Get Like a Boy Scout: Be Prepared for Retirement with a Self-Directed IRA
Boy Scouts learn at a young age to be prepared. However, Americans often don’t prepare for their retirement and fail to save adequately. In fact, according to a new study by the Employee Benefit Research Institute, more than one-third of workers (36%) have a measly $1,000 saved for their retirement years. Wow!!
With more than 6,000 Americans turning 65 each day, the retirement savings statistics are alarming. The Social Security Administration reports that 51% of the workforce has no private pension coverage; 34% of the workforce has no savings set aside specifically for retirement.
Where were these individuals when they were passing out retirement calculators? The days of looking forward to retirement are behind us and many Americans are spending their final working years wracked with worry about the future. A Towers Watson Global Benefit Attitudes Survey found that workers are especially concerned about the affordability of health care in retirement and availability of public programs.
The survey reports that only two in five employees believe they can afford any medical expenses that arise in the next 12 months. Mid-career and older employees and those in poor health were even more concerned regarding health care costs.
- More than half of all employees (53%) are concerned they will not be able to afford the health care they need in retirement.
- 83% believe Social Security will be less valuable in the future.
- 88% have comparable fears about Medicare.
These concerns and others are causing many Americans to reduce current spending and possibly consider delaying retirement, many until age 70 or later.
What can you do to be prepared?
To prepare for a happy and secure retirement, financially savvy investors should get with the program. They should use the time now to build up their nest egg by funding a retirement plan as often and as much as possible. For those who understand alternative investment options, a self-directed IRA can be a great way to build retirement wealth more aggressively. This investment vehicle allows individuals to invest in what they already know and understand … with nontraditional assets not allowed within typical retirement plans such as real estate, mortgages and other loans, private hedge funds, precious metals, limited partnerships, commercial paper and notes and more.
Self-directed IRAs can provide informed investors the ability to develop a more diversified portfolio that they control. A self-directed retirement plan allows the individual to respond to economic downturns or take advantage of opportunistic (and tax-advantaged) investments with greater flexibility. The self-directed IRA administrator like Next Generation Trust Services handles all the details of the transactions and holds the assets.
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.
Have a question now? Contact Next Generation at (888) 857-8058 or Info@NextGenerationTrust.com, or read through our Starter Kits for more information.
Don’t Neglect Your IRA
The Investment Company Institute (ICI) conducted a study recently that showed that an overwhelming majority (nearly 90 percent) of traditional IRAs were opened in 2012 to accept a rollover from a 401(k) or other qualified employer-sponsored plan.
Did you know that among traditional IRA investors ages 25-69, only 8.4 percent made a contribution to their retirement account in 2012? This was noted recently in an article on MainStreet.com, which also cited a study by the Investment Company Institute that showed nearly 90 percent of traditional IRAs opened in 2012 were created for purposes of accepting a rollover from a 401(k) or other qualified employer-sponsored retirement plan.
Individual retirement accounts are meant to be added to, not forgotten or neglected. With the deadline for filing your taxes coming up, you still have time to make a contribution to your self-directed IRA and claim an applicable tax deduction.
However, statistics show that traditional IRAs have, among the general investing population, a very low rate of regular contributions being made.
“IRAs are a key component of the retirement landscape with a total of $6.2 trillion held in all forms of IRAs as of September 2013,” says Sarah Holden, senior director of retirement and investor research at ICI. “And while in recent years most traditional IRAs are created through rollovers, traditional IRAs represent an important contributory savings vehicle, especially for workers without retirement plans through their employers.”
But with such a low contribution rate to IRAs, Americans may be missing an important component to their retirement savings strategy. And missing an important tax benefit.
Workers and their spouses, with or without an employer-sponsored retirement plan like a 401(k), can make deductible or non-deductible traditional IRA contributions. And for those that qualify for the deduction, there is still time to take that tax break for 2013. Contributions to IRAs can be made until the due date for tax returns: April 15.
IRS to follow tax court’s ruling on IRA rollovers
Last month we told you about the Tax Court’s ruling in Bobrow, T.C. Memo. 2014-21 about IRA rollovers. The Tax Court ruling limits tax-free IRA rollovers to one rollover per taxpayer per year, regardless of how many IRAs the individual has.
The IRS announced it will follow this decision; it will issue new regulations that follow the Tax Court’s interpretation of the law and apply the limitation on an aggregate basis. It will also revise Publication 590 to the extent needed to reflect that interpretation.
