Promissory Notes and Secured/Unsecured Loans in a Self-Directed IRA
As we wrote about last fall, promissory notes are one way that self-directed investors—individuals with a self-directed IRA or other retirement plan—can provide funding assistance to other parties while building retirement savings. In that article, we focused on real estate notes, also called private mortgage notes; these are promissory notes secured by a piece (or multiple pieces) of real estate.
Self-directed investors can also include promissory notes in their retirement plans. Also known as commercial paper, these are issued by organizations to raise short-term capital for business purposes. Investment notes are essentially loan agreements that guarantee investors that they will receive a return on their investment within a specified time frame.
There are various reasons why a company issues commercial paper—to finance payroll, accounts payable, inventory purchases, or to meet other short-term liabilities. The maturity term is generally from a few weeks to a few months; the loan is based on the borrower’s promise to repay and the lender’s confidence in that ability.
Another type of loan that can be funded through a self-directed IRA is a student loan. The IRA lends money to someone to pay a student loan and the debtor pays back the self-directed IRA with interest.
When promissory notes and other loans come from a self-directed IRA, the repayment terms (such as maturity date, payment schedule, interest paid on the loan, and a default clause) are worked out between the parties involved, instructions are sent to the self-directed IRA administrator, and the repaid funds with interest go directly back into the IRA.
While investing in notes can be a great way to help others get the funding they need in the short term, investors should always be aware of the risks and should fully understand the nontraditional investments they are considering. As with any investment, we strongly recommend that our clients conduct full due diligence in order to protect the tax-advantaged status of their account(s).
When it comes to questions about self-direction as a retirement wealth-building strategy, we’re here to help. We offer many ways to get in touch with us to learn more. One of those ways is to arrange a complimentary educational session with one of our representatives. Alternatively, you can contact us via phone at 888.857.8058 or email NewAccounts@NextGenerationTrust.com.
Impact Investing Through a Self-Directed Retirement Plan
Younger investors are changing the investing landscape as they start putting more of their dollars into sustainable investments. This category of investments includes those that consider environmental, social, or government practices.
More and more, millennial investors want to include investments that align with their values within their retirement plans—including their self-directed IRAs.
According to the Morgan Stanley Institute for Sustainable Investing, interest in sustainable investing (SI) has grown among the general population and even more so among millennial investors in recent years.
- In 2015 among the general population, 71% of those surveyed indicated they were interested or very interested in SI in 2015. In 2019, that rose to 85%.
- In 2017, 84% of millennials were interested or very interested, which rose to 95% in 2019.
- When it came to actually having sustainable investments:
- In 2017, 42% of the general population and 50% of millennials had sustainable investments.
- Today, 52% of the general population and 67% of millennials do.
- Investment into sustainable funds has nearly tripled in 2019 from the prior year ($13.5 billion to date).
To name a few ways that social impact investing is showing up in self-directed retirement plans, investors have been including assets such as organic farmland, FINtech, innovative startups, or renewable energy. Popular target investments cited in the Morgan Stanley report were those related to plastic reduction and climate change.
The social impact side of this is important to investors – a majority (83% of the general population and 89% of millennials) said they believed their sustainable investments could create economic growth and reduce poverty. Around one-third of these investors (33% of the general population and 36% of millennials) are also screening investments in order to avoid putting money behind something they object to.
Sustainable investments in a self-directed IRA
Given that self-directed investors have more options in terms of the types of investments their plans can include, it’s no surprise that those interested in supporting environmental and social causes, innovations, and companies are including organic farmland, renewable energy resources, or innovative startups within those plans.
Some other examples of social impact and sustainable investing are:
- Climate mitigation projects
- Clean energy projects or companies (wind, water, solar)
- Organic farms, sustainable tree farms
- Affordable housing
- Equity funding in companies that produce devices that increase water or energy efficiency or life-saving medical equipment for rural areas or Third World countries
Self-directed investors make all their own investments decisions – usually based on experience with assets they already know and understand. Self-direction can be a powerful way to put what moves investors most into their retirement plans because it can give investors better control over their earnings. Added benefits of self-direction include portfolio diversification for investors who also wish to continue investing traditionally, and a hedge against stock market volatility.
