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.
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.
- Contributions may be made for beneficiaries until they turn 18; funds must be used within 30 days of the student turning 30 years old. (There are certain exceptions for special needs students.)
- The funds in the account can be transferred into another ESA for a relative under 30 years old.
- The total maximum contribution for any single beneficiary (even with multiple education savings accounts) is $2,000 per year.
- Contributions are considered gifts by the IRS and are not tax deductible.
- There are income guidelines regarding who may contribute. The 2020 limits are as follows:
- For a married couple filing jointly with modified adjusted gross income (MAGI) between $190,000 and $220,00, a partial contribution is permitted; for those with less than $190,000 MAGI, the full $2,000 contribution is permitted.
- Solo tax filers must have MAGI of $95,000-$110,000 to make a partial contribution, and less than $95,000 MAGI to make the full $2,000 contribution.
- Corporations and trusts may contribute to an ESA without the restriction on adjusted gross income.
- There is a 10% IRS penalty on earnings (with certain exceptions) for non-qualified withdrawals.
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:
- The land being explored and/or the mineral rights of that land
- Interest in refineries and drilling companies
- Futures and commodities contracts
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.
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).
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).
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 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.
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:
- Tuition and fees
- Room and board
- Books, supplies and equipment, school-related technology
- Academic tutoring
- Required school uniforms (primary and secondary school)
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.
- The accounts offer a double tax benefit – the funds grow tax free and qualified withdrawals are not taxed (provided the withdrawal does not exceed the beneficiary’s qualified education expenses).
- Anyone can contribute to the ESA, including a trust, corporation or the student, until the designated beneficiary attains 18 years of age.
- Contributions are discretionary; there is no annual contribution requirement.
- Contributions can be made up until the contributor’s tax filing date.
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.
Want Out of the Stock Market? Consider Precious Metals in a Self-Directed IRA
Buckle up, investors—the stock market is taking millions of people for a very uncomfortable ride during the Covid-19 pandemic. Individuals who maintain retirement portfolios with traditional assets like stocks, bonds, and mutual funds have seen precipitous declines in their retirement accounts this month as the markets, businesses, and the world deal with the virus.
Advisors will say that diversification is always the key to a healthy portfolio—something self-directed investors know and practice. One way to hedge against the volatility of the stock market and reduce risk is to include alternative assets within a self-directed IRA. Along with real estate, precious metals are among some of the most popular nontraditional investment options that can be held in a self-directed IRA. In fact, there has been a recent spike in demand from investors who wish to diversify their retirement accounts with metals like gold, silver, platinum, and palladium. You can read the particulars of including precious metals in a self-directed IRA in this blog post.
Why include precious metals in a self-directed IRA?
Long before there was paper currency, there were gold and silver, traded around the world. Key benefits to including precious metals in a self-directed IRA is that these assets have no credit risk, serve as a hedge against market volatility, and also do so vis-à-vis political instability, currency weakness, and economic collapse. As Goldman Sachs was quoted this week, “gold is the currency of last resort.” Given the news swirling around us right now, it’s no wonder precious metals are in higher demand as a long-term investment.
In a move to stabilize the U.S. economy and ward off a credit crunch, the U.S. Federal Reserve has committed to purchasing an unlimited number of Treasuries and securities tied to residential and commercial mortgages. This process, called “quantitative easing,” is meant to enhance liquidity of financial markets. Pushing more money into the market affects gold prices inversely; as more money is available, interest rates go down and the value of gold goes up. This article on MarketWatch explains further and predicts gold will increase sharply in value in the coming weeks.
If you’re already knowledgeable about investing in precious metals or want to include this alternative asset in your retirement plan, check out our helpful Precious Metals Guide to learn more. If you have questions about self-direction and the other kinds of nontraditional investments these plans allow, register for a complimentary educational session with one of our knowledgeable representatives. Alternatively, you can call us directly at 888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com.
Women’s History Month: A Look at Women and Their Financial & Investing History
Ever since the women’s liberation movement of the 1960s and 1970s a lot has changed for women in America, thanks to spitfire pioneers who generated shifts in societal attitudes and pushed for legislative changes.
The National Organization of Women advocated for six measures to ensure women’s equality: enforcement of laws banning employment discrimination, maternity leave rights, childcare centers (so mothers could work), tax deductions for childcare expenses, equal and unsegregated education, and equal job-training opportunities for women in poverty. These all took many years to pass.
Eventually, as more women entered the workforce employers were barred from firing a woman because she was pregnant. More women began running for political office. No-fault divorce laws arose. Women began serving in combat, became astronauts, and sat on the Supreme Court bench. Moreover, they could finally apply for a credit card or loan in their own names.
Women in financial history
Women have been making their mark on the financial sector since our country’s early days. In fact, future First Lady Abigail Adams began trading in government-issued bonds during the Revolutionary War with strong results, and a woman named Victoria Woodhull opened her own brokerage house in 1870 with her sister; she also ran her own newspaper company and was the first woman to run for U.S. President.
Some more notable firsts in modern times:
- Isabel Benham was the first woman to work on Wall Street in the 1930s at R.W. Presspich & Co. and in the 1960s, became the firm’s first female partner.
- Muriel Siebert was the first woman to purchase a seat on the New York Stock Exchange in 1967 and the first woman to be appointed Superintendent of Banking a decade later.
- In 2014, Janet Yellen became the first woman to chair the Federal Reserve.
Women and investing
The women’s liberation movement notwithstanding, it’s been an uphill climb for women to take their rightful places in the workplace and take their seats at corporate tables. As of January 1, 2020, there have been 82 individual women in Fortune 500 CEO roles in total, with three serving as CEO twice.
However, more women are undergoing a new women’s liberation movement when it comes to their investment choices . . . and discovering they can take more control of their financial futures through self-directed investing.
Self-directed IRAs enable investors to better control their retirement savings by investing in alternative assets they know and understand. Although historically, women have taken a more moderate approach to risk, those who prefer to make their own investment decisions can open a new self-directed retirement plan and include non-publicly traded, alternative assets to build a more diverse retirement portfolio. These investments might include real estate, private equity, private lending, partnerships, precious metals or impact investments.
Self-directed investors also conduct their own research and due diligence about the alternative assets they wish to include in their retirement plans. They may already be investing in these assets outside of their existing retirement accounts. In fact, that’s how our founder and CEO, Jaime Raskulinecz, started Next Generation.
Next Generation’s Women in History
Jaime was a seasoned real estate investor who wanted to include real estate in her IRA; she discovered self-direction as a retirement strategy that would allow her to do so. As a pioneer in her own right, Jaime started a company in 2004 to enable more investors to include nontraditional investments in their retirement plans and Next Generation, a third-party administrator for those plans, was born. Continuing to build on her success, in 2017 she led the formation of its sister firm, Next Generation Trust Company, which now acts as custodian for all of its accounts.
Jaime and her partner Linda Varas, Principal of Next Generation, have always believed in the power of women in the workplace and our team is a testament to that. Jaime and Linda have cultivated a career-building environment for women (and men, too!), as you’ll see on our team page.
We are proud to recognize Jaime’s many professional achievements as we continue to educate more women on the power of self-directed investing. Want to take control of your future, today? Sign up for a complimentary educational session with one of our knowledgeable representatives. Alternatively, you can email us directly at NewAccounts@NextGenerationTrust.com or call 888.857.8058 to get started.