Be sure to consult your accountant or tax planning specialist about this matter and how it may affect your overall financial picture and your retirement accounts in particular.
If you have any questions about IRA distributions or rollovers, and the 60-day period that allows for tax-free rollovers into an IRA, ask one of our knowledgeable professionals at Next Generation Trust. Contact us at Info@NextGenerationTrust.com or call (888) 857-8058.
Is Your 401(k) Plan Working for Your Retirement Goals?
is what’s referred to as a defined contribution plan that many employers offer. By “defined contribution,” we mean that the amount of allowable contributions that employers and employees can make to the plan is defined (set percentage of income, for example).
In many cases, the plans provide for employer matching contributions (worker contributes 3 percent; employer matches it with another
3 percent of salary). However, most 401(k) investments come from the employees.
So, how’s that working for today’s workforce members that participate?
Unlike defined benefit plans, which are becoming less common, a 401(k) does not specify how much retirement income will be waiting for you. Therefore, it becomes ever-more important to make sure you are contributing enough to your retirement account to reach a comfortable level of retirement savings. It’s not your employer’s concern—but it should be yours!
The majority of employers offer a 401(k) in order to compete in the marketplace and attract and retain good employees. And many choose these defined contribution plans instead of defined benefit plans because they may believe a 401(k) is a more dependable source of retirement income. This is not necessarily so.
Remember also that with typical 401(k) plans the investments, allocation, and fund performance are not in your control but are controlled by the plan administrator.
One way to make this employee benefit work harder for you (since you are working so hard to save) is to find out if you can open a self-directed 401(k) plan or if your employer offers this option. Take control of your retirement plan if you are comfortable making your own investment decisions. Or consider rolling over your existing 401(k) into a self-directed IRA. Through self-direction, you can invest in many different assets that you already know and understand. Why let your employer call the shots when it’s your retirement and financial future on the line?
You can also roll over a “forgotten” 401(k) from a previous employer (don’t let it languish where it is). You can read more about 401(k) rollovers and how to open a new self-directed retirement account here. Have a question about how to make that happen? Need more insights into self-directing your retirement? Next Generation Trust Services can help. Contact us at (888) 857-8058 or Info@NextGenerationTrust.com and we’ll give you the answers you need to get you started on a harder-working retirement plan that you direct.
Women – It’s Time to Close the Retirement Gap!
In spite of women saving more than men for retirement in general (more of them are saving a larger share of their income), indicators point to a big gap in their ability to enjoy a financially comfortable retirement as opposed to their male counterparts.
A study by ADP Research Institute revealed that 74 percent of women saved, on average, 7 percent of their earnings; 66 percent of men saved at an average rate of 6.4 percent. So women are saving more than men but they are more likely to have insufficient retirement savings. This is because in general, women earn less over their lifetimes.
A few other factors mitigate women’s retirement savings:
- Women outlive men by six years on average, so they will have a longer retirement period and therefore need more income to support themselves.
- The earnings gap between women and men is big (although it differs from state to state). An article in Huffington Post in March 2014 cited data compiled from the Census Bureau, Department of Education, and Bureau of Labor Statistics that showed women are paid 23 percent less than men on average.
- Many women are in and out of the job market due to family issues – raising children, caring for elderly parents – and therefore change jobs more frequently or are unable to build up a consistently upward salary ladder.
- This makes it difficult to become vested in pension plans (which are slowly disappearing from corporate benefits packages).
- The Social Security fund’s future is insecure and it is not meant to be a person’s sole source of retirement income. In 2012 the average benefit for women was $1,023 a month.
Therefore, women will have a lot of catching up to do as they near retirement age. Speaking of catching up, the ADP study also found that fewer than half of younger employees in their 20s were saving for retirement while 65 percent of older employees (50-65 years old) were saving.
Financial journalist Jean Chatzky cited a 2012 study by Financial Finesse that stated only 43 percent of women had an emergency fund in place but 63 percent of men did. When it came to retirement plans, Chatzky said about half the men surveyed reported rebalancing their investment portfolios but only a quarter of women did so.
Rebalance your IRA through self-direction
For savvy investors who understand the investment markets and want to make all their own investment decisions, a self-directed retirement plan can provide the fuel needed to ramp up savings and close that retirement gap. A self-directed IRA makes the investments which can include a broad array of alternative assets such as real estate, commodities, precious metals, unsecured loans and so much more. Are you looking to catch up on your retirement savings? Do you want to find out more about how a self-directed retirement plan can help you save for a more comfortable future? Our friendly professionals are here to help. Contact Next Generation Trust Services for information or check out our website (https://www.nextgenerationtrust.com/ira-education/self-directed-iras/) to get started on controlling your future, today.
