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.
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.
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.