Get Schooled on Self-Directed Education Savings Accounts

Get Schooled on Self-Directed Education Savings Accounts

There are several investment/savings options available to individuals who want to give the gift of education to children. An education savings account (ESA) is an excellent supplement to other education savings (such as a 529 plan) with tax advantages. Also called a Coverdell Education Savings Account, this is a trust account created by the U.S. government.

An ESA may be used to cover qualified expenses related to primary, secondary, or higher education, from kindergarten through college or post-secondary trade school. Withdrawals are tax free (free from federal income tax) when used for eligible expenses. These include tuition, books and supplies, computers/equipment, transportation, school fees, and room & board. Children attending public school or private school may use the funds for qualified expenses.

Self-directed ESA investments

As with any other type of self-directed plan, an education savings account can include a range of alternative assets. Depending on need and time horizons for taking qualified withdrawals, there are opportunities to boost the $2,000 annual contribution limit through nontraditional investments such as private equity, secured and unsecured loans, real estate, precious metals, and many more.

For example:
Baby Sarah’s grandparents want to contribute to her education and open a self-directed ESA – they can contribute up to $2,000 annually. Sarah’s parents are also putting money away for the baby’s education. They plan to register her into public elementary school but may consider private middle/high school.

Every year, Sarah’s grandparents contribute $2,000 into her ESA, and begin investing the funds in an alternative asset with which they have years of experience.

As the value of Sarah’s ESA grows beyond the $2,000 annual contributions, she will have funds to use for books and supplies or can withdraw funds to cover tuition costs at a private high school or for college, to supplement her parents’ savings. Plus, her grandparents can continue to contribute to the ESA until Sarah turns 18—and continue to diversify the accounts’ holdings through other self-directed investments they already know and understand.

Their $36,000 gift over those 18 years can grow exponentially through the power of nontraditional investments not typically affected by the stock market, provide Sarah with more money to use for her education, and give mom and dad a little help along the way.

ESA facts

If you have questions about how to get started or about the alternative assets allowed in self-directed accounts, you can schedule a complimentary educational session with one of our knowledgeable representatives. Alternatively, you may contact us at directly via phone at  888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com.

 

Has Your Work Situation Changed? You Can Roll Your 401(k) Funds into a Self-Directed IRA

Do you have a retirement plan that is still with an employer where you are no longer working? If you have recently lost a job due to COVID-19, or are in job transition, make sure you don’t leave your old 401(k) plan behind. If yours is still with a previous employer, you can rescue those funds and roll them over into a self-directed IRA.

Right now, it’s unclear for many workers if or when there will be a new employer with a new workplace retirement plan. However, one thing is clear: opening an IRA (Roth or Traditional) is an option that enables individuals to make sure their retirement savings stay with them. Moreover, if that new retirement plan is self-directed, there is a much wider range of potential investment options available that account holders—not their employers—control.

Rollovers into self-directed IRAs

Since most 401(k) plans are limited in terms of allowable investments, rescuing and rolling over those funds into a self-directed IRA opens up the door to greater investment opportunity, without the limits imposed by most plan sponsors on the defined contribution plans they offer. As you may know from your existing 401(k), most of those plans are limited to investing in mutual funds or exchange traded funds, stocks, and bonds. Opening a new self-directed IRA will enable you to include an array of alternative assets that you may already know and understand, such as real estate, private equity, precious metals, hedge funds, secured and unsecured notes/loans, energy investments, and more.

Through self-direction, you’ll build a more diverse retirement portfolio, create a hedge against stock market volatility, and gain better control over your investment returns as part of your retirement strategy. You’ll also have the flexibility of buying and selling your investments when you choose, rather than according to a prescribed schedule that most 401(k) plans follow.

You can choose to do a rollover into a new Roth or Traditional IRA, or a SIMPLE or SEP IRA, depending on your employment status, overall tax situation and how far out you are from retirement. As always, we recommend you discuss your unique scenario with a trusted advisor. You may also have to check with the current plan administrator to see if there are any restrictions concerning the type of IRA allowed for a rollover from the existing 401(k).

How to roll funds over into a self-directed IRA

At Next Generation, our comprehensive starter kits walk you through all the steps needed and required documentation to submit in order to open a new self-directed retirement plan with us, and include a rollover form for Traditional, Roth, SEP, or SIMPLE IRAs (we have starter kits for other types of plans as well). Moreover, our helpful team of professionals are available to answer questions about opening a self-directed IRA or about the many types of non-publicly traded, alternative assets, these plans allow. You may schedule a complimentary education session; or you may contact Next Generation by phone at 888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.

