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What’s Your Preference: Financial Freedom or Retirement?

What’s Your Preference: Financial Freedom or Retirement?

A self-directed IRA can get you to both with investments in alternative assets

Retirement for American workers—how it looks, what we want and how we get there—is changing. Franklin Templeton’s recent Voice of the American Worker Survey* revealed that the majority of those surveyed said that path to retirement, and how retirement looks, is different for everyone.

In fact, 80% of survey respondents indicated “traditional retirement” is not an accurate expectation for most people, and 75% said their future financial goals have changed over the past five years.Of note: while more than three-quarters (76%) of survey participants said that the goal of achieving financial freedom appeals to them, only a little over half felt it was achievable. In regard to retirement, specifically—69% found retirement appealing, and 61% thought retirement was likely to be more achievable.

Financial freedom connotes being able to live the life you want with enough savings, investments and cash to do so; of course, this means different things to everyone. So does retirement, which could mean a full stoppage of work, or working part-time—perhaps trying out a new avocation—with time for hobbies and traveling; again, carrying different significance to each individual. This article in Forbes talks about these concepts in greater detail.

In the Franklin Templeton study, “financial independence” was reported to feel more empowering than “retirement” by 81% of participants, especially among women. Respondents also viewed retirement through the lens of their overall well-being.

Financial independence and a comfortable retirement? Self-directing might get you there.

Where do YOU stand on financial freedom vs. retirement? At Next Generation, our clients are working on their financial goals using self-directed IRAs (and other types of retirement accounts) as a retirement wealth-building strategy. With a self-directed IRA, investors can include a range of alternative assets, building a more diverse retirement portfolio and meeting their long-term financial goals through these tax-advantaged retirement plans.

Whether you plan to completely retire, cut back on your work, or continue working well into your 70s or longer, you can map out your road to strong financial health by investing in assets you already know and understand, such as real estate, precious metals, private equity, notes, cryptocurrency and more. When you open a self-directed IRA with Next Generation, you’ll also have access to all your statements and reports to track your goals and make well-informed investment decisions—backed by a third-party administrator that handles all mandatory filing and a custodian that holds the assets.

As you work out a long-term financial plan with your trusted advisor—and determine what financial freedom means to you and the lifestyle you desire during retirement—we invite you to learn more about how and why a self-directed IRA could be a powerful part of your plan. At Next Generation, we’re here to help. You may schedule a complimentary education session with someone from our team, email NewAccounts@NextGenerationTrust.com or call 888.857.8058 with your questions about self-direction and the many types of alternative assets these plans allow.

*The Harris Poll conducted the study on behalf of Franklin Templeton in October 2020 among 1,007 employed U.S. adults, all of whom had some form of retirement savings. 

Investing in Distressed Mortgage Notes with a Self-Directed IRA

We all remember the Great Recession, the housing market crash, and what that wrought for homeowners who could not afford to pay their mortgages. With COVID-19 bringing unemployment and financial hardship to many families, those with mortgages may be struggling to keep up with their payments. These distressed mortgages—also referred to as nonperforming mortgages—can be invested in through a self-directed IRA and create a win-win scenario for both investor and homeowner.

Distressed mortgage notes, like other private lending transactions, are among the alternative assets allowed in a self-directed retirement plan. These nonperforming mortgages are purchased at a discount—typically anywhere from 10 to 50 percent lower than the property’s value—with repayment terms negotiated by the retirement plan owner and the homeowner. This enables the homeowner—who is likely at risk of foreclosure and losing his/her home—to stay in the home and make payments to the self-directed IRA that now holds the note.

Meanwhile, the IRA generates passive income as the full value of the note is repaid, along with the interest agreed upon by both parties. Plus, the investor builds a more diverse retirement portfolio and a hedge against stock market volatility by including private alternate assets in the IRA.

Example of a distressed mortgage note investment:

Due diligence on distressed mortgages

Self-directed investors are accustomed to doing due diligence on their potential investments, and distressed mortgages should be no exception. Like any investment, these notes can carry risks, especially since the buyer (the self-directed IRA) becomes the creditor.

