Social Investing Through a Self-Directed IRA
Self-directed investors are avoiding the stock market roller coaster by investing in non-publicly traded, alternative assets, through their self-directed IRAs. These retirement plans offer the same tax advantages as regular IRAs, but allow for a broader array of nontraditional investments that traditional brokerage accounts do not. This also enables individuals to build retirement wealth through investments that reflect their personal interest or, in other cases, their ethics. One such class of nontraditional investments is social investing, also called sustainable investing or impact investing.
Examples of social investing are assets that fit into the broader category of environmental, social, and corporate governance (ESG); they foster positive social change, social justice, and protect the environment. Investors are discovering ways to invest in causes that are meaningful to them; these may be renewable energy options that reduce carbon footprint, shares in cooperative farms that lift people out of poverty, or funds that include corporations with excellent employee relations or human rights records.
As with any self-directed investment, social investing means taking the time to research and conduct one’s due diligence. Investors who want to make a difference through their retirement plan can look for ways to support sustainable or impact investing projects, or funds that are managed in a socially responsible way. Maybe you know of a startup that’s bringing clean energy projects to market or clean water to remote villages; or perhaps you want to invest in a minority-led company as a way to diversify your retirement portfolio—and support economic diversity.
Once you’ve done your research and selected sustainable investments to include in your retirement plan, Next Generation—as the self-directed IRA custodian and administrator—will first conduct an administrative review of the asset documents to ensure it meets internal guidelines for self-directed retirement plans. We will then process your transaction based on your instructions, hold the assets, and manage all the paperwork and mandatory filing associated with the investment (mandatory IRS filings of 5498s, or Fair Market Value and 1099s if required).
If you have questions about self-direction as a retirement strategy, or about the many other nontraditional investments these retirement plans allow, you may schedule a complimentary educational session with one of our knowledgeable representatives. You can read more about various types of alternative assets these plans allow here; or contact us directly via email at NewAccounts@NextGenerationTrust.com or call 888.857.8058.
Will Social Security Benefits Support Your Retirement Age?
Although individuals can claim Social Security benefits as early as age 62, the retirement age associated with full Social Security benefits had been 65 for many years. That marker has been creeping up over time, with the number currently set at age 67 for people born in 1960 or later. The goal has been to encourage Americans to retire later; the Social Security Trust Fund is only solvent through 2037 and delaying benefits will help shore up the fund.
However, according to a paper titled, “How Sticky is Retirement Behavior in the U.S.? Responses to Changes in the Full Retirement Age,” the increase in full retirement age is not stopping many Americans from retiring and claiming Social Security at the age of 65. The study, published by the National Bureaus of Economic Research (and reported in Investment News) posits that Congress needs to develop new policies – in addition to increasing full retirement age – to get Americans to retire later.
Adding to this conundrum is the effect that the COVID-19 pandemic has had on the economy and personal finances, with historic levels of unemployment or reduced work. It’s unclear right now how this will play out, but one writer foresees trouble ahead for people born in 1960—who are turning 60 years old this year—because of how Social Security benefits are calculated.
- Each year’s earnings over one’s lifetime are adjusted to index to the growth or inflation of national average earnings; the indexing occurs for the year someone turns age 60 and ends there.
- 2020 earnings are taking a major hit compared to 2019 due to the pandemic, and there will likely be a decrease in the national average earnings this year.
- This in turn reduces the indexed lifetime earnings of everyone turning 60 this year, which reduces the monthly Social Security retirement benefits.
- The author warns that, although unknown right now, average earnings could decline for another year or so, also reducing the benefits of those born after 1960.
- Those who are already retired may see little or no cost of living adjustment (COLA).
This may cause many Americans to re-evaluate their retirement timeline, as they may need to work longer as a financial necessity. This is especially true for those who have not been contributing to a retirement plan.
Build a more supportive portfolio with a self-directed IRA
Many people already understand that Social Security may not be there for them throughout their retirement years or be sufficient to rely on as a sole source of retirement income. As a result, most have retirement plans to support them in their later years. For those who’ve been planning for retirement with a self-directed IRA as part of their portfolio, they understand the need to take control of their retirement planning and diversify their investment allocations.