Fuel Your Self-Directed IRA with Energy Investments

Energy investments are among the alternative assets that can be held in a self-directed IRA; oil and gas fall under the umbrella of types of energy investments.

Oil and gas investment opportunities can include:

Oil and gas investments are relatively complicated, but for the right investors, can be a powerful way to fuel one’s retirement portfolio and create asset diversity. As with any nontraditional investment, individuals should carefully research the oil and gas market and understand mineral rights, surface rights, working interests, and royalty streams.

Property issues to consider

In the United States, property owners have rights to the land’s surface, structures and what lies below. Therefore, property owners with oil or gas deposits on their land control those minerals. They may sell or lease the mineral rights to make money and buyers with self-directed IRAs can invest in the mineral rights as a long-term retirement strategy.

Mineral rights

Holding mineral rights means you own the mineral content beneath the surface. Other minerals besides oil and gas that qualify for mineral rights differ among states, so make sure your research and due diligence includes state law regarding mineral rights.

The person who holds mineral rights to a piece of property within a self-directed IRA also has access to the property’s surface; this confers the ability to use reasonable means to locate and produce the underground minerals (as in exploration or drilling).

Surface rights

This is the right to control the surface of the land, including existing structures erected on the land. Depending on the transaction, the seller may stipulate that he or she is selling surface rights only and retaining the mineral rights (or vice versa).

Working interests

A working interest is an investment in drilling operations (also referred to as operating interest). It is an ownership percentage in the operation; therefore, the investor is responsible for a portion of the ongoing costs associated with the exploration, drilling and production of the asset. With all self-directed investments, any expenses related to the asset must be paid from the self-directed IRA account, and profits from the investment must be returned to the account.

The accounts can be tax-deferred or tax free, depending on the type of IRA (Traditional or Roth). Since there are certain tax benefits related to the costs and losses in a working interest, investors are wise to consult a tax specialist as part of their due diligence.

Royalty interests

Royalty interests in oil and gas are the ownership portion of the resource or the revenue it produces. The entity that owns a royalty interest (such as the self-directed IRA) is not responsible for any operational costs, but does own a portion of the resource or revenue produced (the royalties). Some reasons to invest in royalty interests are whether the investor/company/IRA has the finances to bring resources to the production phase, and risk tolerance. In the case of oil production, the producing company pays the property owner a royalty in return for access to the oil field.

Other self-directed energy investments

Solar or wind options, geothermal energy, biofuel, or hydroelectric power are other energy-related assets that can be included in a self-directed IRA.

Take control of your retirement, today

You might already be investing in energy assets outside of your existing retirement plan, in which case, you can open a new self-directed IRA with Next Generation and include these as a hedge against stock market volatility. Whether you plan to include oil, gas, or other alternative assets in your portfolio, you may have questions about self-direction as a retirement strategy. If so, you can schedule a complimentary educational session with the Next Generation team. Alternatively, you can email us directly at NewAccounts@NextGenerationTrust.com or call 888.857.8058.

Social Investing Through a Self-Directed IRA

Self-directed investors are avoiding the stock market roller coaster by investing in non-publicly traded, alternative assets, through their self-directed IRAs. These retirement plans offer the same tax advantages as regular IRAs, but allow for a broader array of nontraditional investments that traditional brokerage accounts do not. This also enables individuals to build retirement wealth through investments that reflect their personal interest or, in other cases, their ethics. One such class of nontraditional investments is social investing, also called sustainable investing or impact investing.

Examples of social investing are assets that fit into the broader category of environmental, social, and corporate governance (ESG); they foster positive social change, social justice, and protect the environment. Investors are discovering ways to invest in causes that are meaningful to them; these may be renewable energy options that reduce carbon footprint, shares in cooperative farms that lift people out of poverty, or funds that include corporations with excellent employee relations or human rights records.

As with any self-directed investment, social investing means taking the time to research and conduct one’s due diligence. Investors who want to make a difference through their retirement plan can look for ways to support sustainable or impact investing projects, or funds that are managed in a socially responsible way. Maybe you know of a startup that’s bringing clean energy projects to market or clean water to remote villages; or perhaps you want to invest in a minority-led company as a way to diversify your retirement portfolio—and support economic diversity.

Once you’ve done your research and selected sustainable investments to include in your retirement plan, Next Generation—as the self-directed IRA custodian and administrator—will first conduct an administrative review of the asset documents to ensure it meets internal guidelines for self-directed retirement plans. We will then process your transaction based on your instructions, hold the assets, and manage all the paperwork and mandatory filing associated with the investment (mandatory IRS filings of 5498s, or Fair Market Value and 1099s if required).