If you’d like to learn more about the many options available through self-direction as a retirement strategy, register for one of Next Generation’s complimentary educational sessions. Alternatively, you can contact our team directly by phone at 1-888-857-8058 or by email at NewAccounts@NextGenerationTrust.com.
All That Glitters Could be Gold: Investing in Precious Metals in a Self-Directed IRA
Gold, silver and platinum figure big in holiday gift giving. But did you know that not all precious metals are destined to become jewelry? For many investors with self-directed IRAs, precious metals are part of their retirement portfolios.
You may have heard the terms “gold IRA” or “silver IRA.” They refer to the self-directed retirement plans that include these precious metals. In these cases, physical gold, silver or other approved precious metals are held in custody for the benefit of the IRA account owner. Instead of paper assets, there are physical coins or bullion bars, referred to as hard assets.
These alternative assets are easy to own and to manage for savvy investors who already know and understand the precious metals markets. And, precious metals have historically been an excellent way to diversify investment holdings and preserve capital. Gold and silver provide a hedge against inflation and precious metals’ value usually move independently of the stock market, which can make a precious metals IRA a good hedge against market volatility.
Precious metal assets allowed in self-directed IRAs
There are three categories of precious metal assets investors can include in their self-directed retirement plans:
- Investment-grade gold and silver bars and rounds, including Credit Suisse-Pamp Suisse bars. Gold must be .995 percent minimum fineness and silver .999 minimum fineness.
- Gold, silver, platinum and palladium bullion – these assets must meet applicable purity or fineness standards. For platinum and palladium this is .9995 percent minimum fineness.
- Investment-grade gold and silver coins as well as some platinum coins. These include gold and silver American Eagles (including proof sets) and Buffalo Bullion coins, as well as foreign coins: gold or silver Austrian Philharmonics and gold, silver or platinum Canadian Maple Leafs, gold Australian Kangaroos, silver Australian Kookaburras and Mexican Libertad coins, and platinum Australian Koalas. Note that certain IRS restrictions apply, so be sure to thoroughly research the investment beforehand.
As with other nontraditional investments that are prohibited from self-directed IRAs, rare and collectible coins are NOT acceptable precious metals for this investment purpose.
Setting up a precious metals IRA
- Open a new precious metals IRA with a custodian, a neutral third party that will act as an administrator on behalf of your account and provide account administration services.
- Fund the account in one of three ways:
- A transfer from an existing like account to your new self-directed IRA (NOTE: your current custodian may request a medallion stamp guarantee to process the transfer form);
- A rollover from your current custodian or a former employer 401(k) into your new self-directed IRA;
- Make a contribution by check.
- Choose a precious metals dealer. This is part of the research that a self-directed investor performs as part of his/her due diligence about investing in this alternative asset.
- Select a depository. You will not hold the coins, bullion or bars on your premises. These assets are stored in an off-site depository that specializes in holding precious metals. You can choose segregated or non-segregated storage. Ask about the depository’s security measures, inventory audits, and reporting.
- Decide what precious metal products to buy.
- Send purchase instructions to the custodian, who will execute the transaction.
Liquidating your assets
You can liquidate precious metals assets any time you wish and your IRA custodian can advise you on the process. Proceeds from the sale of the assets go back into your self-directed IRA as they do with any self-directed asset, so they remain tax-advantaged. You also have the option of taking required minimum distributions in the form of bullion.
Do you have questions about opening a new self-directed IRA or how to execute a transaction concerning a precious metals investment? You may schedule a complimentary educational session or contact our team about self-directed IRAs and the many types of nontraditional investments these plans allow. We’re available via phone at 1-888-857-8058 or by email at NewAccounts@NextGenerationTrust.com.
