The GAO Report and Self-Directed IRAs
GAO Report
The Government Accountability Office (GAO) recently released a publication on January 9th titled Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets. IRAs have become an integral part of retirement savings for many, and more people are beginning to branch out from more traditional assets in favor of alternative types of assets such as real estate, precious metals, private funds, crypto currency, and more. These types of assets are held in self-directed accounts, and the regulations for these types of accounts can be murky at best.
The GAO reported that currently, the IRS provides little guidance to IRA owners when it comes to the increased responsibility and potential challenges that arise when investing in unconventional assets. The following areas needed improved guidelines when it comes to compliance with IRS.
Prohibited Transactions
IRS Publication 590 A defines a prohibited transaction as any improper use of your IRA by you, your beneficiary, or any disqualified person. These prohibited transactions usually fall into these categories: extension of credit or self-dealing. These prohibited transactions do not limit what your IRA can invest in, but dictates who can and cannot interact with your IRA.
Those with self-directed accounts are at a greater risk of engaging in a prohibited transaction with their IRA, and may not even know it. The GAO concluded that there should be more education about prohibited transactions in order to ensure compliance with IRC § 4975. For more information on prohibited transactions, you can click here.
Unrelated Business Taxable Income (UBTI)
Depending upon the assets in your account, your IRA may incur UBTI. Unrelated business taxable income is gross income generated from an ongoing trade or business that is not related to the IRA. So if an IRA were to own a business, such as a grocery store, the proceeds from the store would be subject to UBTI because that would be considered business or ordinary income. The IRA would then file a 990-T tax return and would be responsible for the tax on the earned income. Certain types of income (such as dividends, rental income from property, or interest) do not incur UBTI, unless the rental property that is generating the income holds a mortgage. This type of tax, UBTI, is a very complicated issue and should be discussed with your tax advisor.
The GAO reported that there is not a lot of guidance when it comes to UBTI in publication 590-A or 590-B and warned that without guidance, IRA holders may invest in different opportunities that would subject them to this tax. To read more about UBTI, click here.
Fair Market Valuations
Fair market valuations are necessary for 5498 forms that are required by the IRS. These forms report the values of assets held in IRA accounts as of December 31st of the previous year. For accounts that hold stocks and mutual funds, it is much easier to report the value of the asset, as the value would be the closing market price of the stock or fund on December 31st of the previous year. For assets like real estate, the valuation is not as easy to come by and the valuation can be obtained using various methods.
The GAO recommended that the IRS develop guidelines on how to valuate these types of assets. Creating a guideline would make the valuations much easier for the IRA owners as well as the IRA administrators and custodians. To read more about Fair Market Valuations, click here.
These enhanced guidelines would improve the IRA owners experience with self-directing and make it much easier to include a self-directed IRA in your retirement portfolio. The professionals at Next Generation Trust Services are ready to assist you with any questions you have about any of these topics. If you are interested in self-direction, you can call one of our representatives at 888.857.8058 or email us at Info@NextGenerationTrust.com.
Fair Market Values and Self-Directed IRAs
Every year, IRA account administrators are required to file Form 5498 on behalf of their clients. Form 5498 reports the fair market value (FMV) of the IRA as of December 31st of every year to you and the IRS.. You can find the form here.
With the growing popularity of self-directed retirement plans, the IRS has put these plans more squarely on its radar; a couple of years ago, it added a box to Form 5498 that is meant for self-directed accounts or “certain specified assets.” This appears to signal that the government is more interested in tracking non-publicly traded alternative assets (which are invested within these accounts) more closely. As detailed on the participant instructions sheet of the form, these assets include long- or short-term debt obligations, real estate, ownership in an LLC or similar entity, ownership in a partnership, trust or similar entity, and “other assets that do not have a readily available FMV.”
Declare the Fair Market Value of Your Self-Directed IRA
As noted, Form 5498 reports the FMV of your self-directed retirement account as of December 31st of every year. Custodians or administrators then have until June 1st of the following year to file the appropriate IRS reports (using Form 5498) on behalf of all their clients’ retirement plans. Participants/clients are also required to get statements that reflect the FMV of the assets in their retirement plans (custodians/administrators must provide the report to their clients).