If you have questions about self-direction as a retirement strategy, or about the many other nontraditional investments these retirement plans allow, you may schedule a complimentary educational session with one of our knowledgeable representatives. You can read more about various types of alternative assets these plans allow here; or contact us directly via email at NewAccounts@NextGenerationTrust.com or call 888.857.8058.

Will Social Security Benefits Support Your Retirement Age?

Although individuals can claim Social Security benefits as early as age 62, the retirement age associated with full Social Security benefits had been 65 for many years. That marker has been creeping up over time, with the number currently set at age 67 for people born in 1960 or later. The goal has been to encourage Americans to retire later; the Social Security Trust Fund is only solvent through 2037 and delaying benefits will help shore up the fund.

However, according to a paper titled, “How Sticky is Retirement Behavior in the U.S.? Responses to Changes in the Full Retirement Age,” the increase in full retirement age is not stopping many Americans from retiring and claiming Social Security at the age of 65. The study, published by the National Bureaus of Economic Research (and reported in Investment News) posits that Congress needs to develop new policies – in addition to increasing full retirement age –  to get Americans to retire later.

Adding to this conundrum is the effect that the COVID-19 pandemic has had on the economy and personal finances, with historic levels of unemployment or reduced work. It’s unclear right now how this will play out, but one writer foresees trouble ahead for people born in 1960—who are turning 60 years old this year—because of how Social Security benefits are calculated.

This may cause many Americans to re-evaluate their retirement timeline, as they may need to work longer as a financial necessity. This is especially true for those who have not been contributing to a retirement plan.

Build a more supportive portfolio with a self-directed IRA

Many people already understand that Social Security may not be there for them throughout their retirement years or be sufficient to rely on as a sole source of retirement income. As a result, most have retirement plans to support them in their later years. For those who’ve been planning for retirement with a self-directed IRA as part of their portfolio, they understand the need to take control of their retirement planning and diversify their investment allocations.

Self-direction enables investors to include a broad array of non-publicly traded, alternative assets within their IRAs, which provide a hedge against stock market volatility while building retirement wealth. It’s a proactive approach for individuals who are comfortable making their own investment decisions, and who understand nontraditional investments such as real estate, private equity, precious metals, lending, partnerships and  more.

Are you looking to shift your retirement strategy to include alternative assets you already know and understand? Do you want to develop a retirement portfolio that reflects your interests or an area of expertise? If you’re comfortable making your own investment decisions, it’s a great time to plan your retirement from a different perspective. You’ll find a plethora of information about self-directed IRAs on our website. If you have questions about how to get started, you can schedule a complimentary educational session with someone from our team.  Alternatively, you can contact us directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.

The 2020 RMD Waiver and How it May Affect Your Retirement Plan

The CARES Act (or the Coronavirus Aid, Relief, and Economic Security Act) was an enormous piece of legislation enacted in March 2020 in response to the COVID-19 pandemic. It was designed to mitigate the effects that lockdown and lost business (and wages) were having on employers and employees. Its passage was preceded by the SECURE Act (Setting Every Community Up for Retirement) in late December 2019. Both brought many changes to retirement plan design, participation, and administration.

Waiving the requirement for required minimum distributions

One change concerns the 2020 required minimum distribution (RMD) that retirement account owners or participants historically had to withdraw upon reaching age 70½ .These distributions must be taken for Traditional IRAs, SIMPLE IRAs, SEP IRAs, rollover IRAs, and most 401(k) and 403(b) plans. RMDs do not apply to Roth IRAs unless it is an inherited IRA.

However, for 2020, the CARES Act waives RMDs. Even if you’d already been taking this distribution, you no longer have to do so in 2020 (which enables you to keep those funds in a tax-advantaged retirement plan for continued investment and growth).

Here are some other updates regarding RMD regulations:

Additional RMD updates:

As with any retirement plan and investment, individuals are encouraged to consult their trusted advisor or tax professional to work out the best way to handle their required minimum distributions—whether to take advantage of this year’s waiver, do a rollover, or wait until age 72 to begin, depending on your age and situation. If you have a qualified retirement plan through work, check with the plan administrator about your options.