For example, what if the homeowner defaults? The self-directed investor would be wise to research foreclosure laws in that state to ensure they have a backup plan. In addition:

If the investor decides not to work with the homeowners, the self-directed IRA can resell the property or retain it as a rental investment. Again, as with any self-directed investment, it is the responsibility of the account holder to ensure due diligence, full transparency, and a clear understanding of all tax and legal ramifications.

Where to find nonperforming mortgages for investment

Although lenders will typically sell these notes to get them off their books, there are also online marketplaces and trading platforms that sell notes. However, expect to pay more for these notes than buying direct, as these are retail resellers.  You can also invest in a company that buys nonperforming mortgages from banks at steep discounts.

At Next Generation, many of our clients include real estate as well as secured and unsecured loans within their self-directed retirement portfolios. Adding distressed mortgage debt is another valuable way to build retirement savings through alternative assets—with the potential of helping homeowners stay in their homes. If you have questions about this or other alternative assets allowed through self-direction, feel free to schedule a complimentary education session with someone from our team. You can also email NewAccounts@NextGenerationTrust.com or call 888.857.8058.

How Real Estate Syndications Benefit Self-Directed IRA Investors

Although real estate syndications are not new, they are becoming a popular way for individuals to invest in real estate, including those with self-directed IRAs.

Real estate syndication—also called property syndication—is essentially a partnership between people who operate in two roles: the syndicator (or sponsor) and the investor(s). By partnering up, investors combine their resources, capital, and skills to purchase and manage a property or multiple properties that would not have been feasible to purchase on their own.

In short, the syndicate pools funds for greater buying power, enabling all parties, as a group, to access deal flow. You may hear syndication referred to as real estate crowdfunding because it is a way of making investments more accessible to a wider pool of interested parties. Syndicates may invest in office buildings, multifamily properties, warehouses, or a property fund.

Sponsors and investors

The sponsor is the individual responsible for finding, acquiring, and managing the real estate. Ideally, this person has experience in this area and can underwrite and conduct necessary due diligence on the property. He or she may choose not to put up any cash, and may also earn an acquisition fee or a property management fee if a third party is not contracted to handle that. Everyone else—including self-directed IRAs that participate—are the investors, who own a percentage of the real estate. It is passive ownership for them, providing all the benefits of owning real estate in their portfolios without having to do all the work.

Syndicate structures, syndicate profits

Syndicates are usually limited partnerships or limited liability companies; in these cases, the sponsor is the managing member or general partner. These are special purpose entities through which investors purchase the real estate. All members of the syndicate, including the sponsor, earn periodic returns on the initial investments.

A syndicate agreement is drawn up between the parties, with all arrangements agreed upon in advance (such as acquisition fees, returns on net income, ownership percentages, voting rights, the exit strategy, and how to divide profits after the property is sold). When it is sold, the syndicate is complete.

Using a self-directed IRA in real estate syndication

Rather than go all in on your own, you can have your self-directed IRA partner up with a syndicate. This lowers overall investments costs compared to buying real estate directly, since expenses are spread out over multiple investors. Plus, if your IRA is short on the necessary funds to directly invest in commercial property, participating in a syndicate is a great way to include this asset in your self-directed retirement portfolio.

As with all self-directed investments, you, as the investor, are expected to do your full due diligence—in this case, about the syndicate and the property or properties it plans to include in its portfolio. And, like any other asset, all income and expenses related to this investment flow through the self-directed retirement plan, which will earn returns on the investment until the syndicate is complete. Note that when using your self-directed IRA to invest in a syndication, you may NOT also act as a general partner; investments should be limited partnership only.

If you have questions about using syndications to include real estate investments in your retirement plan, or want to better understand how self-direction as a retirement strategy works, you may schedule a complimentary education session with Next Generation. You’ll gain insights into how these and other assets can be included to create a more diverse portfolio. Alternatively, you may contact the Next Generation team directly via phone at 888.857.8058 or via email at NewAccounts@NextGenerationTrust.com.