Hire a Third-Party Professional to Value Your IRA
In order to correctly report fair market value of the assets within the self-directed account, it is imperative that investors have each separate nontraditional asset valued by a third-party ; this may be an accountant or CPA, an appraiser (depending on the asset) or a valuator. The value may also be reported by an officer of a corporation or other entity.This valuation must be calculated as of December 31st and reported as soon as possible so that account administrators can meet the IRS deadlines for reporting.
We are aware that many valuations are done in the new year so our office requests submission by March 31st. Given that Form 5498 has a section for “certain specified” assets, the IRS is more diligent about requiring these valuations.
Have Questions about Valuation Requirements? Ask Next Generation Trust
If you have any questions regarding Form 5498 and the valuation requirements concerning the nontraditional investments in your self-directed IRA, our professionals are always available with the answers. Contact our team at Assets@NextGenerationTrust.com or 888.857.8058. You can read more about Form 5498 and the latest filing rules on the IRS website.
Next Generation Announcements!
We have three wonderful announcements to make this month! Next Generation has hit a new milestone this month as our holdings have increased to over $600 million. In January of 2016, Next Generation had roughly $533 million in holdings, which is a 12 percent increase. Self-directed retirement accounts have been increasing in popularity and we are very proud to have our clients trust in our abilities to manage their accounts.
DeAnna Cook, previously our Client Service Manager, has been promoted to Vice President of Operations! As our VP of Operations, DeAnna will oversee the day-to-day processes to support the growth of Next Generation. She will focus on setting strategic goals for our staff and direct the operations of the company to support these goals. DeAnna has been improving our operational efficiency, and will continue to do so in her new role. As VP of Operations, she is still aligned with our mission of providing superior customer service, and to keep that possible many of her calls and emails are relayed to our capable staff members to ensure a prompt and accurate response.
Finally, we are pleased to announce that Gail Poyner, formerly an Administrative Assistant, has been given the title of Marketing Coordinator. Gail will be managing our website, marketing campaigns, and social media accounts. Keep on the lookout for her announcements and blog posts!
Watch this space! The Government Accountability Office (GAO) recently released a publication and a new whitepaper will be released shortly!
Spain – Time for Foreign Real Estate Investments in Your Self-Directed IRA
A recent story by Laurie Frayer for NPR highlighted a serious problem for Spain, but one that represents and interesting investment opportunity for Americans. Due to Spain’s poor economy, the exodus of younger citizens, and natural attrition, whole villages are being abandoned. Some are farming villages located in areas where it’s too difficult to farm today due to climate or natural conditions. Some were inhabited by elderly residents who are now gone. Others are victim to migration to the cities for jobs, education, and health care.
These villages are now up for sale, complete with buildings, plenty of land and sometimes even livestock. One village in northwest Spain is listed for $230,000. These abandoned properties are waiting for buyers. For Americans with self-directed retirement plans, which may include foreign and domestic real estate of all kinds, the Spanish villages and properties could be a great way to build up a diverse retirement portfolio. So if you’re an investor who’s been thinking about including foreign real estate in your retirement portfolio, you may want to consider Spain.
Some villages have quaint features such as water wells, bakeries with stone hearths, and barns; many still have clusters of houses standing. The surrounding landscape is beautiful and the low listing prices (as low as $5600 for a house) are alluring. And, as we detailed in an article about retiring to Spain, there’s a lot to like about the country.
Savvy investors who’ve been eying foreign real estate for their self-directed retirement plans may have lots of options for including Spanish real estate in their portfolios. These villages and old homes can be restored for use as rental property, or re-purposed in other ways. As with all self-directed real estate investments, all income and expenses related to the asset must flow through the retirement account, and there are rules regarding prohibited transactions with disqualified individuals, which you can read about here. Note that if this is something you choose to do, neither you nor any disqualified person may visit the property.
