Gig Workers: Tips for Building Your Retirement Savings Hustle

Gig Workers: Tips for Building Your Retirement Savings Hustle

The gig economy is growing, with more people working “on-demand” and side jobs. According to the U.S. Chamber of Commerce, gig workers are independent contractors or freelancers who typically do short-term work for multiple clients. The work may be project-based, hourly or part-time, an ongoing contract or a temporary position. What they have in common is that they earn income outside of traditional long-term, employer/employee arrangements.

Popular food delivery, pet care and transportation services, usually app or online-based, are among the more well-known side hustles that emerged in recent years. However, there’s more than on-demand work in the gig economy. Upwork reported that in 2021:

Saving for retirement as a gig worker

As independent contractors, gig workers do not get the same workplace benefits that many employees may have, such as health insurance or access to an employer-sponsored retirement plan. Plus, the lack of a steady paycheck may make it difficult for some to save for retirement.

At Next Generation, we’re all about educating people on how to build retirement savings. And we love the entrepreneurial spirit that goes along with growing a freelance business or enjoying the schedule and location flexibility of gig work. To that end, we offer these retirement tips for those working in the gig economy:

#1: Explore the types of tax-advantaged retirement plans available to you as a self-employed taxpayer.

#2: Tap into your affinity for flexibility with a self-directed IRA.

When it comes to the types of investments these retirement plans can include, a self-directed IRA offers a higher level of flexibility and creativity—with the same tax advantages of their typical counterparts. You can self-direct a Traditional, Roth, SIMPLE or SEP IRA, as well as a solo 401(k) – you can even self-direct an Education Savings Account (ESA) or Health Savings Account (HSA).

As a member of the gig workforce, you can make contributions to your self-directed retirement plan as your income allows—and grow those contributions through a broad array of alternative assets not available in other plans. These include real estate, unsecured and secured loans, precious metals, royalties, and many more. Doing so gives that extra boost to your retirement savings, provides a hedge against stock market volatility, and allows you to take advantage of investment opportunities not available through stocks, bonds or mutual funds.

Furthermore, if you weren’t always part of the gig-economy and you used to have a regular, W-2 job, you may have some cash sitting in an old employer-sponsored plan, like a 401(k), that can be rolled over into a self-directed account.

“Self-direction” means you are comfortable doing your own research and making your own investment decisions—just as you are directing your professional life. And many people who already know and understand nontraditional investments want to build a more diverse retirement portfolio by including alternative assets in a self-directed IRA.

Need more information? Contact us today.

Earning Passive Income in a Self-Directed IRA Through Cryptocurrency Funds

The interest in cryptocurrencies continues to grow and the crypto investment market is evolving. Although these digital assets have taken a beating in the markets in the last few months, investing in crypto—even in a bear market—remains a popular alternative asset for self-directed IRAs.

Cryptocurrency and self-directed IRAs

One reason why crypto is attractive to self-directed investors is that, as with most alternative assets, it performs better as a long-term investment. In our August webinar about financial fragility and cryptocurrency investing, Junaid Ghauri, chief investment officer of Pareto Technologies, said the data shows the cryptocurrency is a robust investment year-over-year and its average value has increased, thanks in part to mining the digital asset around the world for broader distribution.

He believes that more nontraditional assets, such as cryptocurrency, will prove to be more resilient against financial fragility over time. To paraphrase Junaid, “Any market must be strong enough to withstand the shocks of volatility. Crypto is a nascent asset when compared to traditional financial instruments, but it is accessible, fungible and less fragile than large institutions think it is. Massive market drawdowns happen cyclically, this is not unheard of in crypto and it is what we are seeing now.”

Self-directed IRAs and passive income through crypto funds

As we shared in a previous post, investors can invest directly in cryptocurrencies by purchasing the “coins” on an exchange/online platform. For investors who prefer a more hands-off approach, there is also the growing world of cryptocurrency funds that provide a passive income stream through cryptocurrency investments.