Investing in Oil and Gas Royalties Through a Self-Directed IRA

Last summer, we shared information on investing in energy assets through a self-directed IRA, including investments in mineral rights. Digging a bit further, some self-directed investors choose to include oil and gas royalties in their self-directed retirement plans. Let’s look at how that works.

What is a royalty interest in mineral rights?

In general, royalties are ongoing revenue streams based on production (in the case of energy assets) or licensing/usage (for intellectual property). In the case of oil and gas royalties in a self-directed IRA, the retirement plan owns a portion of the revenue that the oil or gas wells produce.

While most self-directed investors don’t have the equipment and financing needed to explore, extract, and produce oil or natural gas themselves, they can passively earn a royalty from the producing company that leases the land in exchange for access to it (and the ability to produce these energy assets).

How is the investment structured?

There are a couple of common scenarios. The first of which is when the oil/gas company leases land from a property owner (the IRA in this case), with mineral rights as part of the lease; this gives the producer access to the goods that lie beneath the surface (oil, natural gas, uranium, coal, etc.). The property owner is paid a percentage of the total production by the company—so if your self-directed IRA owns the land, the IRA will receive that income as landowner.

As an alternative to the above scenario, the IRA may choose to instead purchase mineral rights to the resources below the surface on a per-acre basis. The IRA then leases those mineral rights to the production company, which keeps its share of the revenue and distributes monthly royalty payments to the self-directed IRA.

These monthly royalty payments can range from a traditional 12.5% in the oil industry to upwards of 25%, depending on what is negotiated. The investor that owns the mineral rights—in this case, the self-directed IRA—may choose to sell those rights in the future for a profit. With profits flowing into the IRA, tax on those earnings would either be deferred or eliminated (in the case of a Roth IRA).

Benefits of mineral rights investments

  1. The production company is responsible for all exploration and extraction operations while the self-directed IRA passively collects an ongoing revenue stream.
  2. Unlike commercial and vacation property real estate investments, there are very little ongoing costs incurred by the investor, since the producer is dealing with expenses associated with working the land.
  3. Similar to real estate investments in self-directed IRAs, diversification is available within one asset class. Your self-directed IRA can invest in multiple oil and gas fields simultaneously—and collect royalties from these – or buy and sell as desired (with all income and expenses flowing through the retirement plan).

As with all self-directed investments, account holders are encouraged to conduct full due diligence about mineral rights investments and different energy assets, to fully understand how mineral rights work and the mechanics of land leases to energy producers.

At Next Generation, we’re here to answer questions you have about many types of non-publicly traded, alternative assets, including oil/gas. You may schedule a complimentary educational session with one of our knowledgeable representatives to discuss the nontraditional investments allowed through self-direction. Additionally, you may enjoy free access to our on-demand webinars and blog articles that cover many topics related to self-direction as a retirement strategy.

Alternatively, you may contact us directly via phone at 888.857.8058 or via email at NewAccounts@NextGenerationTrust.com.

Are You Approaching Retirement? Consider Speeding Up Your Savings Through Self-Direction

The U.S. Census Bureau has reported that more than 3.1 million Americans age 55 or older have retirement income on their minds. The bureau’s Household Pulse survey, conducted between March 3 and March 15, 2021, reveals that these respondents expect to apply for Social Security benefits earlier than they had originally planned because of the COVID-19 pandemic. The subsequent survey, conducted between March 17 and March 29, showed that more than 2.7 million people planned to apply for Social Security earlier than they’d planned due to COVID.

While those early retirements will mean good news regarding job openings for younger workers, it will mean permanent cuts in monthly benefits for those who claim Social Security earlier than full retirement age (as well as their spouse or beneficiaries).

Consider this alternative to Social Security

Rather than rely on Social Security—which was conceived as a safety net, not to replace full working income—rely on your investment expertise. If you are knowledgeable about certain alternative asset classes, you can build up (and potentially speed up) your retirement savings through a self-directed IRA—or, as a business owner or solopreneur, with a self-directed SIMPLE IRA, SEP IRA or self-directed solo 401(k).

