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.
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.
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.
Raising the RMD, Repaying Student Loans and Other Potential Changes to Retirement Accounts
Helping Americans save more for retirement is very much on the mind of Congress.
In the spring, Senators Ben Cardin of Maryland and Rob Portman of Ohio reintroduced legislation (Retirement Security and Savings Act of 2019) that proposes raising the required minimum distribution (RMD) age for retirement accounts to 75, with increases to be phased in over several years from age 70½. Additionally, it would potentially increase savings in 401(k)s and IRAs, help with small employer coverage for part-time workers, and remove obstacles for including lifetime income options in retirement plans.
NOTE: Currently, account holders of Traditional IRAs and SEP IRAs must start taking required minimum distributions no later than 70-1/2 but this rule does not apply to Roth IRAs, Coverdell ESAs and some other plans.
A different bill, Retirement Parity for Student Loans Act, contains a provision that would enable workers to make student loan payments while their employers make matching contributions into their retirement account “as if the student loan payments were salary contributions.” These elements give Americans more time and more financial freedom to save for retirement.
The House of Representatives has also been looking at retirement legislation; in late May, the House passed the SECURE Act—Setting Every Community Up for Retirement Enhancement, which currently awaits passage in the Senate. The bill’s significant retirement policy changes are designed to improve access to financial products in order to encourage more Americans to save for retirement. It also contains incentives for employers to expand access to 401(k) plans, particularly to employees of small businesses and part-time employees.
Is a self-directed IRA on your mind?
Here are some reasons why it should be:
- The flexibility to take RMDs from one’s retirement plan at a later age can help account holders continue to grow their retirement savings for a longer period of time if they wish—and for those investors with self-directed IRAs, to continue building more diverse portfolios for a longer time horizon.
- Self-directed investors who are including alternative assets within their plans would have the potential to accrue more retirement income from real estate, precious metals, commodities, private equity, and many more nontraditional investments these plans allow.
- Two of the nontraditional investments allowed in a self-directed account are secured and unsecured loans. This means the plan can make loans to qualified individuals for tuition or other education-related expenses. Terms of that loan are worked out between the two parties, with all income flowing back into the tax-advantaged self-directed retirement plan.
- Individuals can also self-direct a Coverdell ESA, which—as noted above—does not carry with it the mandatory RMDs by age 70-1/2. Coverdell ESAs can be set up to pay for education-related expenses, as we explored in a prior post.
If you’re thinking about opening a self-directed IRA of any kind, please register for a complimentary educational session with one of our knowledgeable representatives. Alternatively, you can call our team directly at 888.857.8058 or email NewAccounts@NextGenerationTrust.com with any questions.
Is that Education Savings Account Ready to go Back to School?
Before we know it, tuition bills for fall semester will be due, books will need to be purchased, and school fees must be paid. The tuition at colleges and trade schools can be pricey, and student loans may not be the answer for all students. However, paying for school and school-related expenses with money from a Coverdell Education Savings Account (ESA) can be a big help for many.
Any adult can establish an ESA for any child under 18 years old—the beneficiary does not need to be a relative. ESAs offer flexible options as a tool for saving for education:
- The ESA can be used by the beneficiary up until age 30 for all qualified expenses, such as tuition and books.
- The money can be transferred to another family member under age 30 if it will not be used by the original beneficiary in time.
- The money is not restricted to college – the ESA can be used for primary and secondary school as well.
- You don’t have to contribute every year.
- A trust or corporation may make contributions to an ESA for an eligible student.
- The money grows in the account tax free and qualified withdrawals are also tax free. If the money is used for a nonqualified expense, there could be taxes or penalties associate with the withdrawal.
Although ESAs are somewhat similar to 529 plans, there are a few key differences, such as income restrictions for the contributing individuals and annual contribution limits. It’s always wise to check with your tax advisor or financial planner before opening a Coverdell Education Savings Account to ensure you are opening the type of investment account that makes the most sense for your specific financial situation and goals.
Self-directing the funds in an ESA can help boost that return
Whether you want to help cover expenses for private school, college, or trade school, you can give your student extra help if you choose to self-direct a Coverdell ESA.
Savvy investors may choose to self-direct an ESA and hold real estate, precious metals, commodities and more – they may even already be invested in these types of assets outside one of these accounts. The difference is that the returns from those investments will be tax-free as they grow. Although you potentially have a maximum of 18 years in which to build up a Coverdell ESA (from a child’s birth through age 18), investors who self-direct their retirement plans know that by including alternative assets, they are able to build a more diverse portfolio that is not dependent on the ups and downs of the stock market. One can look at it as an investment strategy that could make a great high school graduation gift.