Retirement Plan Contribution Limits for 2020
The 2020 contribution and benefit limits were announced in early November by the IRS. The annual limit for IRAs remains the same at $6,000 with the catch-up contribution for individuals aged 50+ also remaining at $1,000.
There are slight increases for other retirement plans, as follows:
For 401(k), 403(b) and most 457 plans, plus the federal government’s Thrift Savings Plan, the limit is bumped up $500, from $19,000 to $19,500 annually. For individuals aged 50+, the catch-up contribution also goes up $500, from $6,000 to $6,500.
In addition, SIMPLE retirement accounts now have an increased contribution limit of $13,500, up $500 from the current $13,000.
Retirement plan account holders should also be aware of annual limitations and income phase-outs for defined contribution and defined benefit plans in the workplace.
There are new income ranges for determining eligibility to contribute to a Roth IRA and to claim the Saver’s Credit, which all increased for 2020. The income phase-out in 2020 for individuals contributing to a Roth IRA went up for singles, heads of households, and married couples filing jointly. Additionally, taxpayers may be able to deduct contributions from a Traditional IRA if they meet certain criteria. A list of those figures is available in IRS Notice 2019-59.
As always, this new information is strictly for one’s own knowledge, and we encourage individuals to consult their trusted advisors regarding their specific financial situations to determine what works best for them.
Boost your retirement savings with alternative assets
Whether you’re already in the real estate market, invest in precious metals, or are interested in putting private equity in your retirement plan, nontraditional investments are a powerful way to build a more diverse retirement portfolio that provides a hedge against stock market volatility. What many people don’t know is that there are many different types of accounts that can be self-directed to include those nontraditional investments within them. So, if you’ve reached your annual contribution limit on an employer sponsored plan, or an IRA with a brokerage firm, you can still open and fund an account with Next Generation through a transfer or a rollover. Our self-directed IRA specialists are happy to review your options with you.
The deadline to contribute to your retirement plan for the 2019 tax year* is April 15, 2020, but it’s always the right time to contact Next Generation to open your self-directed IRA. You can arrange a complimentary educational session if you have questions about self-direction as a retirement strategy. Alternatively, you can contact our helpful team of professionals directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com. You can always read more about the many options and benefits of self-direction on our FAQs page.
*Please visit our website for 2019 contribution limits.
Self-Directing your HSA Can Help Boost Your Savings for Future Medical Expenses, Tax Free
It’s common today for people to have a high-deductible health plan (HDHP)—one with a higher annual deductible and out-of-pocket maximums (and slightly lower premiums) than typical health insurance plans.
Those high deductibles may be a hard pill for many people to swallow, but HDHPs allow individuals to open and fund a health savings account (HSA). HSAs provide three tax-advantaged ways to save and pay for qualified medical expenses. The tax benefits of these accounts are:
- Funds deposited into an HSA are not taxed
- The balance in the HSA grows tax free
- The amount withdrawn to pay for qualified medical expenses (including copays, coinsurance, premiums, dental care, eye care, and prescription drugs) is not taxed
After a person hits 65 years old and is on Medicare, he or she can no longer contribute to the HSA but the funds may be used for other expenses without penalty; however, any non-medical distributions are treated like those from a Traditional IRA and subject to income tax on the distribution. Unlike a Traditional IRA, there are no required minimum distributions.
Your savings can accrue year after year, just like in an IRA. And just as you include alternative assets within your IRA, you can also invest the money you accrue in your health savings account—and purchase alternative assets to build up your savings for the future.
Just as with any self-directed retirement plan, you can give your health savings account a boost by including nontraditional investments such as real estate, precious metals, notes, private equity, and more. Self-direction allows you to use your expertise in the investments you’re passionate about, and may bring you comfort in knowing you’re making your own investment decisions. And, if you have relatively low medical costs and build up a healthy balance in your HSA, you have another avenue for growing your retirement savings with the potential for higher yield than the returns on a typical savings account. The broad array of diverse investments allowed through self-direction also provide a hedge against stock market volatility.