Crypto funds may invest exclusively in cryptocurrencies, or manage a mix of crypto and other assets. Crypto funds buy and trade the digital assets on behalf of the investor. In the case of a self-directed investor, the fund does so on behalf of the self-directed IRA.

Given the bear market that cryptocurrency has been facing since May 2022, earning passive crypto income is driving interest among investors to help offset losses during downturns and grow crypto capital proactively while reducing risk.

Investing in crypto funds

The list of crypto funds of various kinds is growing. According to Crypto Fund Research, there are more than 800 cryptocurrency/blockchain investment funds. In addition to a large number of venture capital funds and hybrid funds (which invest in liquid cryptocurrencies as well as initial coin offerings), there are:

Active guidance from Next Generation

At Next Generation, there’s nothing passive about our approach as an account administrator and custodian. Whether our clients prefer direct investments into cryptocurrency or crypto funds for passive investing, every transaction undergoes a review process to ensure all mandatory paperwork is completed correctly, the transaction would not be considered prohibited, and is executed correctly—either with an exchange platform or fund manager.

Next Generation knows that self-directed investors are informed investors. If you’re thinking of including crypto funds in your self-directed IRA portfolio as a path to passive income generation, we recommend you thoroughly research and fully understand the fund before making the investment.

Need more information? Contact us today.

Please note that we do not provide financial, or investment advice and we encourage you to consult with a trusted advisor if this is a strategy you’d like to explore.

Earning Passive Income Through a Self-Directed IRA

Work, work, work; it’s the way we earn income to sustain ourselves. However, earned income isn’t the only way to support your lifestyle. Passive income—a sort of “set it and forget it” income stream—can be attained through the alternative assets that can be held in a self-directed IRA.

A peek at passive income
The way passive income functions is that you do the upfront work to get an income-producing entity launched that will return a continual income stream down the line. Many people have done this by setting up online courses people can download, writing a book for sale, creating portfolios of their creative work (paintings, photography, handiwork/crafts) to sell on an e-commerce platform or their own website, and renting out a prime parking space or a swimming pool they’re not using (yes, the swimming pool rental is a real thing!).

Another way to create long-term income: passive investing.

Passive investing through self-direction

Passive investing is a buy-and-hold strategy and is typically a long-term path for building retirement wealth.

A self-directed IRA provides numerous avenues for passive investing and for taxpayers to earn passive income over the long-term. Self-directed investing through alternative assets requires upfront research and due diligence on the part of the investor; after that, they are low maintenance because they typically don’t require active involvement on the account owner’s part once the investment is made. That said, as with any investment, they do require monitoring to ensure they are delivering positive ROI. The IRS also requires that you provide your self-directed IRA custodian, like Next Generation, an annual Fair-Market Value (FMV) of any assets held within your account.

Some examples of passive investments that can be held in a self-directed IRA include:

Getting started on passive investing with a self-directed IRA

If you already have a self-directed IRA, you’re well on your way to building a more diverse retirement portfolio—one that can include passive investments in a range of alternative assets.

For investors who are getting started on self-directing their retirement accounts, Next Generation is here to help. Need more information? Contact us today.

Why Financial Advisors are Adding Alternative Assets to Clients’ Portfolios

In the last two decades, investors have dealt with periods of intense market volatility and this year, a high level of inflation is adding to investor woes.

Although financial advisors have historically stuck with more traditional investments (stocks, bonds, mutual funds) and the occasional foray into hedge funds, alternative assets—like those allowed in a self-directed IRA—are gaining favor with financial advisors who seek to diversity their clients’ retirement portfolios.

The bottom line: Including alternative assets enables advisors to work more responsively with clients’ investing goals, and align certain investments with their risk tolerance, age, and timeline to retirement with greater creativity and variety.

Benefits of diversifying with alternative assets

Financial advisors are seeing more and more that including nontraditional investments that are not tied to interest rates, nor correlated with stock market performance, offer a hedge against volatility and a buffer against inflation.