The Social Security Trust Fund’s long-term viability has long been called into question. However, one thing self-directed investors should not have to question is their confidence when it comes to making their own investment decisions, their ability to thoroughly research the non-traditional investments they wish to include in their retirement plan, and their willingness to stay abreast of the markets and assets in which they invest.

These individuals are actively working to boost their retirement savings by including a broad array of non-publicly traded, alternative assets, within their plans. That way, they not only diversify their retirement portfolios and build a hedge against stock market volatility, they can also take advantage of interesting investment opportunities that arise with such assets as real estate, precious metals, private equity, hard money loans, promissory notes, energy rights, music royalties and more. Alternative assets tend to be non-correlated with the stock market, therefore, this strategy also allows for added diversification and control over investment returns.

If claiming Social Security early is not in your plans, and you’re comfortable making your own investment decisions and conducting full due diligence on your investments, self-direction can be a great way for you to build retirement wealth. Take the first step by opening a new self-directed account at Next Generation, where you get comprehensive, superior service you can always rely on—with account administration, transaction support, and custodial services under one company umbrella.

If you need more information about how self-directed investing works, or the types of alternative assets these plans allow, you can schedule a complimentary educational session with a knowledgeable member of the Next Generation team. You may also contact us directly via phone at 888.857.8058 or email to NewAccounts@NextGenerationTrust.com.

Investing in Self-Storage Through a Self-Directed IRA

Did you know you can include self-storage in your retirement portfolio? Real estate is the most popular asset class in self-directed IRAs—including commercial real estate—and self-storage is a growing segment that offers great potential for self-directed investors. In fact, it is a $39.5 billion industry in the U.S., utilized by approximately 10% of all U.S. households (with tremendous growth potential as Generation Z gets older and Generation X starts to downsize). As of this year, the estimated number of self-storage facilities is over 49,200.

The most common avenues for self-directed investments in this asset class are through promissory notes (lending) or private placements—direct investments in a private entity such as a self-storage REIT (real estate investment trust), C-corporation, LLC or fund. The self-directed IRA invests into those entities, with all income and expenses related to the asset flowing in and out of the retirement plan.

Strong asset class with strong ROI

Investing in self-storage through a self-directed IRA

Before taking the steps to invest in self-storage through a self-directed IRA, there are a few things to note. This must be a passive investment to meet IRS investing guidelines. You, as the self-directed IRA owner, cannot be an active partner, director, or managing member of the investing entity (REIT, fund, LLC)—this makes you a disqualified person and creates a prohibited transaction which can cause your investment to lose its tax-advantaged status. Also, beware of investing in a private fund or company that is owned 50% or more by disqualified individuals, as this would constitute a prohibited transaction. Disqualified persons for this purpose are the account owner, his/her spouse, lineal descendants or ascendants; a beneficiary of the IRA; or plan service providers and fiduciaries.

At Next Generation, we take steps to make investing in all types of alternative assets as easy as possible. Our Starter Kits contain all the paperwork needed to open and fund a new self-directed retirement plan. After you do your research and identify the entity into which you wish to invest through your IRA, we’ll provide you with a list of the documentation required to process and execute the private placement (or promissory note, if lending). You will need to provide our Next Generation team with a buy direction letter, private placement instruction letter and advisory notice, transaction payment method, and outgoing ACH or wire instructions.

We will review the transaction for compliance with IRS investing guidelines and complete the transaction; our custodial firm, Next Generation Trust Company, holds the assets for our clients.

Want to know more including self-storage in your self-directed IRA? Watch this on-demand webinar on the topic, or schedule a complimentary educational session with Next Generation. You can always contact us by phone at 888.857.8058 or by email to NewAccounts@NextGenerationTrust.com with your questions.

Tax Filing Day is Extended to May 17

Taxpayers get an extra month to pull together their reports and receipts for their accountants, now that the Internal Revenue Service has issued a tax return deadline extension until May 17. The reason given was pandemic related, as many Americans are dealing with economic upheaval. You may recall that last year, the deadline was pushed to July 15 as the country underwent extraordinary circumstances, high unemployment, and general distress related to COVID-19.