The contribution limits for HSAs in 2020 will be $3,550 for an individual and $7,100 for a family; individuals 55 and older can make an additional $1,000 catchup contribution.
You can have more than one HSA and you can transfer funds between them—so you may choose to use one to cover medical expenses or medical emergencies and another building wealth as a long-term investment for future medical expenses or supplemental retirement income. With health care costs continually rising, and today’s workforce expected to need at least $260,000 to cover medical expenses during retirement, having a self-directed HSA can help.
By including alternative assets and self-directing your health savings account, you’ll have more options for creating a cushion for medical or other expenses when you retire—and you’ll maximize your HSA contributions while you are able.
If you have questions about self-directed HSAs or any self-directed retirement plans, Next Generation can help with one of our complimentary educational sessions. Or, contact our team about self-directed IRAs and the many types of nontraditional investments these plans allow. We’re available via phone at 1-888-857-8058 or email: NewAccounts@NextGenerationTrust.com.
Don’t Want to Delay Retirement? Here’s Another Option…
Although the current retirement age is 66, many seniors continue to work, even though they are eligible for full Social Security benefits. In fact, research by Provision Living (a provider of services for older adults) revealed that in U.S. cities with populations of 200,000 or more, at least 20 percent of people ages 65 and up were still working. Results of a more recent poll by Provision Living (August 2019) showed that 55 percent of respondents worked part time and 45 percent worked full time. Survey participants were between the ages of 65 and 85.
Why do seniors continue to work?
A sizable amount—one third—enjoy working and don’t want to retire, or prefer working but with fewer hours. However, 62 percent of respondents cited finances as the reason why they were still in the workforce; they couldn’t afford to retire, they were supporting families, or were still paying off debt. For many, their retirement savings were not at the level needed for a comfortable retirement that was not largely dependent on Social Security benefits.
In fact, 70 percent of working seniors in the survey said that Social Security would be their primary source of income after retirement. The others said a pension, 401(k), personal savings, and stocks would be their main income source in later years. A small percentage (11 percent) said they planned to rely on children or family to support them.
Plan for a comfortable retirement through self-direction
If you enjoy being in the workplace, that’s great! But if you’re thinking ahead to either working less or not at all, have you thought about self-directing your retirement plan?
Opening a self-directed IRA opens the door to building a more diverse retirement portfolio allowing you to invest in alternative assets such as real estate, private equity, unsecured or secured loans, and precious metals. Self-direction can be a powerful way to build retirement savings—and gives you the option to delay retirement because you want to keep working, not because you must due to finances.
Savvy investors who are comfortable making their own investment decisions can invest in what they already know and understand, take advantage of certain market opportunities, and enjoy tax-advantaged retirement savings.
The Social Security Trust Fund has an uncertain future which will affect many of today’s workers. Corporate pensions are disappearing. The stock market is unpredictable. Those who wish to self-direct their retirement plans can better control their futures, today—and create a hedge against market volatility.
Want to learn more about self-directed retirement plans? Contact us to set up a complimentary educational session. Alternatively, you can contact our team with any questions about self-directed IRAs and the many types of nontraditional investments these plans allow. We’re available via phone at 1-888-857-8058, or email at NewAccounts@NextGenerationTrust.com.
Get a RISE Out of Your Retirement Savings
You’ve been contributing to your IRA or employer-sponsored retirement plan—but are you retirement-ready or on track to be? Many Americans are not saving enough, or quickly enough, to sail smoothly into a comfortable retirement. Moreover, they are not properly calculating their anticipated expenses during their later years.
