Is Your Self-Directed IRA Looking For a Partner?
Keep Track of Income and Expenses
First of all, all income and expenses related to the purchased assets flow through the IRA, since the account is a separate entity from you (you are not personally the investor, the account is).
Prohibited Transactions
Then there are the prohibited transactions and disqualified people who may not engage, directly or indirectly with the self-directed retirement plan (those include the account holder and the account holder’s spouse, antecedents or descendants and their spouses, and the account holder’s entities).
The Exception to the Rule
There is an exception to this: a self-directed IRA may partner with a disqualified person or entity according to percentage of ownership AND simultaneous funding of the asset. These are important distinctions.
If a partnership were to form, it would have to be a new transaction and all income and expenses must go in and out of the IRAs at the same time. For example, let’s say an account holder partnered 50/50 with her self-directed IRA to purchase real estate and a $100 water bill for that investment property was due monthly. In this case, both the account holder and the retirement account would pay the water company $50. It would be considered prohibited if the account holder and IRA alternated paying the bill in full every other month.
The percentages of ownership cannot be transferred or changed when partnered with a disqualified person, so care must be taken to fully research this option and make sure that it is property set up.
Have Questions?
The professionals at Next Generation Trust Services can explain this strategy to you and help you set up your self-directed retirement plan. Contact us to discuss this further at Info@NextGenerationTrust.com or (888) 857-8058. You can also read up on the basics of self-direction as a retirement wealth-building strategy in our helpful white paper.
Super-sized IRAs Among the Super Rich (and among Savvy Investors as Well!)
In connection with a Senate Finance Committee Hearing into tax issues regarding retirement, it was revealed that at the end of 2011, there were several hundred (314) taxpayers with more than $25 million each in tax-deferred IRAs.* Using figures from the Internal Revenue Service, the Government Accounting Office (GAO) estimated that a total of $81 billion was held in these individuals’ IRAs. That comes out to an average of—are you ready?–$258 million each.
These super-sized individual retirement accounts were not built merely on investing in mutual funds. Many–as Mitt Romney revealed about his own hefty retirement finances during his last presidential bid—were the result of investing in startup company stock. (Romney’s retirement accounts were estimated to be worth over $100 million at the time.)
SUPERSIZED Retirement Savings with a Self-Directed IRA
Although most Americans don’t build up that much retirement wealth, it is not impossible to have at least $1 million in an IRA. According to the GAO numbers for 2011 released in a report this month, 622,000 taxpayers had between $1 million and $5 million in IRA accounts that year; 9,000 taxpayers had more than $5 million in their IRAs. The Senate report stated that many of those high-net-worth individuals held their super-sized investments in Roth IRAs. Since the funds were invested in alternative assets (early-stage companies) this implies the accounts were self-directed Roth IRAs.
Self-Directed IRAs = Flexibility
Although contribution limits to Roth IRAs are relatively modest compared to these retirement fund assets (a maximum of $5,500 in 2014, $6,500 for those 50 and older), the flexibility offered through self-direction allows investors to build up sizable IRAs by investing in startup companies or take advantage of equity funding opportunities if they are accredited investors. The self-directed IRA invests in the early stage company and owns the shares in that firm. Here’s some inspiration for growing a self-directed retirement account through equity funding: Forbes reported that Yelp founder Max R. Levchin held millions of shares of that site in his Roth IRA while billionaire investor Peter Thiel put shares of PayPal and early shares of Facebook in his Roth account.
You Don’t Have to be Super-Rich to Supersize Your Retirement Account
Account holders of self-directed retirement plans enjoy all the tax advantages of an IRA; in the case of a Roth IRA, all contributions made to the account are on an after-tax basis but all withdrawals made in retirement are tax free. You can open a self-directed Roth IRA from new funds or with rollover funds from a 401(k) plan.
Next Generation Trust Services Can Answer Your Questions About Alternative Assets Allowed Through Self-Direction
You don’t have to be super-rich to supersize your retirement account but if you plan to self-direct your retirement investments, you do need to research and understand your target investments. The transaction specialists at Next Generation Trust Services can answer questions you may have about alternative assets allowed through self-direction; contact them at Info@NextGenerationTrust.com or call (888) 857-8058 for guidance.
Are Your 401(k) Fees Eating into Your Retirement Savings?
Many employees enroll in their employers’ 401(k) savings plans because these plans provide the discipline of regular contributions and certain pre-tax advantages. However, these retirement plans can end up being pricey, with hidden fees that participants might not readily notice.
Does Your 401(k) Have Hidden Fees?