You can open an education savings account with Next Generation and fund the account via transfer, by initiating a rollover, or by contributing funds with a check. If you have any questions about self-direction as an education savings strategy, or need assistance getting your ESA open, contact Next Generation by email at NewAccounts@NextGenerationTrust.com or by calling 888.857.8058.
Alternatively, you can schedule a complimentary education session with one of our representatives.
Including Precious Metals in a Self-Directed IRA for a Golden Nest Egg
Are you looking for a way to lay a golden nest egg? If you’re a self-directed investor seeking another alternative asset to diversify your retirement portfolio, you might consider precious metals. Precious metals have historically been an excellent way to diversify investment holdings and preserve capital.
Some reasons to consider including precious metals in a self-directed IRA (also known as a precious metals IRA) are that gold and silver can be good hedges against inflation (when paper currency is devalued) and precious metals are a good hedge against stock/bond/treasury bill volatility, since their values typically move independently of the stock market.
What some people don’t know is that not all types of metals can be held in a self-directed IRA. In order for precious metals to be eligible, they must meet certain requirements as outlined in IRC 408(m)(3). The metals can be owned in bullion form (e.g. bars) that meet a minimum fineness, or they can be in certain approved coin form—one, one half, one quarter, one tenth ounce U.S. gold coins, and/or one ounce silver coins minted by the Treasury Department.
These coins, bars and bullion are hard assets (as opposed to investments on paper) and they are held in an off-site depository that specializes in holding precious metals. To learn more about the types of precious metals allowed in an IRA, download our free guide here. Please keep in mind that the metals cannot be stored with the account holder.
Getting started with a precious metals IRA
If you are just getting started, you must first open a new self-directed IRA with a custodian and then fund the account in one of three ways:
- Transfer funds from an existing IRA
- Roll over funds from an employer sponsored plan (401k, pension plan, etc.)
- Annual contribution
For clients opening a new precious metals IRA at Next Generation, our helpful guide will walk you through all the steps on how to purchase precious metals with your IRA. As outlined in the guide, once your self-directed retirement plan is open, there are a few actions to take:
- Decide which metals to buy – as noted above, your IRA can invest in certain coins, bullion, and bars. Research all your options in order to comply with IRS regulations.
- Select a dealer – we suggest you carefully research precious metals dealers to ensure you are getting the product and quality you expect.
- Choose the depository – this third-party storage facility must be IRS-approved. Depositories are equipped to safeguard your valuable investments under proper conditions, with a high level of security, inventory audits, and reporting. You may choose segregated (private) or non-segregated (communal) storage. As with all aspects of self-directed investments, the account holder is responsible for researching and selecting the depository, and providing instructions to the plan administrator. At Next Generation, we have a relationship with Delaware Depository, should our clients wish to use that entity.
- Direct your custodian to make the purchase – upon completion of your initial paperwork and asset review, the IRA custodian will execute the transaction (including payment from your account) and the dealer will ship the metals to the chosen depository.
You may liquidate your precious metals holdings at any time; and with a precious metals IRA, the account holder has the option of taking required minimum distributions in the form of bullion.
If you have questions about opening a self-directed IRA and including precious metals as one of the many nontraditional investments these plans allow, email us at NewAccounts@NextGenerationTrust.com, call (888) 857-8058, or visit https://www.NextGenerationTrust.com.
Getting Educated About Self-Directed Education Savings Accounts
Thoughts of college are in the air at this time of year, with PSATs, SATs, ACTs and other tests. High school juniors are deciding where to apply to school and seniors have decided where they’ll enroll in the fall.
While college is an exciting time for students, it can be a bit stressful for parents when it comes to making those tuition payments. Even with financial aid, there are plenty of expenses to cover and in many cases, the financial aid does not go far enough.
That’s where Coverdell Education Savings Accounts (ESAs) come in. Many parents and grandparents set up these accounts when a child is born, and contribute to the ESA annually to build up savings to pay education-related expenses. The 2019 annual contribution limit is $2000 per beneficiary (contributed up to age 18), which can be invested and earn tax-free income.
Here are some of the benefits that ESAs have to offer:
- Coverdell ESAs are tax-advantaged so long as the money in them is used to pay for education expenses—which are not limited to higher education only; the funds may be used for qualified elementary and secondary school expenses as well.
- If the distribution is less than the beneficiary’s qualified education expense, the beneficiary (student) will not owe federal income tax.