Self-direction enables investors to include a broad array of non-publicly traded, alternative assets within their IRAs, which provide a hedge against stock market volatility while building retirement wealth. It’s a proactive approach for individuals who are comfortable making their own investment decisions, and who understand nontraditional investments such as real estate, private equity, precious metals, lending, partnerships and more.
Are you looking to shift your retirement strategy to include alternative assets you already know and understand? Do you want to develop a retirement portfolio that reflects your interests or an area of expertise? If you’re comfortable making your own investment decisions, it’s a great time to plan your retirement from a different perspective. You’ll find a plethora of information about self-directed IRAs on our website. If you have questions about how to get started, you can schedule a complimentary educational session with someone from our team. Alternatively, you can contact us directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.
The 2020 RMD Waiver and How it May Affect Your Retirement Plan
The CARES Act (or the Coronavirus Aid, Relief, and Economic Security Act) was an enormous piece of legislation enacted in March 2020 in response to the COVID-19 pandemic. It was designed to mitigate the effects that lockdown and lost business (and wages) were having on employers and employees. Its passage was preceded by the SECURE Act (Setting Every Community Up for Retirement) in late December 2019. Both brought many changes to retirement plan design, participation, and administration.
Waiving the requirement for required minimum distributions
One change concerns the 2020 required minimum distribution (RMD) that retirement account owners or participants historically had to withdraw upon reaching age 70½ .These distributions must be taken for Traditional IRAs, SIMPLE IRAs, SEP IRAs, rollover IRAs, and most 401(k) and 403(b) plans. RMDs do not apply to Roth IRAs unless it is an inherited IRA.
However, for 2020, the CARES Act waives RMDs. Even if you’d already been taking this distribution, you no longer have to do so in 2020 (which enables you to keep those funds in a tax-advantaged retirement plan for continued investment and growth).
Here are some other updates regarding RMD regulations:
- RMDs are also waived in 2020 for inherited IRAs.
- This waiver is temporary; account owners and participants must resume or start RMD payments in 2021.
- The waiver also applies to people who turned 70½ in 2019 and did not take their first RMD before January 1 of this year. (One usually has a three-month extension until April 1 of the following year to take the very first RMD; otherwise, the deadline is always December 31 of the tax year.)
Additional RMD updates:
- The SECURE Act increased the age at which an individual must begin taking RMDs to 72 beginning in 2020. Therefore, investors who haven’t yet crossed that 70½-year-old mark now have more time to allow their retirement funds to be invested and grow in a tax-advantaged retirement plan.
- Since any distribution in 2020 is no longer seen as an RMD, it can be converted to a Roth IRA, which was prohibited before COVID-19.
- Eligible individuals who took a distribution this year that was not treated as an RMD (due to the waiver) may roll over those funds to another eligible retirement plan or to an IRA within 60 days of the distribution.
- The IRS has extended the 60-day rollover deadline to allow most individuals until July 15, 2020 to do so.
- For beneficiaries taking distributions over a five-year period, 2020 is disregarded and one year is added to the remaining period to distribute inherited assets.
As with any retirement plan and investment, individuals are encouraged to consult their trusted advisor or tax professional to work out the best way to handle their required minimum distributions—whether to take advantage of this year’s waiver, do a rollover, or wait until age 72 to begin, depending on your age and situation. If you have a qualified retirement plan through work, check with the plan administrator about your options.
RMDs and self-directed retirement plans
The RMD waivers and updated provisions concerning these distributions apply to self-directed retirement plans as well. And, with the age increase for taking these distributions, self-directed investors with alternative assets within their plans have the potential to accrue more retirement income from real estate, precious metals, private equity, and many more nontraditional investments these plans allow. There is also now a longer time horizon for using self-directed funds for unsecured or secured loans, which are other popular ways to invest through a self-directed IRA.
The professionals at Next Generation are available to help you calculate your RMD when you’re ready—whether in 2020 or in the future—and will handle all the tax reporting and administration associated with your self-directed IRA. If you have questions about RMDs or about self-direction as a retirement wealth-building strategy, you can schedule a complimentary educational session. To connect with our team directly, call Next Generation at 888.857.8058 or email us at NewAccounts@NextGenerationTrust.com.