A recent survey from Cerulli Associates of 100 advisors revealed average alternative allocations of 14.5% during the first half of 2022; advisors reported they want to boost percentages to 17.5% in two years. The industry average for alternative allocation (such as real estate, commodities, and private equity) is closer to 10%.

Recommending that they include alternative assets in their retirement portfolios enables advisors to be more effective with their clients and develop more personalized retirement strategies.

They can guide clients towards asset classes that they are interested in or know a lot about. And for those clients who are already investing in alternatives outside of their existing retirement plan, advisors can show they “speak their language” and build a stronger relationship.

Alternative assets and self-directed IRAs

Alternative assets are typically long-term, offer greater investing flexibility, and are somewhat protected from the macro trends of the stock and bond markets.

They enable individuals to invest along their personal interests, such as shares in a theatrical production, a coffee plantation, or a biotech startup. And when held within a self-directed IRA, the assets grow in a tax-advantaged account, which benefit the investor in the long run.

Although they may consult a trusted advisor regarding asset allocation, typical self-directed investors are those who are comfortable making all their own retirement decisions and conducting their due diligence about these nontraditional investments.

And while the self-directed IRA custodian/administrator, like Next Generation, does not sell or endorse any investments, the individual’s financial advisor can serve as a reliable sounding board when exploring the many options available through self-direction.

Next Generation is here to help

Next Generation is here to help self-directed investors and their advisors understand more about how self-directed IRAs work and share information about the types of investments allowed in these plans.

Need more information? Contact us today.

Private Equity is Popular Among Billionaires . . . and Among Self-directed Investors – Here’s Why

According to a recent article on Bloomberg.com, there is some concern about the future of private equity (PE) investing. The author cited fewer initial public offerings, hesitation by banks to give buyout loans, and pension and endowment funds allocating less money to PE as an asset class (due to a selloff of global stocks and bonds). All these factors are contributing to fewer deals in terms of buying and selling companies.

However, PE is now attracting ultra-high-net-worth family offices and retail investors. Billions are being invested in venture capital funds and a survey by UBS revealed that among the biggest family offices with an average of $1.2B in assets each, 21% of their money was allocated into PE.

Why PE?
The family offices are seeking to boost returns and are seeking to broaden their asset allocation in alternative assets.

The UBS survey also showed that among respondents, 85% said they’re likely to invest early-stage companies this year, up from 74% in 2021. And about 75% of these billionaire families believe private equity will continue to outperform public markets. Plus, 51% plan to increase their asset allocation into direct PE investments and 44% plan to do so in PE funds within the next five years.

Private equity and self-directed IRAs
You don’t need to be a billionaire to include private equity as an alternative asset within a self-directed IRA. Private equity funding is growing in popularity among self-directed investors—especially since the SEC broadened the criteria regarding accredited and nonaccredited investors with full passage of the JOBS Act. This enabled a wider pool of investors to add private equity funding part of their self-directed retirement plans.

And given the volatility of the markets today, savvy investors seeking to diversify their retirement portfolios—and create a hedge against both inflation and market volatility—are looking at private equity as an alternative asset class that can enhance portfolio returns. As we’ve written in a previous post, self-directed investors can include the following PE investments:

These are all non-publicly traded assets which qualify them for inclusion in a self-directed IRA; however, PE investments—like many nontraditional investments allowed through self-direction—are often illiquid and should be considered as a longer-term investment.

One clear benefit of PE investments is that returns they deliver do not necessarily correlate with markets. So, while traditional investors are worrying about stocks and bonds on the decline (or slow to rebound), PE investors are helping early-stage companies or those seeking growth capital to thrive.

Are you adding private equity to your self-directed IRA? Next Generation can help.
Remember that as with any alternative asset held in a self-directed IRA, you as the account owner are responsible for preforming thorough due diligence on any potential PE investment, and you make all the investment decisions regarding the account. Your trusted financial advisor can offer insights into how adding PE investments may affect your tax picture or help you reach your retirement savings goals.