The Retirement Income Security Evaluation (RISE) is an online tool that evaluates where individuals are along their path to retirement in terms of their savings and their necessary income needed for the future. Based on data you provide, RISE gives you a score that measures how well you’ll be able to live on what you have saved today. The tool was developed by a provider of actuarial products and services and is provided by the Alliance for Lifetime Income, a non-profit organization. It’s flexible, so users can adjust data to see how they’d fare based on different financial information.
Consumers are asked to input their expected Social Security income, pension income if relevant, current savings, and their monthly living and medical expenses. The tool then calculates a score that tells users how well they can expect to live based on today’s numbers. Many people may be surprised by the gap their score reveals, since health care expenses are often left out of the equation—and can run into the thousands annually in a person’s later years. Plus, depending on the source, financial institutions recommend having up to 10 times your pre-retirement annual income in your retirement plans as a savings benchmark.
Knowing your score and where you stand can help you gauge whether you may need to ramp up your savings or—in the case of self-directed investors—further diversify your retirement portfolio with alternative assets.
Self-direction empowers individuals to achieve their retirement goals in more unique ways, by including nontraditional investments in their plans. These investments—such as real estate, private equity, unsecured or secured loans, precious metals, and more—have the potential to return greater ROI than the stock market and provide a hedge against market volatility. Savvy investors who are comfortable making their own investment decisions can invest in what they already know and understand, and take advantage of certain market opportunities.
If you’re thinking about how to boost your retirement score through self-direction, you can learn more about this strategy in one of Next Generation’s complimentary educational sessions. Or, you can contact our team with any questions about self-directed IRAs and the many types of nontraditional investments these plans allow. We’re available via phone at 1-888-857-8058 or email: NewAccounts@NextGenerationTrust.com.
Next Generation Trust Company (“NGTC”) does not review the merits or legitimacy of any investment. NGTC does not endorse or recommend any companies, products, services or investments. NGTC does not provide any financial, legal or investment advice.
If the services of NGTC were recommended by any third party, such persons or entities are not in any way affiliated with NGTC. All information provided is for educational purposes only. All parties are encouraged to consult with their professional advisors prior to making any investments.
Next Generation Services (NGS) is a third-party administrator of self-directed retirement plans, located in Roseland, New Jersey. NGS handles all the back office administration, record keeping, mandatory reporting, and transaction support. Accounts are named with Next Generation Trust Company as the custodian and holder of assets, for benefit of the individual account.
NGS does not review the merits or legitimacy of any investment. NGS does not endorse or recommend any companies, products, services or investments. NGS does not provide any financial, legal or investment advice.
If the services of NGS were recommended by any third party, such persons or entities are not in any way affiliated with NGS. Next Generation Services is not a “fiduciary” as defined in the IRC, ERISA, and/or any applicable federal, state or local laws. All information provided is for educational purposes only. All parties are encouraged to consult with their professional advisors prior to making any investments.
Investing in Notes Through a Self-Directed IRA
Private notes, also called promissory notes, may be mortgage notes or deeds of trust, private loans, or corporate debt, and are among the many alternative assets allowed in a self-directed IRA. “Promissory” indicates that there is a written promise to repay the sum according to the terms of the loan.
These notes comprise a form of private lending from the self-directed IRA, with the same tax advantages that the retirement plan allows. Investing in notes is not only popular, it’s a great way to help someone who needs funding and earn passive, tax-advantaged retirement income at the same time. It is important, however, to note that the borrower cannot be a disqualified person, as defined by IRS Publication 590.
Notes may be secured with collateral—like mortgages that have real estate to back up the loan; in fact, real estate notes represent a fast-growing segment of self-directed investments. With a secured loan, if the borrower does not pay back the loan, the lender gets the collateral in lieu of payment.
Promissory notes may also be unsecured (without collateral), which carries some risk because there is no recourse if the loan goes unpaid (other than taking a borrower to court).
Real estate notes—an attractive nontraditional investment
Here are four reasons why real estate notes are popular among self-directed investors.