Investing in Cryptocurrency in a Self-Directed IRA
One of the benefits of self-direction as a retirement strategy is the ability to include a broad array of nontraditional investments in an IRA or retirement plan. One such investment that has the attention of certain savvy investors is cryptocurrency.
Many people have heard of Bitcoin—a form of cryptocurrency—but what is this alternative asset all about?
What is cryptocurrency?
In short, it’s a digital or virtual currency—not paper money or metal coins—that is created on decentralized networks of computers using blockchain technology. Blockchain is a distributed/online ledger and an organizational method for ensuring the integrity and security of all transactional data—an essential component of many cryptocurrencies.
Cryptocurrencies are secured by encryption techniques called cryptography and allow for secure online payments as virtual tokens—these tokens are the ledger entries in the system. Cryptocurrencies are not held at a bank nor issued by any central authority such as a government agency or financial institution. No personal information is exchanged during a transaction and there is no third-party interaction with institutions such as a banks or credit card companies. The parties’ digital wallets are account addresses with a public key and the owner has a private key to sign transactions.
Bitcoin, launched in 2009, became famous as the first blockchain-based cryptocurrency; today, there are many others that compete with it. A more detailed explanation of blockchain technology and cryptocurrency can be found here.
Including cryptocurrency in a self-directed IRA
Diversifying one’s retirement plan through self-direction enables individuals to include many non-publicly traded alternative assets—such as cryptocurrency—in their retirement portfolios. Investors who know and understand this asset also know that market prices are based on token supply and trader/user demand, and the exchanges the currencies trade on.
(NOTE: There is a limited supply of this computer-generated currency by design; for example, Bitcoin was designed to cap at 21 million).
That said, like many nontraditional investments, cryptocurrencies can provide a hedge against stock market volatility and inflation, and unlike other alternative assets, are certainly easy to transport and use.
Investing in Cryptocurrency through an IRA at Next Generation
Note that any time you buy or trade a digital asset, this transaction is done through a digital wallet that is linked to a checking account. If you plan to invest in Bitcoin or other cryptocurrencies, most self-directed IRA custodians, like Next Generation, require that this be done through an LLC; the LLC is funded by the self-directed IRA and opens a business checking account to use for the digital wallet. This checkbook control should ensure that the funds are held and used specifically for the purpose of buying or trading this digital asset (or other alternative assets within the IRA)
If you’ve done your research on cryptocurrencies—or if you’re already trading these digital assets outside of your existing IRA—you can form an IRA LLC with Next Generation and start building a more diverse retirement portfolio that includes Bitcoin or other cryptocurrencies. You can also schedule a complimentary educational session with one of Next Generation’s team members to discuss how this all works. For questions about self-direction as a retirement strategy, contact Next Generation by phone at 1.888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.
Retirement Planning in the Face of the COVID-19 Pandemic
We are all aware of the widespread economic impact that the lockdowns instituted to curb COVID-19 have had on U.S. businesses and taxpayers, which has moved Americans to rethink their retirement planning strategies.
Given the spikes in unemployment or reduction in wages experienced by millions of people – and unpredictable stock market performance, which so many rely upon for their retirement wealth – the pandemic is causing disruptions beyond the everyday.
Ken Dychtwald, founder and CEO of Age Wave, reported in an article on ThinkAdvisor said, “The pandemic has had the biggest impact on what we used to think of as retirement because now all the pieces on the table are moving around. It’s brought to light the importance of matching health span to life span. People are thinking more and more about the importance of health and what they can do to optimize it.”
Health spans, lifespans, and retirement lifestyles
Americans have enjoyed longer lifespans over the generations and have had to plan on saving more for retirement to enjoy their lifestyles for longer periods of time. However, COVID-19 has older adults also thinking more about their health. As Dychtwald puts it, they have suddenly been thrust into thinking about what matters most in life. He feels that for many people, the psychological impact of the pandemic has been not only to consider what happens if they die, but how they want to live their lives—more streamlined, pared down to the essentials of a good life, and optimizing their health.
That said, according to Dychtwald, there’s more optimizing to do for retirees in the realms of technology and financial literacy. He says this population needs to adapt to and adopt technology to connect to new ways of socializing, access medical care (via telemedicine), or research financial information. A Pew Research study reported that only 62% of Americans over age 75 use the internet and 28% use or feel comfortable connecting to social media. And when it comes to financial health, Dychtwald notes many retirees don’t understand their options for retirement savings and what it all means, including Social Security benefits.
