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.
Considering Taking a Hardship Distribution from Your Retirement Plan?
The coronavirus pandemic is leaving millions of Americans on furlough or out of a job, dealing with reduced hours or workload… but NOT with reduced monthly bills to pay. For many, this is a time of financial hardship. Sadly, according to a 2018 Federal Reserve report, 40 percent of adults cannot cover a $400 emergency expense and the current situation goes far beyond that.
Sometimes, individuals consider dipping into one’s retirement plan to cover short-term expenses. Among the emergency expenses that may qualify for such a withdrawal are tuition/education expenses; down payment or repairs on a primary residence, rent or mortgage payments (to thwart possible eviction or foreclosure); out-of-pocket medical expenses; and funeral costs.
- The withdrawal amount has been limited to the amount of the emergency expense
- The plan participant pays income tax on the withdrawal plus a 10 percent penalty if under 59½ years old
- If a 401(k) design allows for loans (not all do), people taking loans against their 401(k) plans must repay the full loan amount with interest; lack of repayment can trigger additional penalties
- In addition, participants’ contributions from their paychecks into their 401(k) plans are suspended for at least six months after taking the hardship distribution
Changes with the CARES Act
This stimulus package has loosened the rules around taking hardship withdrawals from retirement plans, and loans from 401(k) plans. A CARES Act provision allows individuals who are facing adverse financial consequences due to COVID-19 to withdraw funds from their retirement accounts without penalty (regardless of age). This applies to IRAs and 401(k) plans.
The withdrawal must be made before December 31, 2020 and can be up to $100,000. Tax payments on this income are extended out three years. For those taking loans against their 401(k)s, that amount is also raised to $100,000. Note that there are no loans from IRAs.
Why gamble with your retirement savings?
Many financial experts argue against taking out a hardship loan from one’s 401(k) plan to avoid reducing any retirement savings, when there are other loan options available (such as a home equity loan, SBA loan, or other lines of credit). And, all good intentions aside, it may be difficult to replace the funds from a hardship distribution from an IRA or other retirement plan—and then rebuild on that money for retirement.On top of that, the stock market has suffered a tremendous downturn, with subsequent volatility almost daily, as a result of COVID-19 and the economic stressors stemming from lockdowns.
Weathering market volatility through self-direction
Self-directed investors have greater leeway when it comes to hedging against that stock market volatility. That’s because of the many alternative assets that can be held in a self-directed retirement plan. Investing in real estate, precious metals, private equity, or other non-publicly traded assets give savvy investors many more ways to build a more diverse retirement portfolio that have stronger potential to weather the COVID-19 storm (and other times of economic uncertainty). One reason is because the returns on nontraditional investments in a self-directed IRA do NOT directly correlate with stock market returns.
You can even loan funds from your self-directed IRA to someone who is dealing with a cash flow shortage, with the terms worked out between both parties, and receive interest and principal paid back to your IRA.
As always, it is best to consult your trusted financial adviser about how to navigate financial hardship as it relates to your retirement plan. At Next Generation, we’re here to answer any questions you have about self-direction as a retirement strategy, or about the many alternative assets allowed in these plans. You can schedule a complimentary educational session to learn more or contact us directly via phone at 888.857.8058 or email NewAccounts@NextGenerationTrust.com.
Amid Stock Market Downturn, Consider Self-Directed IRAs
Many investors are dealing with yet another stock market downturn, which is in reaction to current events such as global concerns about the Coronavirus and U.S. politics during an election year. These and other factors—from geopolitics to macroeconomics, trade issues to plant closings to a company’s profitability and earnings—can influence a stock market downturn.
Stocks by nature are volatile, which is why many investors look to alternative assets to build their retirement savings and avoid stock market downturns that are often hard to predict. That means looking at self-directed IRAs, which allow individuals to include a variety of nontraditional investments and build a more diverse retirement portfolio based on assets they already know and understand.
Look at it this way: unless they work there, many people are not experts on what a Blue Chip or Fortune 500 company produces or sells, and they certainly cannot control what those companies do in the marketplace. However, many people know a lot about investing in real estate, precious metals, or private equity. Others like the idea of including secured or unsecured loans in their retirement plan, with terms they determine with the borrower. All of these investment types can be included in a self-directed IRA, where investors build retirement wealth with alternative assets—and have better control over their earnings.
A self-directed IRA has the same tax advantages as regular retirement plans with the added bonus of being a great hedge against stock market volatility. For those who are comfortable making their own investment decisions and conducting their due diligence, self-direction is a powerful retirement strategy.