There are underlying expense ratio fees paid to the fund managers from the investment vehicles (which are usually mutual funds), and the account managers do possess specific expertise which costs money. However, these fees are not charged directly to your 401(k) which is why account holders don’t notice them right away. Rather, they are deducted from the fund’s overall return. If your 401(k) allows you the ability to purchase individual stocks and bonds (as opposed to mutual funds) you can moderate that expense ratio somewhat; however, it is very rare to have individual stocks and bonds available through a 401(k). This points to another major issue: with a 401(k) fund for many people is that the investment choices are decided by the administrators.
High fees can also spring from a poorly managed fund—one that does not meet its investment goals. Fees are also affected by the number of participants in the plan. Over the course of many years, the expense ratio can consume a hefty percentage of a portfolio’s return. (NOTE: In response to these issues, as of 2013, all 401(k) statements must be distributed quarterly and show all fees that each participant pays.)
A Self-Directed 401(k) Puts You In Control
Wouldn’t you rather control your own investments with a self-directed retirement plan—or a self-directed 401(k)? Depending on your employer (or if you are the employer, setting up a plan for your staff), you can have a self-directed 401(k), self-directed SIMPLE IRA or self-directed SEP IRA that allows account owners to make their own investment decisions from a broader array of asset classes. You, as the account holder, can set your investment goals, choose from the types of investments—both traditional (stocks, bonds, mutual funds, CDs) and nontraditional (real estate, precious metals, commodities, private placements, loans and so much more).
The self-directed plan is administered by a third party like Next Generation Trust Services, who makes sure all your investment instructions are properly executed, that you are investing within stated IRS guidelines, and that all the appropriate and mandatory paperwork, reporting and filing is done on time and correctly.
Next Generation Trust Can Help You Get Started With A Self-Directed Retirement Plan
Through self-direction, you control your investment choices and your financial future. If you need more information or want to get started with this type of retirement strategy, you can read more online or contact Next Generation at (888) 857-8058 or Info@NextGenerationTrust.com
How Much Will Your State Tax Your Retirement Income?
Did you know that some states levy higher taxes on retirees than others? Although everyone’s federal income taxes are consistent, the amount of retirement income (and Social Security income) you retain may depend on the state you live in. So word to the wise—if you are thinking at all of retiring in a different state than where you currently live, you should be aware of how this could affect how much of your income you’ll be able to retain.
You can check on which states allow tax-free retirement income and which levy taxes (and how much) at this handy website: https://www.retirementliving.com/taxes-by-state. Be sure to check your own state’s taxation guidelines regarding retirement income—perhaps it’s best to move out of state when you retire! The site also gives you breakdowns of state income tax levels and the various permutations of how (or where/if) your Social Security and retirement income may be taxed.
What States Are the Best To Retire In For Tax Reasons?
This issue is not necessarily according to region; in fact it varies all over the map. For example, in Pennsylvania and Mississippi, all retirement income is tax-free, including pension income. Most states let retirees shelter a portion of retirement income from state tax, with Georgia being the most generous—$65,000 per individual ($130,000 per couple). You might want to avoid California, Minnesota, Nebraska, North Dakota, Rhode Island and Vermont; these states offer no exclusions at all on retirement income taxation.
Some states don’t levy state income tax and others impose state taxes on dividend and interest income, with some tax breaks for people 65 and older. Just under 20 percent of all states impose state tax on Social Security income (another situation to look up on the map) and of those, a few only do so after a certain benefits level. The taxation levels and circumstances vary widely across states.
It’s Not Just the Income Tax!
It’s not only state income tax on retirement benefits that retirees should be aware of; sales tax, property tax, state income tax rates, and state estate taxes can take a big chunk out of your retirement savings as well. So you can see, there’s a lot to consider when evaluating where you should retire across the United States.
How to Build Up Your Nest Egg with a Self-Directed IRA
One way to build up a hearty nest egg and shelter your retirement savings is by investing through a self-directed retirement plan. Depending on your specific financial picture, you may want to invest through a self-directed Traditional IRA or a self-directed Roth IRA; each offers tax advantages and as self-directed accounts, they allow you to invest in a broader range of alternative assets not allowed in typical retirement accounts.
Next Generation Trust Can Help Get Your Self-Directed Retirement Plan Going
No matter what state you live in, the professionals at Next Generation Trust Services can help you get your self-directed retirement account opened and our transaction specialists can explain the various options and benefits of self-direction as a retirement strategy. Contact us at Info@NextGenerationTrust.com or call (888) 857-8058 to get started or for more information.
Using an IRA Rollover as a Business Start Up
Entrepreneurs who are seeking to start up a business using funds from an IRA rollover might be familiar with the term ROBS which means Rollovers as Business Startups. At first blush this might sound like a good idea (in spite of a questionable acronym) but there are issues surrounding this particular strategy that are sure to catch the attention of the IRS.