RMDs and self-directed retirement plans

The RMD waivers and updated provisions concerning these distributions apply to self-directed retirement plans as well. And, with the age increase for taking these distributions, self-directed investors with alternative assets within their plans have the potential to accrue more retirement income from real estate, precious metals, private equity, and many more nontraditional investments these plans allow. There is also now a longer time horizon for using self-directed funds for unsecured or secured loans, which are other popular ways to invest through a self-directed IRA.

The professionals at Next Generation are available to help you calculate your RMD when you’re ready—whether in 2020 or in the future—and will handle all the tax reporting and administration associated with your self-directed IRA. If you have questions about RMDs or about self-direction as a retirement wealth-building strategy, you can schedule a complimentary educational session. To connect with our team directly, call Next Generation at 888.857.8058 or email us at NewAccounts@NextGenerationTrust.com.

Investing in Cryptocurrency in a Self-Directed IRA

One of the benefits of self-direction as a retirement strategy is the ability to include a broad array of nontraditional investments in an IRA or retirement plan. One such investment that has the attention of certain savvy investors is cryptocurrency.

Many people have heard of Bitcoin—a form of cryptocurrency—but what is this alternative asset all about?

What is cryptocurrency?

In short, it’s a digital or virtual currency—not paper money or metal coins—that is created on decentralized networks of computers using blockchain technology. Blockchain is a distributed/online ledger and an organizational method for ensuring the integrity and security of all transactional data—an essential component of many cryptocurrencies.

Cryptocurrencies are secured by encryption techniques called cryptography and allow for secure online payments as virtual tokens—these tokens are the ledger entries in the system. Cryptocurrencies are not held at a bank nor issued by any central authority such as a government agency or financial institution. No personal information is exchanged during a transaction and there is no third-party interaction with institutions such as a banks or credit card companies. The parties’ digital wallets are account addresses with a public key and the owner has a private key to sign transactions.

Bitcoin, launched in 2009, became famous as the first blockchain-based cryptocurrency; today, there are many others that compete with it. A more detailed explanation of blockchain technology and cryptocurrency can be found here.

Including cryptocurrency in a self-directed IRA

Diversifying one’s retirement plan through self-direction enables individuals to include many non-publicly traded alternative assets—such as cryptocurrency—in their retirement portfolios. Investors who know and understand this asset also know that market prices are based on token supply and trader/user demand, and the exchanges the currencies trade on.

(NOTE: There is a limited supply of this computer-generated currency by design; for example, Bitcoin was designed to cap at 21 million).

That said, like many nontraditional investments, cryptocurrencies can provide a hedge against stock market volatility and inflation, and unlike other alternative assets, are certainly easy to transport and use.

Investing in Cryptocurrency through an IRA at Next Generation

Note that any time you buy or trade a digital asset, this transaction is done through a digital wallet that is linked to a checking account. If you plan to invest in Bitcoin or other cryptocurrencies, most self-directed IRA custodians, like Next Generation, require that this be done through an LLC; the LLC is funded by the self-directed IRA and opens a business checking account to use for the digital wallet. This checkbook control should ensure that the funds are held and used specifically for the purpose of buying or trading this digital asset (or other alternative assets within the IRA)

If you’ve done your research on cryptocurrencies—or if you’re already trading these digital assets outside of your existing IRA—you can form an IRA LLC with Next Generation and start building a more diverse retirement portfolio that includes Bitcoin or other cryptocurrencies. You can also schedule a complimentary educational session with one of Next Generation’s team members to discuss how this all works. For questions about self-direction as a retirement strategy, contact Next Generation by phone at 1.888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.

 

Retirement Planning in the Face of the COVID-19 Pandemic

We are all aware of the widespread economic impact that the lockdowns instituted to curb COVID-19 have had on U.S. businesses and taxpayers, which has moved Americans to rethink their retirement planning strategies.

Given the spikes in unemployment or reduction in wages experienced by millions of people – and unpredictable stock market performance, which so many rely upon for their retirement wealth – the pandemic is causing disruptions beyond the everyday.

Ken Dychtwald, founder and CEO of Age Wave, reported in an article on ThinkAdvisor said, “The pandemic has had the biggest impact on what we used to think of as retirement because now all the pieces on the table are moving around. It’s brought to light the importance of matching health span to life span. People are thinking more and more about the importance of health and what they can do to optimize it.”

Health spans, lifespans, and retirement lifestyles

Americans have enjoyed longer lifespans over the generations and have had to plan on saving more for retirement to enjoy their lifestyles for longer periods of time. However, COVID-19 has older adults also thinking more about their health. As Dychtwald puts it, they have suddenly been thrust into thinking about what matters most in life. He feels that for many people, the psychological impact of the pandemic has been not only to consider what happens if they die, but how they want to live their lives—more streamlined, pared down to the essentials of a good life, and optimizing their health.