Are you thinking about including real estate investments in your self-directed IRA? Contact Next Generation Trust Services with questions about the what, where and how of this popular asset: Info@NextGenerationTrust.com or 888.857.8058. Our helpful professionals will provide you with the answers you need and help you open your self-directed retirement plan—whether you’re investing in a Spanish village or farmland in southern New Jersey, or any of the alternative assets allowed through self-direction.
Live Long & Prosper with a Self-Directed Retirement
This is a great mantra if you are healthy and have planned ahead for your retirement. However, a new Healthview Services report acknowledges that with women living longer than men and the possibility of high health care costs looming in their future, it is more important than ever for women to get serious about ensuring that their retirement plan is in good shape.
Modern-day women are in a unique position. They have longer average life expectancies and typically have lower average lifetime earnings than men. And, while health care costs for men and women are similar during their lifetimes, it’s a fact that women tend to live two years longer than men. This means they will have more years to pay Medicare premiums and other out-of-pocket medical costs.
Other factors to take into consideration:
- Since husbands are often a few years older than their wives, many women may deplete much of their household assets to pay for the care of their spouse. After their spouse’s death, these women may spend their final years alone and with fewer assets.
- Rising divorces rates among older women may reduce available assets in retirement.
More Costs Ahead
Health care inflation and rising medical needs that are all part of aging translate into a stressful reality: Women face more years of health care expenses than men and with greater costs for each additional year of life.
- The report states that healthy women retiring this year at 65 (living to 89) can expect to spend more than $235,000 on health insurance premiums over the rest of their lifetimes, compared to men who are projected to spend $200,000. That figure includes Medicare Part B, which covers doctors’ visits, outpatient services, and Part D premiums for prescription drug coverage. It also considers Medicare supplement insurance and the assumption that health care costs will increase by about 6 percent annually.
- Add other out-of-pocket costs such as hearing, vision, and dental expenses, which are not covered by Medicare, and the total lifetime health care costs for women rises to $314,673, 17% higher than the total health care costs of $267,395 for men.
- An additional challenge will be meeting long-term care needs. According to the S. Department of Health and Human Services, 70% of people turning 65 will require some form of long-term care during their lifetime.
The numbers above are based on an assumption that a modified adjusted gross income for retirement is below $85,000 for individuals and $170,000 for married couples. These income figures would trigger high-income premium surcharges for both Medicare Parts B and D.
Plan to Prosper
The answer lies in understanding there is no gender equality in retirement. Therefore, the best way for women to live long and prosper is to plan ahead.
Knowledgeable investors should think strongly about self-directing their retirement plan and building a more diverse portfolio. Those who are already investing in alternative assets such as real estate, commodities, precious metals, or loans and mortgages may include these in a self-directed retirement plan and enjoy all the same tax advantages of regular IRAs. With Social Security at risk of disappearing and the stock market’s unpredictable returns, many people who are comfortable making their own investment decisions—and understand the ins and outs of nontraditional investments—can plan to prosper in their retirement years through self-direction.
At Next Generation Trust Services, our professionals are available to answer questions about self-directed retirement plans, and our transaction specialists are educated to ensure you are investing within IRS guidelines. Since we do not give investment advice, we strongly recommend you consult your trusted financial advisor about your investments and any tax implications for your unique situation. Contact us at 888.857.8058 or Info@NextGenerationTrust.com for more information, and read through our Starter Kits to open a new self-directed retirement account.
Not Feeling Confident About Retirement? Self-Direction Can Help Boost Your Preparedness.
There are multiple factors at play when it comes to Americans’ confidence about their financial readiness for retirement.
Millennials are dealing with college loans and in many cases are trying to establish their careers, home ownership and families. Baby boomers are discovering they have inadequate savings to pay for medical bills and cover living expenses. Here are some factors and concerns about retirement readiness that were revealed in recent research studies.
- We are living much longer than prior generations. We all know a centenarian (or two), right? Life expectancies are rising and with them, living expenses for a longer retirement time line. This includes medical costs, which as we all know, have been rising dramatically. The average retiree will need, today, about $130,000 just to cover medical expenses; double that for couples and compare that with what you have in your retirement account.
