What’s Your Preference: Financial Freedom or Retirement?
A self-directed IRA can get you to both with investments in alternative assets
Retirement for American workers—how it looks, what we want and how we get there—is changing. Franklin Templeton’s recent Voice of the American Worker Survey* revealed that the majority of those surveyed said that path to retirement, and how retirement looks, is different for everyone.
In fact, 80% of survey respondents indicated “traditional retirement” is not an accurate expectation for most people, and 75% said their future financial goals have changed over the past five years.Of note: while more than three-quarters (76%) of survey participants said that the goal of achieving financial freedom appeals to them, only a little over half felt it was achievable. In regard to retirement, specifically—69% found retirement appealing, and 61% thought retirement was likely to be more achievable.
Financial freedom connotes being able to live the life you want with enough savings, investments and cash to do so; of course, this means different things to everyone. So does retirement, which could mean a full stoppage of work, or working part-time—perhaps trying out a new avocation—with time for hobbies and traveling; again, carrying different significance to each individual. This article in Forbes talks about these concepts in greater detail.
In the Franklin Templeton study, “financial independence” was reported to feel more empowering than “retirement” by 81% of participants, especially among women. Respondents also viewed retirement through the lens of their overall well-being.
- More than half (57%) of respondents say their financial well-being includes health and lifestyle rather than being all about the money.
- Along physical, mental and financial health criteria, nearly three-quarters (74%) said their current physical health, 70% said mental health, and 65% said financial health are associated with well-being.
- Many reported that they struggle to get a holistic view of their financial health, having to go to multiple sources (61%), and nearly 90% would like more planning tools and resources to track their financial health and achieve financial independence.
Financial independence and a comfortable retirement? Self-directing might get you there.
Where do YOU stand on financial freedom vs. retirement? At Next Generation, our clients are working on their financial goals using self-directed IRAs (and other types of retirement accounts) as a retirement wealth-building strategy. With a self-directed IRA, investors can include a range of alternative assets, building a more diverse retirement portfolio and meeting their long-term financial goals through these tax-advantaged retirement plans.
Whether you plan to completely retire, cut back on your work, or continue working well into your 70s or longer, you can map out your road to strong financial health by investing in assets you already know and understand, such as real estate, precious metals, private equity, notes, cryptocurrency and more. When you open a self-directed IRA with Next Generation, you’ll also have access to all your statements and reports to track your goals and make well-informed investment decisions—backed by a third-party administrator that handles all mandatory filing and a custodian that holds the assets.
As you work out a long-term financial plan with your trusted advisor—and determine what financial freedom means to you and the lifestyle you desire during retirement—we invite you to learn more about how and why a self-directed IRA could be a powerful part of your plan. At Next Generation, we’re here to help. You may schedule a complimentary education session with someone from our team, email NewAccounts@NextGenerationTrust.com or call 888.857.8058 with your questions about self-direction and the many types of alternative assets these plans allow.
*The Harris Poll conducted the study on behalf of Franklin Templeton in October 2020 among 1,007 employed U.S. adults, all of whom had some form of retirement savings.
Investing in Oil and Gas Royalties Through a Self-Directed IRA
Last summer, we shared information on investing in energy assets through a self-directed IRA, including investments in mineral rights. Digging a bit further, some self-directed investors choose to include oil and gas royalties in their self-directed retirement plans. Let’s look at how that works.
What is a royalty interest in mineral rights?
In general, royalties are ongoing revenue streams based on production (in the case of energy assets) or licensing/usage (for intellectual property). In the case of oil and gas royalties in a self-directed IRA, the retirement plan owns a portion of the revenue that the oil or gas wells produce.
While most self-directed investors don’t have the equipment and financing needed to explore, extract, and produce oil or natural gas themselves, they can passively earn a royalty from the producing company that leases the land in exchange for access to it (and the ability to produce these energy assets).
How is the investment structured?
There are a couple of common scenarios. The first of which is when the oil/gas company leases land from a property owner (the IRA in this case), with mineral rights as part of the lease; this gives the producer access to the goods that lie beneath the surface (oil, natural gas, uranium, coal, etc.). The property owner is paid a percentage of the total production by the company—so if your self-directed IRA owns the land, the IRA will receive that income as landowner.
As an alternative to the above scenario, the IRA may choose to instead purchase mineral rights to the resources below the surface on a per-acre basis. The IRA then leases those mineral rights to the production company, which keeps its share of the revenue and distributes monthly royalty payments to the self-directed IRA.
These monthly royalty payments can range from a traditional 12.5% in the oil industry to upwards of 25%, depending on what is negotiated. The investor that owns the mineral rights—in this case, the self-directed IRA—may choose to sell those rights in the future for a profit. With profits flowing into the IRA, tax on those earnings would either be deferred or eliminated (in the case of a Roth IRA).