Need more information? Contact us today.

Achieving Financial Freedom Through Self-Direction & Alternative Assets

We don’t need to hammer home the concerns about inflation in the U.S. (actually, worldwide)—we are all seeing rising prices on products and services everywhere, and for many Americans, their paychecks don’t cover as much as they used to. According to Bloomberg, inflation hit a 40-year high in May with a consumer price increase of 8.6% over last year.

Add to that the terrible stock market performance we’ve been witnessing since the beginning of 2022, made worse by world events (and inflation). For people nearing retirement or those that are already retired, they’ve seen their retirement portfolios decline steeply over the past six months and market corrections or a quick fix are not on the horizon.

According to a CNN report in May, the stock market “meltdown” resulted in more than a $7 trillion decline in market value from the blue chip stocks in the S&P 500. The index at that time was down nearly 18% since the end of December.

CNBC reported more bad news in June, with the S&P falling to its lowest level since March 2021, bringing with it 21% losses from its January record. The Dow Jones Industrial Average has dropped (down 17% from its record high) as has the Nasdaq Composite by several percentage points (with 33% losses during this sell-off period). Treasury bond prices are dropping as well. All this is fueling recession fears.

With retirement savings in peril and the Fed trying to curb inflation, many people are feeling stuck. They are wondering how to invest to protect their retirement savings against the current market storm—and create a brighter future in their retirement years.

How alternative assets can help steady your rocking investment boat

With all this market volatility, investors may be feeling a bit of despair (we don’t blame them). And while many people understand that where there’s knowledge there is power, others might not realize the power that investing in alternative assets through self-direction can add to a retirement portfolio. Here are some of the benefits:

  1. Self-direction allows for a broad array of nontraditional investments—far broader than stocks, bonds and mutual funds. Savvy investors are including various sectors of commercial and residential real estate, precious metals, private equity, among others, in self-directed IRAs, and taking advantage of investing opportunities that arise in the asset classes they know and understand.
  2. The nontraditional investments allowed in a self-directed IRA have a low correlation to how other asset classes perform. So, while the stock market may tumble, an investment in mineral rights or music royalties can deliver unrelated returns. And real estate can be a lucrative option when done right.
  3. Alternative assets allow investors to fulfill on their ESG goals for environmental, sustainable and governance investments more nimbly and directly than through traditional funds.
  4. Self-direction enables investors to take advantage of “in the moment” investment opportunities and changing market conditions. For example, the supply chain issues the world has been dealing with since the start of the pandemic have opened opportunities to invest in transportation assets.

In short, alternative assets provide a hedge against market volatility while also helping investors develop a more diverse portfolio and offering inflation protection and yield. Additionally, the more you know about a specific asset class, the better chance you have at controlling (or increasing) your return.

Risk-reward

Imagine you’ve done your research and decided that investing in self-storage or senior housing—both growing real estate sectors—makes sense for your goals. Or you like the idea of investing in renewable energy assets, timber, or infrastructure sectors. All these are possible through self-direction.

Of course, there are risks with alternative assets as there are with any type of investment, but self-directed investors are comfortable making their own investment decisions; conducting their research and due diligence on the assets; and generally enjoy taking a more active—and proactive—approach to building their retirement wealth. They understand the nontraditional investments they are including in their self-directed retirement plan can have strong ROI. And they like the control they have over their investments and their future.

Investing in alternative assets in a self-directed IRA can create a powerful path to financial freedom. Self-directed investors have more avenues for beating back the hazards of inflation and stock market volatility. And they have more paths to take for investing in what matters most to them.

Need more information? Contact us today.

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.

Need more information? Contact us today.

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:

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:

  1. 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.
  2. 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):

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:

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. Need more information? Contact us today.

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:

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.

Need more information? Contact us today.