So where does retirement planning come into this new pandemic-colored picture?
A new post-pandemic lifestyle?
For many people, they’ve been experiencing a quieter, simpler lifestyle in the wake of COVID-19 lockdowns and safety guidelines— and may be re-evaluating what their retirement looks like. Will it include more travel or less travel? Time spent with loved ones or more time for hobbies or volunteering? Staying in a sprawling home or downsizing to a cozy bungalow, moving to an urban environment from the suburbs or getting that cabin in the woods?
Given the business closures—even temporary ones—business owners who may have been putting off retirement before the pandemic might be looking at retiring earlier than originally planned … and are taking a fresh look at their retirement accounts and how the funds are invested.
Taking control of your financial future with self-directed IRAs
Luckily for self-directed investors, they’re connecting, researching, and are savvy about the types of investments they’re including within their retirement accounts. Rather than rely on the ups and downs of the stock market or tolerate sluggish returns on Treasuries, self-directed investors are taking stock of their goals, perhaps shifting their priorities, and planning for the future—despite these uncertain times—with nontraditional investments such as real estate, private equity, secured and unsecured loans, hedge funds, precious metals and many more.
While this retirement strategy is not for everyone, many individuals are seeking a hedge against stock market volatility (such as the recent market turbulence wrought by the pandemic), portfolio diversification and better control over their investment returns – all benefits offered by self-directed IRAs.
Are you looking to shift your retirement strategy to include alternative assets you already know and understand? Do you want to develop a retirement portfolio that reflects your interests or an area of expertise? If you’re comfortable making your own investment decisions, it’s a great time to plan your retirement from a different perspective. You’ll find a plethora of information about self-directed IRAs on our website; and if you have questions about how to get started, you can schedule a complimentary educational session with someone from our team. Alternatively, you can contact us directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.
Education Savings Accounts – It’s Never too Early to Start Investing in Alternative Assets
The baby’s born, the gifts and cards are delivered . . . and investors with an eye toward the future open an education savings account (ESA).
An ESA is a federally sponsored, tax-advantaged, flexible savings tool that enables friends and family to help fund a child’s education through contributions to the account. Any adult can establish an ESA for any child under 18 years old or with special needs.
The funds can pay for private elementary or high school, trade school, or college. Qualified expenses include:
- Tuition and fees
- Room and board
- Books, supplies and equipment, school-related technology
- Academic tutoring
- Required school uniforms (primary and secondary school)
Designated beneficiaries can receive distributions, tax-free, to cover qualified education expenses. These expenses can also be paid directly from the account to the educational institution. The beneficiary has until age 30 to use the funds for all qualified expenses.
If the original beneficiary won’t be using all the funds in time (excluding special needs students), the account can be transferred to another family member under age 30. The funds can also be distributed to the beneficiary when he or she reaches age 30; this distribution is taxable and a 10% penalty may be triggered if the distribution is not for qualified education expenses.
- The accounts offer a double tax benefit – the funds grow tax free and qualified withdrawals are not taxed (provided the withdrawal does not exceed the beneficiary’s qualified education expenses).
- Anyone can contribute to the ESA, including a trust, corporation or the student, until the designated beneficiary attains 18 years of age.
- Contributions are discretionary; there is no annual contribution requirement.
- Contributions can be made up until the contributor’s tax filing date.
Education savings accounts have certain limitations, such as income restrictions for contributing individuals and an annual contribution limit per individual beneficiary of $2000. However, opening a self-directed ESA can help boost the growth of those contributions by investing in non-publicly traded alternative assets.
Instead of relying on stocks, bonds or mutual funds, the account owner can invest in real estate, private placements, hedge funds, precious metals and many other nontraditional investments a self-directed ESA would allow. Including alternative assets within an ESA provides a hedge against stock market volatility and diversifies the portfolio.
Self-directed ESAs are handled by a third-party administrator for self-directed retirement plans, like Next Generation Services. As with any self-directed retirement plan, the account owner makes the investment decisions and provides instructions to the administrator. In the case of Next Generation, our sister firm, Next Generation Trust Company, custodies the assets, providing comprehensive account services under one corporate umbrella.