That said, according to Dychtwald, there’s more optimizing to do for retirees in the realms of technology and financial literacy. He says this population needs to adapt to and adopt technology to connect to new ways of socializing, access medical care (via telemedicine), or research financial information. A Pew Research study reported that only 62% of Americans over age 75 use the internet and 28% use or feel comfortable connecting to social media. And when it comes to financial health, Dychtwald notes many retirees don’t understand their options for retirement savings and what it all means, including Social Security benefits.

So where does retirement planning come into this new pandemic-colored picture?

A new post-pandemic lifestyle?

For many people, they’ve been experiencing a quieter, simpler lifestyle in the wake of COVID-19 lockdowns and safety guidelines— and may be re-evaluating what their retirement looks like. Will it include more travel or less travel? Time spent with loved ones or more time for hobbies or volunteering? Staying in a sprawling home or downsizing to a cozy bungalow, moving to an urban environment from the suburbs or getting that cabin in the woods?

Given the business closures—even temporary ones—business owners who may have been putting off retirement before the pandemic might be looking at retiring earlier than originally planned … and are taking a fresh look at their retirement accounts and how the funds are invested.

Taking control of your financial future with self-directed IRAs

Luckily for self-directed investors, they’re connecting, researching, and are savvy about the types of investments they’re including within their retirement accounts. Rather than rely on the ups and downs of the stock market or tolerate sluggish returns on Treasuries, self-directed investors are taking stock of their goals, perhaps shifting their priorities, and planning for the future—despite these uncertain times—with nontraditional investments such as real estate, private equity, secured and unsecured loans, hedge funds, precious metals and many more.

While this retirement strategy is not for everyone, many individuals are seeking a hedge against stock market volatility (such as the recent market turbulence wrought by the pandemic), portfolio diversification and better control over their investment returns – all benefits offered by self-directed IRAs.

Are you looking to shift your retirement strategy to include alternative assets you already know and understand? Do you want to develop a retirement portfolio that reflects your interests or an area of expertise? If you’re comfortable making your own investment decisions, it’s a great time to plan your retirement from a different perspective. You’ll find a plethora of information about self-directed IRAs on our website; and if you have questions about how to get started, you can schedule a complimentary educational session with someone from our team.  Alternatively, you can contact us directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.

Education Savings Accounts – It’s Never too Early to Start Investing in Alternative Assets

The baby’s born, the gifts and cards are delivered . . . and investors with an eye toward the future open an education savings account (ESA).

An ESA is a federally sponsored, tax-advantaged, flexible savings tool that enables friends and family to help fund a child’s education through contributions to the account. Any adult can establish an ESA for any child under 18 years old or with special needs.

The funds can pay for private elementary or high school, trade school, or college. Qualified expenses include:

Designated beneficiaries can receive distributions, tax-free, to cover qualified education expenses. These expenses can also be paid directly from the account to the educational institution. The beneficiary has until age 30 to use the funds for all qualified expenses.

If the original beneficiary won’t be using all the funds in time (excluding special needs students), the account can be transferred to another family member under age 30. The funds can also be distributed to the beneficiary when he or she reaches age 30; this distribution is taxable and a 10% penalty may be triggered if the distribution is not for qualified education expenses.

In addition:

Self-directed ESAs

Education savings accounts have certain limitations, such as income restrictions for contributing individuals and an annual contribution limit per individual beneficiary of $2000. However, opening a self-directed ESA can help boost the growth of those contributions by investing in non-publicly traded alternative assets.

Instead of relying on stocks, bonds or mutual funds, the account owner can invest in real estate, private placements, hedge funds, precious metals and many other nontraditional investments a self-directed ESA would allow. Including alternative assets within an ESA provides a hedge against stock market volatility and diversifies the portfolio.

Self-directed ESAs are handled by a third-party administrator for self-directed retirement plans, like Next Generation Services. As with any self-directed retirement plan, the account owner makes the investment decisions and provides instructions to the administrator. In the case of Next Generation, our sister firm, Next Generation Trust Company, custodies the assets, providing comprehensive account services under one corporate umbrella.

If you’re interested in opening a self-directed ESA for a minor under the age of 18, schedule a complimentary educational session to get answers to your questions about self-direction as an investment strategy. Alternatively, you can contact us directly via phone at 888.857.8058 or email us at NewAccounts@NextGenerationTrust.com.