Benefits of mineral rights investments
- The production company is responsible for all exploration and extraction operations while the self-directed IRA passively collects an ongoing revenue stream.
- Unlike commercial and vacation property real estate investments, there are very little ongoing costs incurred by the investor, since the producer is dealing with expenses associated with working the land.
- Similar to real estate investments in self-directed IRAs, diversification is available within one asset class. Your self-directed IRA can invest in multiple oil and gas fields simultaneously—and collect royalties from these – or buy and sell as desired (with all income and expenses flowing through the retirement plan).
As with all self-directed investments, account holders are encouraged to conduct full due diligence about mineral rights investments and different energy assets, to fully understand how mineral rights work and the mechanics of land leases to energy producers.
At Next Generation, we’re here to answer questions you have about many types of non-publicly traded, alternative assets, including oil/gas. You may schedule a complimentary educational session with one of our knowledgeable representatives to discuss the nontraditional investments allowed through self-direction. Additionally, you may enjoy free access to our on-demand webinars and blog articles that cover many topics related to self-direction as a retirement strategy.
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.
Americans are Working Longer
Recent research from the Transamerica Center for Retirement Studies* shows that Americans are working longer, with 54 percent saying they expect to work past age 65 or never retire at all. Twenty-two percent of respondents said they plan to retire either at age 65 or later, and 22 percent plan to retire earlier.
While there are personal factors around why Americans are working longer – such as maintaining social connections, longer lifespan and emotional health – financial factors are also part of this story. In the U.S., it’s often not having enough saved for retirement and Social Security concerns; three-quarters of the workers surveyed said they are worried that Social Security will not be available when they retire.
Global expectations around retirement age are very interesting to look at and compare with U.S. figures. Transamerica conducted additional research across 15 countries, in collaboration with the Aegon Center for Longevity and Retirement. While the current expected age of retirement in the U.S. is 66 (shared by the United Kingdom and Australia), it is 65 in many European countries and Canada, 60 in India, and 58 in Turkey and China. The findings are based on 14,400 workers and 1,600 retired people surveyed online between 22 January and 14 February 2019.
However, as we know, the average retirement age is rising in the U.S.; for Americans born in 1960 and later, it is 67. The Netherlands is already there and according to the study, France, Spain and Poland are planning to move their retirement age to 67 as well.
Americans are Working Longer, but a Self-Directed IRA Can Help Make the Most of Your Employment and Retirement Timelines
In the Transamerica/Aegon global study, a majority of respondents said they envision an active retirement, where work and leisure can co-exist. Sixty percent cited travel and 57 percent cited spending time with family and friends as important retirement goals; 49 percent said they look forward to pursuing new hobbies. Additionally, 27 percent aspired to do volunteer work and 26 percent planned to include some form of paid work. The two biggest retirement concerns were declining physical health and running out of money.
Whether you retire at age 65 or 66, or continue to work in some capacity well into your retirement years, you can make the most of your retirement savings through self-direction. A self-directed IRA allows you to include many alternative assets, which are not allowed in typical retirement plans, and build a more diverse retirement portfolio. This also allows investors to hedge against the volatility of the stock market, and include nontraditional investments they already know and understand. Why limit yourself to stocks and bonds when you can invest in real estate, precious metals, promissory notes, private equity and joint ventures—and have more control over your returns—within a self-directed IRA?
At Next Generation, we help individuals make the most of their retirement savings and live up to their retirement goals through self-directed retirement plans. If you’re someone who’s comfortable making your own investment decisions and conducting your full due diligence about certain types of investments, you may benefit from self-direction.
Plus, with the SECURE Act provisions that enable workers to continue contributing to a Traditional IRA for a longer timeline, and delay taking required minimum distributions from their plans until age 72, there’s more time to build up one’s retirement nest egg with a broad array of nontraditional investments.
Want to learn more? Sign up for a complimentary educational session about self-directed IRAs with one of our knowledgeable representatives. Alternatively, you can call us directly at 888.857.8058 or email NewAccounts@NextGenerationTrust.com.
*Online survey conducted between October 26 and December 11, 2018 among a nationally representative sample of 5,923 workers who were U.S. residents, age 18 or older; and full-time or part-time workers who are not self-employed and work in a for-profit company employing one or more people.
Retirement Plan Contribution Limits for 2020
The 2020 contribution and benefit limits were announced in early November by the IRS. The annual limit for IRAs remains the same at $6,000 with the catch-up contribution for individuals aged 50+ also remaining at $1,000.