If you’re interested in opening a self-directed ESA for a minor under the age of 18, schedule a complimentary educational session to get answers to your questions about self-direction as an investment strategy. Alternatively, you can contact us directly via phone at 888.857.8058 or email us at NewAccounts@NextGenerationTrust.com.
Investing in Private REITs with a Self-Directed IRA
A real estate investment trust (REIT) is a company that invests in/owns and usually operates all types of income-producing commercial real estate: multi-family housing/apartment buildings, student housing, retirement and senior communities; warehouse and industrial properties; retail centers, hospitality, and office buildings.
In order to qualify as a (REIT), the company must file with the SEC and meet certain SEC requirements. Although most REITs are publicly traded on stock exchanges (known as public, traded or listed REITs), there are also private REITs; like their stock exchange-traded counterparts, private REITS must register with the SEC and are subject to the same IRS regulations. That includes the requirement to return 90 percent of their taxable income to shareholders annually.
One big difference in public vs. private REITs is that the latter are not as susceptible to demand-driven price volatility as public REITs, whose value fluctuates daily; private REITs are valuated annually.
Why invest in a REIT
- REITs provide access to dividend-based income in the short term, and long-term return on investment as the property grows in value over time.
- Real estate is a popular hedge against inflation/stock market volatility and enables investors to diversify their portfolios.
- REITs require a relatively low minimum investment to get started.
Renters are on the rise—and so is rental property popularity
Multi-family housing represents a large portion of real estate investments, thanks to an increase in the renter population, which has been in growth mode for a few years and continues to rise. There are several reasons for this:
- Baby Boomers are downsizing into amenity-rich luxury rental apartments; the 2015 Census Bureau projected that by 2020, five million Baby Boomers will make an apartment their next residence.
- Millennials are delaying home ownership and looking for smaller domiciles in more urban, denser areas; they value the flexibility of apartment living and are paying off student debt.
- Right behind Millennials is Gen Z, whose members have started entering the rental market.
Investing in private REITs with a self-directed IRA
As you know, a self-directed IRA can include many different types of nontraditional investments, with real estate being the most popular class of alternative assets within these plans.
When your self-directed IRA invests in a private REIT, all income and expenses related to the asset flow in and out of the retirement plan. However, private REITS are not the only type of real estate investment you can include in a self-directed IRA. Other types of real estate investments might allow you to partner your self-directed IRA with another buyer, transact a “fix & flip” and take the profit on the sale of the property, or buy and hold the asset, so the IRA earns tax-advantaged rental income over time.
After you’ve researched a REIT or any other real estate investment you’d like to include in a self-directed retirement plan, it’s time to open and fund your account. At Next Generation we not only provide comprehensive transaction support, we also provide client education about investing in real estate and other alternative assets through a self-directed retirement plan. Of particular importance is understanding prohibited transactions and disqualified persons as defined by the IRS.
If you have questions regarding this strategy, don’t hesitate to contact Next Generation at NewAccounts@NextGenerationTrust.com or call 888.857.8058. Alternatively, you can schedule a complimentary educational session with one of our knowledgeable representatives.
Considering Taking a Hardship Distribution from Your Retirement Plan?
The coronavirus pandemic is leaving millions of Americans on furlough or out of a job, dealing with reduced hours or workload… but NOT with reduced monthly bills to pay. For many, this is a time of financial hardship. Sadly, according to a 2018 Federal Reserve report, 40 percent of adults cannot cover a $400 emergency expense and the current situation goes far beyond that.
Sometimes, individuals consider dipping into one’s retirement plan to cover short-term expenses. Among the emergency expenses that may qualify for such a withdrawal are tuition/education expenses; down payment or repairs on a primary residence, rent or mortgage payments (to thwart possible eviction or foreclosure); out-of-pocket medical expenses; and funeral costs.
- The withdrawal amount has been limited to the amount of the emergency expense
- The plan participant pays income tax on the withdrawal plus a 10 percent penalty if under 59½ years old
- If a 401(k) design allows for loans (not all do), people taking loans against their 401(k) plans must repay the full loan amount with interest; lack of repayment can trigger additional penalties
- In addition, participants’ contributions from their paychecks into their 401(k) plans are suspended for at least six months after taking the hardship distribution
Changes with the CARES Act
This stimulus package has loosened the rules around taking hardship withdrawals from retirement plans, and loans from 401(k) plans. A CARES Act provision allows individuals who are facing adverse financial consequences due to COVID-19 to withdraw funds from their retirement accounts without penalty (regardless of age). This applies to IRAs and 401(k) plans.