Fidelity Investments forecasts that women (who live longer) will spend about $135,000 on health care in retirement, while men will spend about $125,000. This represents an 18 percent increase from 2014’s estimate for expenses including Medicare premiums, co-payments, prescriptions, and out-of-pocket costs.- A study by the LIMRA Secure Retirement Institute found that more than half of non-retired Americans believe a significant out-of-pocket health care expense ($15,000 or more) would seriously compromise their financial security in retirement. Given the uncertainties around Medicare and Medicaid, health care requires as much advance financial planning as any other aspect of life.
- Many women feel compelled to file for Social Security on the early side due to life circumstances, but then collect a lower amount for their lifetimes. Had they been able to wait until full retirement age or later (age 70), they would collect more.
Fidelity Investments forecasts that women (who live longer) will spend about $135,000 on health care in retirement, while men will spend about $125,000. This represents an 18 percent increase from 2014’s estimate for expenses including Medicare premiums, co-payments, prescriptions, and out-of-pocket costs.- Social Security is not keeping pace with actual cost of living.
We’ve said this many times—do not think you can rely on Social Security to cover your living expenses during retirement. It was never meant to be anyone’s sole source of income in later years although it is, for many people. The raise in the cost of living adjustment (COLA) for 2017 will be a measly 0.3 percent which amounts to a few dollars a month on average. All the more reason why building up a self-directed retirement portfolio will be a better safety net for investors who are comfortable making their own investment decisions.
- Women are financially fragile. Although more women are working, it turns out that, according to research from the George Washington University Global Financial Literacy Excellence Center, women in their 50s are more financially fragile than they were just a decade ago. They are therefore delaying retirement due to accumulated debt or in many cases, divorce or widowhood and the lack of financial stability due to these circumstances.
- We are not living in Ozzie & Harriet times; working women need to save for retirement, whether through a Traditional or Roth IRA or employer-sponsored contribution plan, and create a more financially secure and independent future. Women business owners have SEP IRAs as another possibility. All IRAs can be self-directed, so the account holders can include many different types of alternative assets in these plans, which have the potential to build a more lucrative nest egg.
- A recent survey of American workers by the Transamerica Center for Retirement Studies substantiates this problem. It reveals that 46 percent of women are either “not too confident” or “not at all confident” in their ability to retire with a comfortable lifestyle, compared with 36 percent of men; only 12 percent of women are “very confident” in their ability to fully retire with a comfortable lifestyle.
- Caregivers lack retirement savings and are in crisis. Full-time caregiving has a severe impact on people’s ability to plan for their own financial futures as well as those of their loves ones. A majority of families (82 percent) with special needs children/young adults report they are concerned they don’t have enough money to last their disabled relative’s entire lifetime. These are families for whom caring for a child with special needs is a full-time job. And, since they have spent enormous amounts of time and money caring for their loved ones with special needs, nearly a third—30 percent—are not saving for their own retirement. These results are from the Special Needs Caregiver Survey from the American College of Financial Services.
- It was also revealed that 67 percent of Americans with special needs have no Special Needs Trust established for them, which puts them at imminent risk of losing Medicaid coverage and Social Security benefits.
- Half of Americans fear they will outlive their money. A recent survey conducted by Research Now Group Inc. and commissioned by Fifth Third Private Bank found that nearly half of those surveyed have serious concerns about outliving their funds in retirement. Only 25 percent of those surveyed said they feel more optimistic about their financial future than they did last year. Backing up this concern is the latest GOBankingRates survey: in 2015, out of more than 5,000 adults surveyed, 62 percent have less than $1,000 in savings, and 28 percent reported having no savings at all.
Bolstering your retirement accounts through self-directed investing is one way to take control of your financial future. With self-directed retirement plans, you can invest in nontraditional assets you already know and understand such as real estate, precious metals, or commodities. You can even build tax-advantaged retirement savings by making loans. Next Generation Trust Services, an administrator of these plans, is here to answer any questions you have about self-direction as a retirement strategy, and our handy online tools and educational videos and webinars will help you get started. Contact us at Info@NextGenerationTrust.com or (888) 857-8058 for information and build your retirement confidence—and savings—through a self-directed retirement plan.