- Even though the loan is backed by real estate, the owner of the self-directed retirement plan does not need to be involved with activities related to owning and caring for the property—that is the borrower’s responsibility or can be delegated to a third party. Instead, the self-directed IRA acts in effect like a bank, with funds loaned out to a third-party borrower (who must not be a disqualified person as stated above).
- The IRA generates interest income and the profits are tax-advantaged (either tax-deferred or tax-free, depending on the type of IRA).
- The investor does not have to take title to a piece of real estate in order to profit from the transaction.
- The self-directed IRA may be able to purchase an unpaid balance on a note at a discount.
As with any self-directed investment, the loan is made from the retirement account (not personal funds) and loan payments flow through the retirement account, with terms worked out by both parties. Similar to a bank loan, terms on a promissory note may include amount owed, interest and monthly payment amounts, and the loan’s maturity date.
Types of real estate notes
Just as there are many ways to invest in real estate directly through a self-directed IRA, there are different types of real estate notes (loan types) and scenarios, including:
- Performing vs. non-performing
- First position vs. second position liens
- Owner occupied vs. rental property
- Single family, multifamily, land, mobile, commercial
Do your research before investing in notes
Self-directed investors are those who are comfortable making their own investment decisions and conducting thorough research/due diligence before making any investment(s). From property liens, to real estate appraisals, to the borrower’s creditworthiness, there are many items to check off your list before entering into a transaction.
For investors who wish to include notes or private placements in their retirement plans, or if you’d like more information about self-directed IRAs, please register for a complimentary educational session with one of our representatives. Alternatively, you can email us at NewAccounts@NextGenerationTrust.com or call 1.888.857.8058.
Private Equity Investing Using a Self-Directed IRA
Do you know someone who is starting a company and is seeking investors? Is there an established privately held company you’d like to invest in to help it expand—and earn some equity in the process?
If you have a self-directed IRA, you could include private equity investing for startups and other private companies within your retirement plan. The investment gives you shares that represent ownership or an interest in the entity. Private equity investments are among the many alternative assets in which you can use to build a more diverse retirement portfolio through self-direction.
What is a private equity investment?
Whether via accredited online crowdfunding platforms or direct investment, private equity is a capital investment in an entity that is not publicly traded; rather, it’s an investment in a privately held company. Once only utilized by high-net-worth investors, both accredited and non-accredited investors may now take advantage of this investment opportunity. Including private equity investments in one’s retirement portfolio also provides a hedge against the volatile stock market.
Examples of private equity investments are:
- Private common stock, preferred stock; options, rights, and warrants – shares in a private company, primarily held by its founders, venture capitalists, and private equity firms
- Private hedge funds – investors pool their assets with others to take advantage of investment strategies laid out by the fund manager
- Limited liability corporations (LLCs), limited partnerships (LPs)
- Foreign private equity – investment in privately held in non-U.S. companies
- Convertible notes – relatively short-term loans repaid through conversion to an equity stake in the company
When using a self-directed IRA, the plan invests directly into the business, partnership, or other entity, with terms worked out between the parties (in the case of a private placement, this is typically done via a subscription agreement). The entity gets needed capital and the self-directed investor diversifies his/her retirement portfolio by including this nontraditional investment within the retirement plan.
Ask your financial advisor if a private equity investment is right for you
As with any self-directed investment, account holders should conduct full due diligence about an investment opportunity before sending instructions to the self-directed IRA administrator. At Next Generation, we also strongly recommend that you check with your trusted advisor as to whether private equity and the potential tax liabilities associated with the investment fit with your financial goals. After all, every asset class has its risks – be sure you fully understand the upsides and potential downsides of any self-directed investment before making your decision.
For individuals who would like to invest in private equity, Next Generation offers complimentary educational sessions, so you can learn more about how these investments are structured with a self-directed IRA. Alternatively, you can contact our team with any questions about this or other self-directed investments by phone: 1-888-857-8058 or email: NewAccounts@NextGenerationTrust.com.