The withdrawal must be made before December 31, 2020 and can be up to $100,000. Tax payments on this income are extended out three years. For those taking loans against their 401(k)s, that amount is also raised to $100,000. Note that there are no loans from IRAs.
Why gamble with your retirement savings?
Many financial experts argue against taking out a hardship loan from one’s 401(k) plan to avoid reducing any retirement savings, when there are other loan options available (such as a home equity loan, SBA loan, or other lines of credit). And, all good intentions aside, it may be difficult to replace the funds from a hardship distribution from an IRA or other retirement plan—and then rebuild on that money for retirement.On top of that, the stock market has suffered a tremendous downturn, with subsequent volatility almost daily, as a result of COVID-19 and the economic stressors stemming from lockdowns.
Weathering market volatility through self-direction
Self-directed investors have greater leeway when it comes to hedging against that stock market volatility. That’s because of the many alternative assets that can be held in a self-directed retirement plan. Investing in real estate, precious metals, private equity, or other non-publicly traded assets give savvy investors many more ways to build a more diverse retirement portfolio that have stronger potential to weather the COVID-19 storm (and other times of economic uncertainty). One reason is because the returns on nontraditional investments in a self-directed IRA do NOT directly correlate with stock market returns.
You can even loan funds from your self-directed IRA to someone who is dealing with a cash flow shortage, with the terms worked out between both parties, and receive interest and principal paid back to your IRA.
As always, it is best to consult your trusted financial adviser about how to navigate financial hardship as it relates to your retirement plan. At Next Generation, we’re here to answer any questions you have about self-direction as a retirement strategy, or about the many alternative assets allowed in these plans. You can schedule a complimentary educational session to learn more or contact us directly via phone at 888.857.8058 or email NewAccounts@NextGenerationTrust.com.
Want Out of the Stock Market? Consider Precious Metals in a Self-Directed IRA
Buckle up, investors—the stock market is taking millions of people for a very uncomfortable ride during the Covid-19 pandemic. Individuals who maintain retirement portfolios with traditional assets like stocks, bonds, and mutual funds have seen precipitous declines in their retirement accounts this month as the markets, businesses, and the world deal with the virus.
Advisors will say that diversification is always the key to a healthy portfolio—something self-directed investors know and practice. One way to hedge against the volatility of the stock market and reduce risk is to include alternative assets within a self-directed IRA. Along with real estate, precious metals are among some of the most popular nontraditional investment options that can be held in a self-directed IRA. In fact, there has been a recent spike in demand from investors who wish to diversify their retirement accounts with metals like gold, silver, platinum, and palladium. You can read the particulars of including precious metals in a self-directed IRA in this blog post.
Why include precious metals in a self-directed IRA?
Long before there was paper currency, there were gold and silver, traded around the world. Key benefits to including precious metals in a self-directed IRA is that these assets have no credit risk, serve as a hedge against market volatility, and also do so vis-à-vis political instability, currency weakness, and economic collapse. As Goldman Sachs was quoted this week, “gold is the currency of last resort.” Given the news swirling around us right now, it’s no wonder precious metals are in higher demand as a long-term investment.
In a move to stabilize the U.S. economy and ward off a credit crunch, the U.S. Federal Reserve has committed to purchasing an unlimited number of Treasuries and securities tied to residential and commercial mortgages. This process, called “quantitative easing,” is meant to enhance liquidity of financial markets. Pushing more money into the market affects gold prices inversely; as more money is available, interest rates go down and the value of gold goes up. This article on MarketWatch explains further and predicts gold will increase sharply in value in the coming weeks.
If you’re already knowledgeable about investing in precious metals or want to include this alternative asset in your retirement plan, check out our helpful Precious Metals Guide to learn more. If you have questions about self-direction and the other kinds of nontraditional investments these plans allow, register for a complimentary educational session with one of our knowledgeable representatives. Alternatively, you can call us directly at 888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com.