The May 17 target date allows those who’ve been out of work, had hours cut, or are just getting back into the workforce time to figure out their finances and review tax changes that went into effect with the American Rescue Plan. For example, unemployment benefits up to $10,200 received in 2020 are tax free for individuals with incomes below $150,000. A few things to note:

At Next Generation, here’s a caveat we like about this filing extension: it gives taxpayers more time to contribute to their retirement accounts and reduce 2020 income (since the prior year contribution deadline was also extended to May 17) using stimulus money or compensation from their restarted or new job. Contributing to your retirement plan has the potential to qualify an individual for stimulus funds by reducing income on the tax return (for tax year 2020). And of course, if you have a self-directed IRA or other self-directed retirement plan, health savings account (HSA), or education savings account (ESA), you can also leverage the power of alternative assets to build a more diverse portfolio and a hedge against stock market volatility.

Weather-related extensions for affected taxpayers

In Louisiana and Texas, people affected by the bitter February storms and cold snap now have until June 15 to complete activities related to retirement plans (IRAs and employer-sponsored plans), HSAs and ESAs. These time-sensitive activities, which typically must occur by the tax filing deadline, include:

If you are in the affected areas, you can read more here.

It’s always a good time to invest in alternative assets

All those retirement plans and other accounts noted above can be self-directed—including HSAs and ESAs.

Savvy investors who self-direct their retirement plans (as well as other plans) enjoy the benefits of portfolio diversification. They can also take advantage of investment opportunities as they arise or invest in assets that align with their values or goals. Examples of alternative assets allowed in self-directed IRAs are real estate, precious metals, notes/loans, private equity, cryptocurrency, impact investments and more. We recently presented webinars on how to invest in music royalties and impact investments, so you can see the field is quite open for including nontraditional investments you already know and understand—any time of year.

Here’s another tip: you can schedule a complimentary educational sessions with someone from the Next Generation team; or contact us directly via phone at 888.857.8058 or email NewAccounts@NextGenerationTrust.com to get answers to your questions about self-direction as a retirement wealth-building strategy.

Celebrating Women in Finance During Women’s History Month

All hail the powerful women who are making strides and breaking glass ceilings in the world of banking and finance! As it is Women’s History Month, the team at Next Generation is shouting out kudos to female visionaries and leaders in the financial realm.

Although women in the U.S. only gained the right to open their own bank accounts in the 1960s, today they are at the helm of global banks as CEOs, presidents, executive VPs, chief strategy officers, risk management officers, senior investment strategists, and many more leadership roles. According to American Banker, this year’s Most Powerful Women in Finance lead major banking institutions, credit card/transaction processing companies, and asset and investment management firms (no surprise, given the organization’s name). You can read about 100 influential women in U.S. finance on Barrons (March 2020 list). For a regular dose of inspiration, you can hear from women about their careers, industry trends, and diversity issues in the Women Leaders in Finance podcast out of London.

Today, the doors are opening to more and more women in the financial industry taking their places at the head of the figurative table in many ways, in fintech, alternative assets, traditional banking and finance, and more.

Among the women we herald are Wall Street veteran Sallie Krawcheck, who founded Ellevest in 2016, in recognition of gender wealth inequality and how the financial industry was not serving women (“built by women+, for women+”). According to its website, the organization’s mission is to get more money in the hands of women, non-binary individuals, and allies. Membership in Ellevest provides access to investing, banking, learning, and coaching.

Currently an organization in Chicago, First Women’s Bank is setting sights on bridging the gender gap in lending by connecting women-owned small businesses with capital solutions. Marianne Markowitz, who was acting administrator for the SBA nationally and regional administrator for its Midwest Region V will be president, CEO and a member of the board of directors of the bank and the company. Amy R. Fahey, whose banking career spanned nearly 29 years at JPMorgan Chase and its predecessor organizations, will be the chair of the boards of directors.