There are slight increases for other retirement plans, as follows:
For 401(k), 403(b) and most 457 plans, plus the federal government’s Thrift Savings Plan, the limit is bumped up $500, from $19,000 to $19,500 annually. For individuals aged 50+, the catch-up contribution also goes up $500, from $6,000 to $6,500.
In addition, SIMPLE retirement accounts now have an increased contribution limit of $13,500, up $500 from the current $13,000.
Retirement plan account holders should also be aware of annual limitations and income phase-outs for defined contribution and defined benefit plans in the workplace.
There are new income ranges for determining eligibility to contribute to a Roth IRA and to claim the Saver’s Credit, which all increased for 2020. The income phase-out in 2020 for individuals contributing to a Roth IRA went up for singles, heads of households, and married couples filing jointly. Additionally, taxpayers may be able to deduct contributions from a Traditional IRA if they meet certain criteria. A list of those figures is available in IRS Notice 2019-59.
As always, this new information is strictly for one’s own knowledge, and we encourage individuals to consult their trusted advisors regarding their specific financial situations to determine what works best for them.
Boost your retirement savings with alternative assets
Whether you’re already in the real estate market, invest in precious metals, or are interested in putting private equity in your retirement plan, nontraditional investments are a powerful way to build a more diverse retirement portfolio that provides a hedge against stock market volatility. What many people don’t know is that there are many different types of accounts that can be self-directed to include those nontraditional investments within them. So, if you’ve reached your annual contribution limit on an employer sponsored plan, or an IRA with a brokerage firm, you can still open and fund an account with Next Generation through a transfer or a rollover. Our self-directed IRA specialists are happy to review your options with you.
The deadline to contribute to your retirement plan for the 2019 tax year* is April 15, 2020, but it’s always the right time to contact Next Generation to open your self-directed IRA. You can arrange a complimentary educational session if you have questions about self-direction as a retirement strategy. Alternatively, you can contact our helpful team of professionals directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com. You can always read more about the many options and benefits of self-direction on our FAQs page.
*Please visit our website for 2019 contribution limits.
Self-Directing your HSA Can Help Boost Your Savings for Future Medical Expenses, Tax Free
It’s common today for people to have a high-deductible health plan (HDHP)—one with a higher annual deductible and out-of-pocket maximums (and slightly lower premiums) than typical health insurance plans.
Those high deductibles may be a hard pill for many people to swallow, but HDHPs allow individuals to open and fund a health savings account (HSA). HSAs provide three tax-advantaged ways to save and pay for qualified medical expenses. The tax benefits of these accounts are:
- Funds deposited into an HSA are not taxed
- The balance in the HSA grows tax free
- The amount withdrawn to pay for qualified medical expenses (including copays, coinsurance, premiums, dental care, eye care, and prescription drugs) is not taxed
After a person hits 65 years old and is on Medicare, he or she can no longer contribute to the HSA but the funds may be used for other expenses without penalty; however, any non-medical distributions are treated like those from a Traditional IRA and subject to income tax on the distribution. Unlike a Traditional IRA, there are no required minimum distributions.
Your savings can accrue year after year, just like in an IRA. And just as you include alternative assets within your IRA, you can also invest the money you accrue in your health savings account—and purchase alternative assets to build up your savings for the future.
Just as with any self-directed retirement plan, you can give your health savings account a boost by including nontraditional investments such as real estate, precious metals, notes, private equity, and more. Self-direction allows you to use your expertise in the investments you’re passionate about, and may bring you comfort in knowing you’re making your own investment decisions. And, if you have relatively low medical costs and build up a healthy balance in your HSA, you have another avenue for growing your retirement savings with the potential for higher yield than the returns on a typical savings account. The broad array of diverse investments allowed through self-direction also provide a hedge against stock market volatility.
The contribution limits for HSAs in 2020 will be $3,550 for an individual and $7,100 for a family; individuals 55 and older can make an additional $1,000 catchup contribution.
You can have more than one HSA and you can transfer funds between them—so you may choose to use one to cover medical expenses or medical emergencies and another building wealth as a long-term investment for future medical expenses or supplemental retirement income. With health care costs continually rising, and today’s workforce expected to need at least $260,000 to cover medical expenses during retirement, having a self-directed HSA can help.
By including alternative assets and self-directing your health savings account, you’ll have more options for creating a cushion for medical or other expenses when you retire—and you’ll maximize your HSA contributions while you are able.
If you have questions about self-directed HSAs or any self-directed retirement plans, Next Generation can help with one of our complimentary educational sessions. Or, contact our team about self-directed IRAs and the many types of nontraditional investments these plans allow. We’re available via phone at 1-888-857-8058 or email: NewAccounts@NextGenerationTrust.com.
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.