be homes whose owners cannot afford to take on costly repairs and upgrades. Real estate investors relieve the owners of this burden by buying the house, making the upgrades to increase value, and flipping it.
Property tax liens: When an owner fails to pay property taxes, the city or county government may place a lien (a legal claim) on that property for the unpaid amount. The liens are sold at auctions as certificates that reflect the amount owed plus penalties.; the tax lien certificates are auctioned off based on the rate of interest the investors are willing to receive from the homeowner. The certificates may often be purchased for only a few hundred dollars.
The investor pays off the property taxes owed, and the homeowner repays the investor the full amount plus interest over a specified time. Individuals may use a self-directed IRA to invest in tax liens.
Investing in tax liens can be a complex transaction and as with any self-directed investment, the investor is expected to thoroughly research and understand the process and potential risks. Investopedia offers additional information on investing in tax liens.
Mortgage notes: Investors can include defaulted mortgages—another alternative asset related to distressed real estate—in a self-directed IRA. As we wrote about in a previous post, these “nonperforming mortgages” are purchased at a discount from the lender; full repayment terms are negotiated by the self-directed investor and the homeowner. Since a defaulted mortgage puts foreclosure on the homeowner’s horizon, this transaction enables the homeowner to stay in the home and make payments to the self-directed IRA that now holds the note.
We’ll be hosting a webinar on this topic at the end of the month. Register for it here.
Real estate syndicates and partnerships: Real estate syndicates are entities that invest in various types of commercial real estate. They partner sponsors (who source the real estate asset) and investors. The investors combine their human and financial resources to purchase and manage the properties. A real estate syndication could focus on investing in multiple distressed properties.
Secured real estate loans: A self-directed IRA can make a secured loan to a real estate investor or owner of a distressed property. The investor may need funds to renovate a house and flip it, bring a dilapidated multifamily property up to market-rate rental level, or develop an abandoned, vacant piece of land in a blighted area. The property can be held as collateral, and the IRA owner and borrower work out their terms (loan amount, interest rate, length of loan, etc.).
Partnering self-directed IRAs
Did you know that one self-directed IRA can partner with another to make an investment? As with syndicates, this arrangement brings more investing power to the transaction table. All parties work out the arrangements of that partnership, and share the expenses and income related to the asset.
Real estate and self-directed IRAs
Real estate can be a lucrative investment for investors who know and understand the market. All expenses related to the asset (construction, renovation, taxes, maintenance, etc.) flow through the IRA, which is the owner; the same goes for the income when the property is sold, the tax lien is paid, or rent is collected.
At Next Generation, we offer many educational webinars on all types of real estate investments and self-directed IRAs. We also offer complimentary educational sessions with a Next Generation representative, who can explain more about this and other alternative assets these plans allow. Alternatively, you can contact our office directly via email at NewAccounts@NextGenerationTrust.com, call us at (888) 857-8058, or text us at (848) 233-4076.
Women are Investing More—and Alternative Assets are Part of Their Retirement Strategy
NASA scientists. Corporate CEOs. Medical directors. Winning investors.
Women are roaring more loudly than ever, making history and headway as leaders in their fields . . . and winners in investing. Although women have been considered more conservative or less confident than men when it comes to investing, the Fidelity Investments’ 2021 Women and Investing Study revealed something different. Released last October, the study showed that women edged out men slightly in their investing performance from 2011 to 2020. The study also showed that:
- Two-thirds of respondents are making investments outside of their retirement savings and emergency funds, a 50% increase since 2018.
- Women want to take proactive steps towards their financial planning and investing – 90% said they are ready to do so through 2022, and 62% were interested in boosting their knowledge of financial planning and investing.
- Nearly half of women reported they have $20,000 or more in savings aside from their emergency reserves, and many are holding cash more than $50,000 or $100,000 (more on that below).
That is a lot of money that could be invested in alternative assets. Interestingly, women are doing so in increasing numbers—and more so than men. Intelligent Partnership cited another study of high-net-worth women that showed women allocate 27% of their assets to non-traditional investments; men are only at 20%. Plus, over half (55%) said they had increased their allocation into alternative assets over the prior year.
Women investors for the win!
Some reasons why women are doing well with their investments—especially with alternatives: they are doing their research, conducting their due diligence, and investing with goals in mind. Moreover, they understand the value of a more diversified retirement portfolio that provides a hedge against stock market volatility (and inflation—a very contemporaneous concern). This trend is not new: in 2014 it was reported that 60% of women were interested in including alternative assets in their portfolios, over 47% of men. Do we call that women’s intuition or investing smarts?
Invest in those alternative assets through self-direction
Circling back to our note about the $20,000-$100,000 that women are holding in cash—yes, liquidity is important and it’s good to have cash on hand—but imagine how far those dollars could go when invested in alternative assets through a self-directed IRA. As a custodian and administrator for self-directed retirement plans, and a woman-owned business, Next Generation encourages women to continue doing that research into nontraditional investments, make their investment plans, and consider opening a self-directed IRA.
Funding a self-directed IRA opens so many doors to alternative investments that build retirement wealth—without direct correlation to the ups and downs of the stock market—and provides a tax shelter for your investment gains. Women who are already investing outside of their existing retirement plans can open and fund a self-directed IRA, and include those investments in a tax-advantaged account. Real estate, private equity, ESG investing, precious metals, and cryptocurrency are among the many alternative assets these plans allow.
Woman power = investment power
As a self-directed investor, you make all your own investment decisions; the self-directed retirement plan administrator executes the transactions based on your instructions and holds the assets. You grow your portfolio with the same tax advantages as regular IRAs, but with a much broader array of investment options.
Why not turn what you already know and understand into retirement wealth you control? If you’d like to learn more about this retirement strategy, you can schedule a complimentary educational session with a Next Generation representative. You may also email us at NewAccounts@NextGenerationTrust.com, call 888-857-8058 or text 848-233-4076 for answers to your questions about how to get started—and join the growing ranks of female investors who are turning conventional thinking upside down!