Typical retirement plans offered by brokerage houses or banks limit investors to publicly traded stocks, bonds, certificates of deposit, and mutual or exchange-traded funds. But a self-directed IRA allows you to hold the alternative investments noted above plus notes, private placements, limited partnerships, tax lien certificates and more.
Our whitepaper library has a lot of great information about self-directed IRAs and our helpful team is here to answer your questions about self-direction. To find out more about self-direction, you may call us at 888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com. Alternatively, you can sign up for a complimentary educational session with one of our knowledgeable representatives.
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.
You Could Work a Little Longer to Build More Retirement Savings—or Invest More Creatively through Self-Direction
Did you know that by working six months longer, workers can reap significant Social Security compounding benefits? A Stanford University economics professor, John Shoven, says that older people who are behind on their retirement savings goals can catch up pretty well and increase their retirement standard of living by working just six months longer (and paying into Social Security).
In his paper, “The Power of Working Longer,” Shoven showed that postponing retirement by just three to six months is equivalent to saving an additional percentage point of earnings for 30 years. Plus, for individuals who are in their mid-60s, working just one month longer is equal to saving ten more years for retirement.
Shoven’s study is geared toward people ages 62 to 69 who have a retirement plan but have saved less money for retirement than they desire, have an annual income up to about $200,000 and who rely largely on Social Security during their retirement years. His model used an inflation-adjusted rate of six to eight percent real returns and assumed a safe strategy of investing mostly in bonds.
However, even with higher risk factored in, Shoven found that working slightly longer was still the better way to raise retirement income. Those extra months enable individuals to contribute more to their retirement plans while also boosting Social Security benefits by continuing to pay into the system.
Working a couple of years longer than originally anticipated—say, retiring at age 66 instead of 64—provides even more income when factoring in contributions to both one’s retirement plan and Social Security. Of course, as with any financial planning around one’s retirement age and when to claim Social Security benefits, it’s always best to consult a trusted advisor.*
Invest smarter—and make self-direction work for you
If working longer than originally planned isn’t for you, but investing in alternative assets is, you can boost your potential retirement savings with a self-directed IRA. If you start early enough (or are able to make additional catch-up contributions later on), and you are comfortable making your own investment decisions, self-direction can work for you in a number of ways:
You can build a more diverse retirement portfolio that is not dependent on stocks, bonds and mutual funds – or subject to stock market volatility
- You can include nontraditional investments you may already be investing in outside of your existing retirement plan (such as real estate, precious metals, unsecured or secured loans, private equity)
- You’ll enjoy the same tax advantages of regular IRAs – tax deferred or tax free earnings, depending on the type of account you use
So, you can keep that original retirement date on your calendar and start putting a broader array of investments in your retirement plan with a self-directed IRA. Next Generation makes setting up and funding your new account easy with our helpful starter kits, and our team is here to answer your questions about this type of retirement strategy. Contact Next Generation via email at NewAccounts@NextGenerationTrust.com or call us at 1.888.857.8058 or email NewAccounts@NextGenerationTrust.com.
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*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.
Are you an Active or a Passive Saver?
A Harris Interactive poll conducted online in November 2010 asked 2151 adults about how their savings (if any) are invested now. For their retirement savings, most have parked their money in some combination of stocks/mutual funds, bonds and money market funds; for their personal savings nearly one third (31 per cent) keep their money in bank accounts or CDs. Although individuals will earn negligible interest on those accounts, it seems that for those who struggle to save, “Better safe than sorry” is the guiding factor as they seek the most stable, safest investment vehicles possible.
Concern about market volatility appears to affect the younger age groups as well, even though people in their 20s and 30s have many more years ahead of them to build their retirement wealth, and they are often counseled to be more aggressive early on with their investing.
Harris also reported that a majority of respondents had not changed their portfolio mix in their personal savings and investments or their retirement savings and investments in the six months leading up to the poll (70-74 per cent). A hands-off approach doesn’t serve anyone well except the financial institutions holding those funds. Even the most cautious of investors should sit down with their financial advisers periodically to review their account’s performance, revisit their long-term and short-term financial goals, and make course corrections for how their funds are invested.
What many consumers do not realize is that even for those individuals who have just a few thousand dollars socked away for their retirement, they can boost their yield with some know-how and moxie through a self-directed IRA. Investors who are interested and comfortable in taking a more active role in their retirement strategy should learn more about this growing trend in retirement savings strategy.