How to Rectify a Prohibited Transaction
. Whether the retirement account has invested in commercial paper, a private placement, real estate, a commodity or natural resource, or any of the many other allowable alternative assets, it is important to remember that:
- You personally are not the investor, the self-directed IRA is, and
- The account administrator must execute all transactions on your behalf, for the benefit of the self-directed retirement account.
- You cannot take funds out of any investment the IRA has made directly. All income and expenses related to the investments must go through the account that made the investment before being transferred or distributed elsewhere.
A common error investors make is to sell the investment that the IRA made and have the proceeds forwarded directly to them or to another IRA account; they then deposit that amount received personally into another IRA with another IRA custodian. Because the proceeds from the sale were not sent back directly to the self-directed IRA custodian first, this is a prohibited transaction.
In the case of a prohibited transaction you erroneously conducted, there are a few steps you can take to correct the transaction, and avoid undue tax penalties and protect the tax-advantaged status of your self-directed IRA.
Steps to take to rectify a prohibited transaction pertaining to an improper recipient of funds
- Send the funds back to the investment directly. You will need to contact the incorrect IRA custodian to have the funds returned to you before sending the funds back to the investment. Or, if the funds from the investment went directly to another custodian, that custodian should send them back to the investment.
- Once the funds are received by the investment, the investment would then further direct the funds back to the proper IRA at the original custodian (in our case, back to Next Generation TS). Using our office as an example, the investment can make a check payable to your appropriate account (Next Generation TS FBO Client Name IRA ####) or send the funds via wire transfer.
- Once received by the NGTS IRA, the funds can then be further transferred or distributed at your discretion. Should you choose to direct NGTS to issue the funds out of the IRA, the account can then be closed if you no longer wish to take advantage of self direction.
At Next Generation Trust Services, our goal is to help our clients protect the tax-advantaged status of their self-directed IRAs. We provide clients with a 14-day window, as the IRS instructs, to correct the transaction so that the funds are not distributed as a prohibited transaction; this would be a taxable event and may be subject to IRS penalties. The Next Generation staff can explain and assist you with expediting these steps, and provides guidance and information throughout the process as part of our customer service commitment.
Because of potential tax ramifications, we recommend you consult with an attorney or CPA that specializes in ERISA* law and IRA Rules set forth in the Internal Revenue Code’s Title 26 USC § 4975 or other applicable retirement plan specialists. We can provide contact information for known ERISA attorneys; however, we cannot endorse or guarantee their services.
As always, if you have a question about your self-directed retirement plan, the types of investments you can make, or if you need information about liquidating an asset, contact our self-direction experts at Info@NextGenerationTrust.com or (888) 857-8058.
*Employee Retirement Income Security Act
Self-Directed IRA Investors: Make Sure You Don’t Conduct Prohibited Transactions
allow for many diverse types of investments, there are several prohibited transactions as proscribed by the IRS that investors must adhere to . . . or risk paying penalties or having their accounts lose their tax-advantaged status.
A common error account holders make is to liquidate an investment that is in their self-directed IRA directly to them or to another IRA. This is not allowed because all income and expenses related to the investment must flow through the self-directed retirement account that made the initial investment. Therefore, any returns from the investment must go back to the IRA that invested in them.
Three common types of prohibited transactions are when:
- The account holder liquidates the IRA investment directly into another IRA – The proceeds must go back into the self-directed IRA first, and then can be rolled over or transferred into another IRA. Bottom line—the money has to go back into original account that made the investment. For example, say you had invested in a rental property through your self-directed IRA. If you sell that real estate, you are prohibited from directly taking the proceeds of the sale or liquidating them into another retirement account. The real estate IRA must receive the funds, which may then be distributed by the account custodian to the individual or transferred into another IRA, upon written instruction by the account holder.
- The investor takes the funds out from the investment directly and moves them to another account – Account holders are prohibited from doing this because the individual is not the investor, the self-directed IRA is. This causes the receiving custodian to treat and code the funds incorrectly. The other custodian will operate under the belief the money is income, a rollover or a contribution; however, this is not income from an asset it holds. Any transactions must be executed by the account custodian (upon instruction of the account owner), who will confirm that the transaction is allowed. There must be a trail that can be followed by the IRS in order to ensure the transaction and assets are treated properly.