Planning to work during retirement? Better plan ahead first.
There are good reasons to work during one’s retirement years—staying active and engaged is always healthy and for some people, it’s a great time to explore new interests, and people can use their past professional experience to create new consultancies and other jobs for themselves in later years.
According to a Bankrate.com report, 70 percent of non-retired Americans say they plan to work as long as possible during retirement. Of this group, about a third (35 percent) said they plan to work because they need the money. Nearly half the people in this survey said they are worried about outliving their retirement savings. We’ve written before that Americans are not saving enough for their retirement (with many saving what amounts to nothing) so this is significant. More people in this group (38 percent) plan to continue working because they like to work.
The study also showed that very few Americans plan to retire early: just 13 percent of non-retired Americans hope to retire in their 50s, which is a big drop from 10 years ago, when 27 percent of non-retired people said they hoped to retire early.
Tax disincentives for those who continue to work
Of course, continuing to work means continuing to pay higher income taxes. Everyone’s financial picture is unique, so a consultation with your financial adviser is always a good idea as you head into those retirement years. Whether or not you have a pension plan (these are fast disappearing across Corporate America), what you have saved in your retirement plan, other assets, etc.—plus your health and ability to continue at a steady work pace—could also be factors in your decision.
On top of these considerations, the Bankrate.com report listed some government-imposed work disincentives that may end up discouraging some people from extending their work lives: explicit marginal taxation such as FICA payroll taxes, implicit taxation associated with the loss of government benefits, and increased premiums associated with increased earnings.
Are you also planning around your adult children’s needs?
The empty nest is very different today than it was a few decades ago. Although many people in their 50s often are at the peak of their earning potential, and therefore should be well positioned to bulk up their retirement savings after the kids fly the coop, the reality is quite different. Research from Boston College’s Center for Retirement Research showed that household savings through 401(k) plans only increase for empty nesters by a tiny 0.3 to 0.7 percentage points. This could be due to continued financial support (paying off student loans, helping with insurance payments, assisting with the down payment on that first home) which get in the way of increasing one’s retirement savings at a critical time in the person’s work life.
In a perfect world, people would continue working because they derive personal satisfaction out of the work itself and out of remaining productive. Unfortunately, many are working in retirement because they have to, for various reasons. One great way to plan for a more secure retirement is to open a self-directed retirement account. With self-direction, you make all your own investment decisions, based on investments you already know and understand.
The beauty of these retirement plans is that you can include a broad range of alternative assets that are not allowed in typical plans: real estate, mortgages, notes, secured loans, private placements, commodities, precious metals, and more. These options enable you to build a more diverse, and potentially more lucrative, retirement nest egg with all the same tax advantages of regular plans. You can self-direct a Roth or Traditional IRA, SEP IRA, SIMPLE IRA and in some cases (depending on your employer), a 401(k) plan.
You can read more about self-direction as a retirement strategy in this free white paper or contact us at Info@NextGenerationTrust.com or 888.857.8058 for more information.
Next Generation Trust Services is a third-party administrator of self-directed retirement plans, and our helpful professionals can answer your questions and get you started on the road to a self-directed retirement with you in control of your future, today.
Beware a Lack of Consumer Protections: Self-Direct Your Retirement Instead!
An article on November 19, 2016 in the New York Times spells out a troubling issue regarding brokerages and banks—more specifically, the issue of stock brokers doing business in spite of black marks on their disciplinary records. According to the article,
there is a sizable percentage of these people handling clients’ retirement accounts and other investment vehicles.
This revelation comes at a time when there is concern among investors and brokerages regarding the possible dismantling by President-elect Trump of investor protections that are scheduled to take place soon. It concerns a Department of Labor rule regarding expansion of a fiduciary duty: that those that give financial advice work in their clients’ best interests. The article states that one of the President-elect’s advisers promised before the election that Trump would repeal this “fiduciary” rule if he were elected.