- The money is considered the beneficiary’s money when applying for federal student aid, which may reduce the amount of student aid the student receives.
- The funds in the account can be used by the beneficiary up to age 30 or be rolled over to another plan.
Self-directed ESAs – the flexible way to build up education savings
Did you know that when ESAs were first introduced in 1997, they were called Education IRAs?
And did you know that, like all other types of IRAs a Coverdell ESA can be self-directed, so that the funds can be invested in alternative assets?
A Coverdell ESA that is opened with a custodian of self-directed retirement plans—like Next Generation—can include the same types of nontraditional investments as other self-directed plans. That way, if the stock market tumbles, the account provides a hedge through the use of those nontraditional investments, such as real estate, precious metals, private equity, notes, and more. Parents or grandparents who already have the knowledge and experience with these types of investments can apply that experience to the student’s education savings through self-direction—and help grow their contributions over time.
Think of the high school graduation gift you could give your child or grandchild years from now, with a self-directed ESA that has grown in value through nontraditional investments. At Next Generation, we offer a plethora of resources to learn more about Coverdell ESAs and the benefits of self-direction. Because client education is so important to us, we’re here to answer your questions about self-direction as a savings strategy—for education expenses or retirement. Contact Next Generation at 1.888.857.8058 or email NewAccounts@NextGenerationTrust.com if you need assistance.
Alternatively, you can sign-up for a complimentary educational session with one of our representatives.
Are Your Grown Kids Affecting Your Retirement Future?
We’ve all heard about boomerang children who come back to the nest after college—not yet financially independent, and sometimes staying for longer than parents expect. A financial security survey from Bankrate in early April shows that in many cases, those kids are costing parents their retirement savings. Data reveals a trend of financial co-dependence between parents and children—whether through prolonged education, helping with housing costs, or other high expenses.
All this “help” is hurting Generation X and Baby Boomer parents who should be funneling funds into their own retirement accounts instead. According to the survey, 50 percent of respondents in those generational age groups say they have sacrificed or are sacrificing their own retirement savings in order to help their adult children with finances.
What’s the right age to cover one’s bills?
Survey respondents comprised the Silent Generation down to Gen Z. Most felt that 18 or 19 year-olds (and in some cases, 20 year-olds) should take on their own car payments and auto insurance, cell phone bills, and credit card bills. All generations agreed the average age to start paying for one’s own subscription services is 20 years-old.
The higher the bills, the older the age for when individuals should begin paying on their own, such as age 23 for health insurance premiums as well as student loans. Housing costs (rent or mortgage) also had a higher average age overall, at 21 years old.
Time to pay less and save more
As noted above, the April Bankrate survey found that half of Americans are putting their own retirement savings at risk by covering their grown childrens’ expenses; and a March 2019 survey found that more than 20 percent of working Americans aren’t saving any money for retirement, emergencies, or other financial goals. Major barriers to saving included insufficient wage growth and large debt payments. For those covering grown kids’ expenses, the rising cost of a college and post-graduate education (often felt necessary to be more prepared to enter the workforce) is significant here.
But is it worth sacrificing one’s financial future to provide a financial safety net for children who could be working, at least part time—especially as one approaches retirement?
While each family has a personal perspective on this growing trend, no one can dispute the importance of preparing for a comfortable retirement. One way to combat the “boomerang child” syndrome is to self-direct one’s retirement account, and grow tax-advantaged income through investments in alternative assets such as real estate, commodities, precious metals, private equity, unsecured and secured loans, and more.
Take control of your retirement with a self-directed IRA
Self-directed investors not only know and understand certain nontraditional investments, they are comfortable making their own investment decisions. A powerful decision to make is to start controlling your retirement savings through a self-directed IRA.
Even putting a little money into a self-directed IRA every month as you wean your kids off your wallet will enable you to build a more diverse retirement portfolio. Set the example and who knows? Maybe when junior is ready to be on her own, she’ll open a self-directed retirement plan too and start investing in land or energy, a Broadway show, a startup company, or any of the creative ways to boost retirement wealth through self-direction.
Next Generation makes it easier for you and your adult kids to get started. Our helpful team can answer your questions about self-direction in general or your account in particular. And our newsletter subscription is always available so you can learn more.
Contact Next Generation at NewAccounts@NextGenerationTrust.com or 1.888.857.8058 for assistance. We can’t help you get your kids out of the house but we can help you take more control over your investment returns through self-direction.
Alternatively, you can register for a complimentary educational session with one of our representatives.