ROBS is a complex strategy some entrepreneurs are implementing, using retirement savings early (before the age of mandatory distributions) to buy or launch a business, and avoid paying taxes and penalties for early withdrawal. It has been around for decades; the IRS launched a compliance unit to study ROBS in 2010, and has issued guidelines about it which you can find at https://www.irs.gov/pub/irs-tege/robs_guidelines.pdf
The IRS ROBS Guidelines
Here are the steps that are generally followed in setting up this type of transaction:
- An individual sets up a shell corporation that would sponsor a qualified retirement plan (such as a 401(k) plan). This corporation typically has no employees, operations or assets at this point.
- The plan document put in place states that all participants in the plan may invest the entire account balance in company stock.
- The individual who set up the plan becomes the only employee and participant. Usually at this point there is no ownership or equity interest in the company.
- The individual either rolls over or transfers current retirement plan funds, either from a previous employer plan or IRA, into the newly created plan. Any taxes that might ordinarily be owed by taking a distribution are avoided as the assets go directly into another tax-deferred vehicle.
- The only participant of the new plan then directs the purchase of his assets into company stock, which is then valued at the amount of the plan assets invested.
- These funds are then used by the individual to purchase a business/franchise or initiate a different type of business.
- Many times after the business is established, the plan is amended to prohibit further investments in the company stock, thereby making it impossible for any other employees to invest in company stock.
- In some cases a portion of the proceeds of the stock transaction are remitted back to the promoter.
IRS Warnings Against Using ROBS
The IRS has issued warnings that these arrangements may put account holders on the wrong side of the law—and that they might be held liable for back taxes and won decisions in 2013 against business owners who misused ROBS: In Peek v. Commissioner, the tax court said two Colorado entrepreneurs owed more than $560,000 after they used their company’s retirement plan to guarantee a loan. In Ellis v. Commissioner, the court ruled against a Missouri man who used a ROBS transaction to rent space for his business and pay himself a salary.
Some IRS and Department of Labor issues to be aware of are 1) violations of the non-discrimination requirements of the regulations of qualified plans and 2) possible prohibited transactions because of stock valuations that have no professional valuations and are set based on the amount of initial assets being invested.
ROBS and Self-Directed IRAs
Although Next Generation Trust Services is a neutral, third-party administrator of self-directed retirement plans and we do not give investment advice, we do have one piece of advice for clients who are considering this complicated and questionable arrangement: contact an independent attorney well-versed in ERISA (Employee Retirement Income Security Act) and in setting up employer-based retirement plans such as 401(k)s. An independent ERISA attorney will have your best interests in mind as you review the various aspects of using an IRA rollover to fund a business startup; in addition, there are many stipulations about setting up qualified plans that an ERISA attorney can counsel you on.
Some other things to consider:
In the world of self-directed IRAs, the Ellis v. Commissioner would be a double-jeopardy case of a prohibited transaction with a disqualified individual. You can read more about these in a previous post.
One question you may also want to pose with your tax professional is whether it makes sense for you to use retirement savings for this purpose, especially if you are approaching retirement age and have fewer years to bounce back from a potentially risky investment.
The other issue—one we guide our clients about every day—is to thoroughly research any alternative investment you plan to make within a self-directed retirement plan and to understand it fully before making that investment. Self-directed IRAs allow for an interesting and diverse array of nontraditional investments and account holders should have a full understanding of them before sending our transaction specialists their instructions to expedite. There are many other ways to use retirement funds to make permitted investments that do not venture into questionable territory, and there are many other ways to fund a new business, especially as crowdfunding becomes more popular.
Contact our Self-Directed IRA Retirement Specialists
To discuss other strategies for funding a business and acceptable investments in self-directed retirement plans, contact our specialists at (888) 857-8058 or Info@NextGenerationTrust.com
Saving Your Summer Cash for Retirement
How soon is too soon to start saving for retirement? You could tell your teenager who is finishing up a summer job that they should start saving now, and they may not listen. But, here’s something they might listen to: if they contribute the maximum amount to a Roth IRA now (at age 19), by the time they are ready for retirement (at age 67) they will have accumulated about $330,000 more than someone who begins contributing at age 25.
Q. What’s the difference?
A. Basic compounding.
Do the Math! An Early Start Pays Off Big Time!
It’s a no-brainer. Let your kids do the math. If they start now, or ask for help from you, their grandparents or anyone else who will listen, it will pay off in big money over time.