To make matters worse, the article reveals that many brokers with black marks and troubled work histories are still in business—putting concerns about “clients’ best interests” at the forefront. A study titled, “The Market for Financial Adviser Misconduct,” created by three professors early in 2016, examined the disciplinary records of every stockbroker in the country from the Financial Industry Regulatory Authority, the industry’s self-regulator. About seven percent of the brokers had at least one black mark, yet 44 percent of those who lost their jobs because of misconduct found work elsewhere in the industry within a year.
Among one legacy brokerage, nearly 20 percent of its representatives had at least one black mark. And the New York Times article author’s reported that in one particular county in upstate New York, nearly a third-32 percent—of brokers had a black mark and still had managed to set up shop there. Misdemeanors, impersonations, misappropriation of funds and more were cited.
So buyer (or retirement investor), beware! You can look these up on FINRA’s BrokerCheck website, where you’ll find various investor or regulatory complaints or investigations, criminal proceedings or personal money problems (a broker’s bankruptcies or tax liens, for example).
Take control of your retirement investing through self-direction
Rather than rely on brokers who may or may not be acting in your best interest (fiduciary rules notwithstanding), have you considered self-directing your retirement plan? Self-direction can be a great way to take control of your retirement investments if you are a savvy investor who is comfortable making your own investment decisions.
Whether or not the fiduciary rule is enacted or rolled back, there is nothing like being in control of your investments and making decisions in your best interest—especially if you are already investing in one (or more) of the many alternative assets allowed in self-directed IRAs and other plans. For example, if you are already have investment property, why not include real estate in your self-directed retirement plan? How about precious metals, commodities or loans and mortgages? These are all among the many nontraditional investments that account holders are including in their self-directed retirement accounts, building more diverse portfolios based on investments they already know and understand. And, since you are making all your own investment decisions, you know you’ll always have your best interests as a top priority.
Plus, when you open your account with Next Generation Trust Services, you’ll also rest assured that your plan administrator also has your best interests as a top priority. From our diligent transaction review process to our reporting and account administration, we’re with you every step of the way to ensure you are investing in compliance with IRS guidelines. We’re here to answer your questions, and our free educational webinars, videos and white papers provide additional guidance as needed.
Ready to get started? Check out our Starter Kits or contact Next Generation Trust Services at Info@NextGenerationTrust.com or 888.857.8058 for more information about self-direction as a retirement wealth-building strategy that puts you in control of your future, today.
Can You Still Really Bank on Your 401(k) Plan?
According to a recent report from investment advisory firm Research Affiliates, not so much.
The report states that even making a 5 percent return on traditional investments in a 401(k) plan is not likely to happen over a 10-year horizon.
Research Affiliates looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors and came out with an average annualized long-term expected return of 6.2 percent. Taking 1.6 percent off for inflation, the number dropped to 4.6 percent (rounded up to 5 percent). The research considered plans containing mainstream stock and bond portfolios (60% stocks and 40% bonds) in target-date funds with 10 years to retirement. And you know what that means: either work longer to save more or get more aggressive with your retirement portfolio through self-direction.
Go ahead, be a retirement savings maverick and take control of your future with self-directed investments.
If you’re savvy about certain investments such as precious metals, commodities, real estate, and private placements, and you’d like to include these in your retirement plan, you can do so with a self-directed retirement plan at Next Generation Trust Services. After all, if you are already making these types of nontraditional investments outside of your existing IRA, why not make them part of a self-directed IRA that you control?
With self-direction, the account holder makes all his/her own investment decisions and can include a vast array of alternative assets not allowed in typical retirement plans. And, depending on your employer’s guidelines, you might be able to self-direct the 401(k) plan offered at work. Either way, you can read up on what self-direction is all about on our website, download our free white paper, or contact our helpful team with any questions you have about building up your self-directed retirement savings. Then, head on over to our Starter Kits to open a potentially more lucrative retirement portfolio with a self-directed IRA at Next Generation Trust Services.