It’s important to note here as well that any rollover from the liquidated assets into another IRA can be a taxable event, so investors are strongly advised to discuss their plans with their financial advisors or tax planners. The IRS will want to know where those funds came from. A distribution becomes a taxable event when the funds or asset is not rolled over to another tax-advantaged account within 60 days.
- The individual takes funds directly as a “distribution” – The account administrator cannot record this withdrawal as a distribution if the administrator did not first accept the funds. This is against the law and can have a negative cascading effect for the account holder.
If you ever have any doubt about a transaction, or you and your financial planner need clarification about how to handle liquidated assets, contact Next Generation Trust Services at Info@NextGenerationTrust.com or (888) 857-8058. Our experienced professionals can answer your questions about any aspect of self-directed retirement plans and the alternative assets allowed in them.
Timothy Wilms-Crowley Promoted to Compliance Manager at Next Generation TS
Timothy Wilms, Compliance Manager for your Self-Directed IRAsWilms-Crowley will supervise the company’s transaction team, oversee internal compliance and administrative reviews, and ensure that Next Generation is always ahead of the curve in terms of regulatory and legislative changes within the self- directed retirement plan industry. He was previously the firm’s transaction supervisor; in that role he oversaw the transaction processing team to ensure accurate and efficient processing of all self-directed investments, and proper documentation and recording of all transactions. His team will continue to manage those responsibilities.
“Tim is well-versed in IRS regulations related to self-directed retirement plans and has already demonstrated expertise in the various compliance requirements concerning these plans,” said CEO Raskulinecz. “As part of his new responsibilities, he will train for CISP (certified IRA services professional) certification, receive ongoing industry compliance training, and represent Next Generation Trust Services at regulatory conferences to stay abreast of the updates in self-directed retirement plan investing guidelines.”
Self-directed retirement plans allow for a broad array of nontraditional and traditional investments; the investor makes all his/her own investment decisions and the transactions are executed by a third-party administrator, such as Next Generation. Next Generation holds the assets, manages all the paperwork and reporting, and ensures that clients are investing within proper IRS guidelines.
“There are always regulatory and legislative changes that arise, such as IRA rollover rules and IRS reporting forms,” noted Wilms-Crowley. “As compliance manager, I will be responsible for making sure that our staff is fully apprised of these important updates that affect our industry and our internal operations. In addition, I will be responsible for making sure all employees receive the proper training, education and credentials to perform their delegated duties.”
All employees at Next Generation Trust Services are cross-trained to be able to answer client questions about self-directed retirement plans more efficiently and to direct them to the proper forms and reference materials to help them open their accounts. Wilms-Crowley said that educating them on compliance will help them serve clients even better.
For more information about self-direction as a retirement strategy, contact Next Generation Trust Services at Info(at)NextGenerationTrust(dot)com or (888) 857-8058, or visit https://NextGenerationTrust.com.
About Next Generation Trust Services
Next Generation Trust Services (NGTS), headquartered in Roseland, New Jersey, is a professional third-party administrator of self-directed retirement plans. NGTS provides education, administrative support, and account maintenance to individuals interested in self-directing their retirement portfolios with a wide variety of investments that are not typically found in an IRA, such as real estate, precious metals, notes and mortgages, private placements, accounts receivables, limited partnerships, hedge funds, and much more. Next Generation Trust Services serves clients globally via its website, https://www.NextGenerationTrust.com. For more information on self-directing a retirement plan, call 973-533-1880, 888-857-8058 (toll free), or e-mail Info(at)NextGenerationTrust(dot)com.
Did You Miss Our Webinar on Self-Directed IRAs and Non-Recourse Loans?
Did you miss the non-recourse lending webinar chaired by Jared Lopez of Next Generation Trust Services? View the video below to learn more about the basics of investing your self-directed into real estate IRA. Roger St. Pierre from First Western Federal Savings Bank discusses the steps to receive a in non-recourse loan to help fund your IRA investment . Next Generation Trust Services (NGTS), headquartered in Roseland, New Jersey, is a professional third-party administrator of self-directed retirement plans. NGTS provides education, administrative support, and account maintenance to individuals interested in self-directing their retirement portfolios with a wide variety of investments that are not typically found in an IRA, such as real estate, precious metals, notes and mortgages, private placements, accounts receivables, limited partnerships, hedge funds, and much more.
For more information on self-directing a retirement plan, call 973-533-1880, 888-857-8058 (toll free), or e-mail Info@NextGenerationTrust.com