Giving your teenager a gentle nudge will put them on the right track (and in the right frame of mind) to continue to grow their retirement savings. Waiting until after college to initiate retirement savings is unwise—your teenager can reap huge benefits later by starting earlier.
If that doesn’t motivate your teenager, maybe these truths will:
- According to the U.S. Centers for Disease Control and Prevention, the U.S. life expectancy (at birth) is 77.9 years and rising. Any guesses on how much retirement will cost the youth of America when they are ready to retire?
- Right now, Americans are concerned about Social Security. Who knows what governmental programs will be in place when your teenager is ready to retire decades from now?
When it comes to retirement planning, most of us are on our own. These days many jobs do not come with pensions. And, most of us unfortunately won’t have our parents around to catch us when we’re ready to retire.
Retirement is the one thing you can’t finance but you can plan for it. And, as parents, we can teach our children well by planning ahead.
It’s Never Too Early to Start Planning and Saving
What can your teenager do now? By using their time wisely, teenagers can start funding a retirement plan with as much monies as possible.
For those budding investors (or their parents) who understand alternative investment options, a self-directed IRA can be a great way to build up their nest egg more aggressively. Self-direction allows individuals to invest in what they already know and understand—both traditional and nontraditional assets—and they make all their own investment decisions. Self-directed retirement plans may include real estate, mortgages and other loans (such as lending tuition money to a friend and getting it back with interest), private hedge funds, precious metals, and much more.
The self-directed IRA administrator, like Next Generation Trust Services, handles all the details of the transactions and holds the assets.
Next Generation Trust Services Can Answer All Your Self-Directed Retirement Plan Questions
At Next Generation, our professionals are available to answer questions you or your teenager may have about self-directed retirement plans and our transaction specialists ensure that investments are within IRS guidelines. Since we do not give investment advice, we strongly recommend you consult your trusted financial advisors about your investments and any tax implications they have for your unique situation.
Have a Self-directed Retirement Plan Question Now?
Contact Next Generation at (888) 857-8058 or Info@NextGenerationTrust.com, or read through our Starter Kits for more information.
Lending Money to a Business through Your Self-Directed IRA
Signals from the Federal Reserve indicate that interest rates will be slowly rising in the near future (early 2015). For business owners who have lines of credit or adjustable rate loans, this will have an immediate impact on their bottom lines because it will cost more to borrow money from the bank.
Rather than hold off on needed capital to improve company infrastructure or grow their business, business owners can borrow funds from other people’s self-directed retirement plans. Yes—the alternative assets within self-directed retirement plans may include private placements, secured loans (guaranteed by the asset), unsecured loans (without any collateral) and even mortgages.
Are You a Self-Directed IRA Owner that Needs an Infusion of Cash?
If you own a self-directed IRA, and you know a business owner who could use an infusion of cash, you can make a loan from your account. You and the borrower work out all the terms of the loan such as interest rate and payment schedule. Because the transaction involves a self-directed account, the IRA makes the loan and the payments go to the IRA (all funds flow in and out of the account, not between the individual parties). As with all self-directed transactions, the account holder is responsible for conducting all the necessary due diligence about the investment before sending instructions to the account administrator, who executes the transaction.
Making Loans from a Self-Directed IRA
You can make unsecured or secured loans from a self-directed IRA to help someone pay for personal needs such as college tuition, a down payment for a home, or to purchase a car; or your self-directed retirement plan can lend funds to finance a business transaction (such as new equipment or capital improvements). Self-directed IRAs have helped business owners open or expand restaurants, update their computing infrastructure, and get through a cash flow crunch. Other ways that self-directed IRAs have made unsecured loans are investments in Broadway shows, as startup capital, and even shares of a race horse; these accounts allow for many nontraditional and diverse types of investments.
Next Generation Trust Services Can Answer All Your Self-Directed IRA Questions
As an administrator of self-directed retirement plans, Next Generation Trust Services can answer your questions about these types of alternative investments, and our transaction specialists will alert you to any issues surrounding disqualified individuals or prohibited transactions (see an earlier post about this topic for more details). We recommend that our clients consult with their tax professional before sending us the instructions for making a loan through their self-directed plan.
Retirement Savings Issues Being Studied by the Bipartisan Policy Center
ARE YOU SAVING ENOUGH?
A Washington, DC think tank, the Bipartisan Policy Center (BPC) is taking a hard look at the problem of Americans not saving enough for their retirement. The non-profit organization formed a Commission on Retirement Security and Personal Savings this spring to examine “whether savings rates and available savings vehicles are meeting the retirement goals of Americans and the nation’s investment needs” according to its website, bipartisanpolicy.org. The commission will then devise recommendations on how to boost national savings, improve the defined contribution retirement system, improve the effectiveness of tax-advantaged savings vehicles (such as Traditional and Roth IRAs) and develop safeguards against the rising costs of long-term care.