Given her remarkable career in the public and private sectors, we must also include economist Janet Yellen. The current (78th) secretary of the U.S. Department of the Treasury, she was the chair of the Federal Reserve from 2014 to 2018 and the first woman to serve in those roles. She chaired the Council of Economic Advisors in the Clinton administration and is the first person in American history to have led the White House Council of Economic Advisors, the Federal Reserve, and the Treasury Department.

Our praises would be incomplete if we failed to mention Jaime Raskulinecz, founder and CEO of Next Generation, who has nurtured and grown our organization to become two sister firms—one focused on the administration of self-directed retirement plans, the other a custodian for the assets held within our clients’ plans. Her vision, determination and guidance have helped our team develop and expand professionally, so we can help our clients develop and diversify their retirement portfolios with alternative assets. Thank you, Jaime, for all you do for Next Generation and its clients!

This is dedicated to the memory of Ms. Raskulinecz’s mother, Ella Raskulinecz, 1/7/1929-3/12/2021. Ms. Raskulinecz said, “She was an extraordinary woman who was fiercely independent and much stronger than she realized. It is because of her unconditional love and unwavering support that I have become the woman I am today and I cherish every day we had together.” May she rest peacefully.

Using a Self-Directed IRA to Invest in Music Royalties

A royalty is essentially the income stream generated from certain intellectual property—usually music, books, and films—and earned by the rights holder of said published or produced properties. Singers, songwriters, producers, labels, publishers and authors are among the individuals or companies that can have legal claim to the income generated from the intellectual property (IP).

Did you know that music royalties are considered an alternative asset that can be bought or sold and included in a self-directed IRA?

Self-directed investors can invest in music royalties to diversify their retirement portfolios with a non-publicly traded asset. Like many other nontraditional investments allowed through self-direction, music royalties are considered uncorrelated assets, meaning they perform unrelated to public markets (such as the stock exchange); therefore, they provide a good hedge against market volatility.

Royalties as revenue streams

Royalties are legally-binding payments from a licensee to a licensor—the party with the legal claim to the intellectual property. In the music world, royalties are paid based on album sales, song/album downloads, streams, or whenever a song is used in a commercial or movie—any sales channel. They can generate a consistent cash flow, especially in today’s age of digital streaming. Think Taylor Swift, Ed Sheeran, and other pop music artists who’ve created the asset one time but earn income for years; their songs and records climb the charts and continue to sell or be downloaded time and time again, year after year.

Royalties are a long-term asset, paid for the life of the artist plus seven years, creating the potential for capital appreciation over time.

Artists may sell royalties to their back catalogs or even current works to raise capital in the short term or create financial security, enabling them to earn money immediately from their works, or even have the proceeds donated to charity. Sometimes estates auction off the catalogs.  Investors can earn passive income when holding the IP asset in their self-directed IRA.

How to invest in music royalties

In the past, investing in royalties had been limited largely to private equity investors or institutional funds. Today, royalties are bought and sold on exchange platforms created specifically for this purpose, making this alternative asset more accessible to a wider pool of investors (including those with self-directed retirement plans).

There are four main categories of music royalties:

The account owner invests in a percentage of the royalties through auction and can earn a healthy yield. According to Royalty Exchange, one of the exchange platforms for entertainment IP, music royalties earned 10% or more average ROI (annualized asset return) in the first six months of 2020. Other exchanges are SongVest and Lyric Financial.

Other types of royalty investments

Self-directed investors may include royalties in trademarks, patents, mineral rights, educational materials, pharmaceuticals, or invest in royalty trusts. When investing in items with copyrights or patents, the income – and the percentage ownership – lasts for the lifetime of that copyright or patent.

At Next Generation, our clients invest in a broad array of alternative assets through their self-directed IRAs, from real estate to royalties, private equity to precious metals. Next Generation offers custodial and administration services for these accounts, and as part of our white-glove service, we offer client education through webinars and our complimentary educational sessions. Alternatively, our helpful team is available to answer your questions directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.