One reason for the decrease in retirement savings is that defined benefit pensions, once the stronghold of prior generations’ retirement income, are also decreasing. Today’s retirees are leaning on other savings arrangements such as defined contribution plans (such as 401ks) and their Social Security benefits (which were never meant to be the whole of anyone’s retirement income). However, with the rise of self-employed individuals or those employed by companies that do not offer payroll-deduction savings plans, it is becoming increasingly difficult for many Americans to deal with forced savings. They are simply not putting enough away in their IRAs or other vehicles and those who are approaching retirement age have inadequate savings set aside to maintain their current standard of living.
The BPC’s commission is studying:
- The impact of federal policies on private savings – what policy changes are needed to encourage higher levels of saving among Americans?
- Social Security –Social Security Disability Income as well as Social Security benefits and how they interact with medical insurance and/or personal savings.
- Long-term care needs and expenses during retirement
- Home ownership – how student debt may impact the ability of Americans to purchase homes or to save money
Its final report will be presented in early 2015.
What’s your retirement savings policy?
Are you a disciplined saver? Are you someone who wants to make your own investment decisions? Do you understand the ins and outs of investing in traditional and alternative assets? If so, you could open a self-directed retirement plan, and build retirement wealth with many diverse types of investments.
If you are self-employed, you can open a self-directed SEP IRA or as a business owner you may also offer a self-directed SIMPLE IRA to your employees (and yourself as well). If your employer offers a defined contribution plan (401k) at work, ask if a self-directed 401k is possible. Your retirement account will be able to invest in many more instruments to build up your retirement savings such as real estate, commodities, precious metals, loans and so much more.
Want to know more about self-directed retirement plans? Read up here or go to Next Generation’s Starter Kits to find out what you need to open one for yourself. As always, our customer service policy is to answer any questions you might have about this retirement strategy and provide guidance about these plans, so contact us at Info@NextGenerationTrust.com or call (888) 857-8058. However, we strongly recommend you consult your tax professional or financial adviser to make sure that self-direction is the best retirement policy for your unique situation.
After the Financial Storm, Generation X Must Recommit to Retirement Investing
For Generation-Xers, who have had to weather the biggest economic downturn since the Great Depression, the housing market collapse, and a difficult job market, saving for retirement may not be high up on their “To Do” list but they are anxious about their future. In fact, according to the Pew Research Center 2012 survey, 44 percent of Gen-Xers are concerned about whether they’ll have enough money for their retirement.
The fact is, the financial obstacles dodged by Gen-Xers (people born between the mid-1960s and 1980s) have left many pessimistic about a happily-ever-after retirement. And, some of these Gen-Xers do have cause for concern. For instance, even though most in this age group earn more than their folks did at the same age, the Pew Economic Mobility survey found that only one-third of these households are actually wealthier than their parents. This downward mobility can be attributed in part to the hit that Gen-Xers took during the recent economic crisis, where many lost about half of their wealth.
If Gen-Xers don’t move retirement funding to the top of their “To Do” list, they will have less money to spend during retirement and more time to spend it. (Gen-Xers have a longer life expectancy than the current generation of retirees.) This is not a nice to do but makes retirement saving a need to do. And, there is still time to prepare for a happy and secure retirement.
Getting back on track
Although funds may be tight, financially savvy investors can get with the program by funding a retirement plan as often and with as many resources as possible. And, for those who understand alternative investment options, a self-directed IRA can be a good way to build retirement wealth more aggressively. A self-directed retirement plan allows individuals to invest in nontraditional assets not allowed within typical retirement plans; these alternative assets include real estate, mortgages, unsecured loans, private hedge funds, precious metals, limited partnerships, commercial paper and notes and more to bolster their retirement efforts.
With a self-directed retirement plan, informed investors have the ability to develop a diversified portfolio that they control. Individuals can respond to economic downturns or take advantage of opportunistic (and tax-advantaged) investments with greater flexibility. A self-directed IRA administrator like Next Generation Trust Services handles all the details of the transactions and manages all the paperwork and filing.
At Next Generation, our professionals are available to answer questions about self-directed retirement plans and our transaction specialists ensure you are investing within IRS guidelines. Since we do not give investment advice, we strongly recommend you consult your trusted financial advisors about your investments and any tax implications they have for your unique situation.
What are you waiting for? Check that item off your “To Do” list. Contact Next Generation at (888) 857-8058 or Info@NextGenerationTrust.com, or read through our Starter Kits for more information.
