Investing in Self-Storage Through a Self-Directed IRA

Investing in Self-Storage Through a Self-Directed IRA

Did you know you can include self-storage in your retirement portfolio? Real estate is the most popular asset class in self-directed IRAs—including commercial real estate—and self-storage is a growing segment that offers great potential for self-directed investors. In fact, it is a $39.5 billion industry in the U.S., utilized by approximately 10% of all U.S. households (with tremendous growth potential as Generation Z gets older and Generation X starts to downsize). As of this year, the estimated number of self-storage facilities is over 49,200.

The most common avenues for self-directed investments in this asset class are through promissory notes (lending) or private placements—direct investments in a private entity such as a self-storage REIT (real estate investment trust), C-corporation, LLC or fund. The self-directed IRA invests into those entities, with all income and expenses related to the asset flowing in and out of the retirement plan.

Strong asset class with strong ROI

Investing in self-storage through a self-directed IRA

Before taking the steps to invest in self-storage through a self-directed IRA, there are a few things to note. This must be a passive investment to meet IRS investing guidelines. You, as the self-directed IRA owner, cannot be an active partner, director, or managing member of the investing entity (REIT, fund, LLC)—this makes you a disqualified person and creates a prohibited transaction which can cause your investment to lose its tax-advantaged status. Also, beware of investing in a private fund or company that is owned 50% or more by disqualified individuals, as this would constitute a prohibited transaction. Disqualified persons for this purpose are the account owner, his/her spouse, lineal descendants or ascendants; a beneficiary of the IRA; or plan service providers and fiduciaries.

At Next Generation, we take steps to make investing in all types of alternative assets as easy as possible. Our Starter Kits contain all the paperwork needed to open and fund a new self-directed retirement plan. After you do your research and identify the entity into which you wish to invest through your IRA, we’ll provide you with a list of the documentation required to process and execute the private placement (or promissory note, if lending). You will need to provide our Next Generation team with a buy direction letter, private placement instruction letter and advisory notice, transaction payment method, and outgoing ACH or wire instructions.

We will review the transaction for compliance with IRS investing guidelines and complete the transaction; our custodial firm, Next Generation Trust Company, holds the assets for our clients.

Want to know more including self-storage in your self-directed IRA? Watch this on-demand webinar on the topic, or schedule a complimentary educational session with Next Generation. You can always contact us by phone at 888.857.8058 or by email to NewAccounts@NextGenerationTrust.com with your questions.

Tax Filing Day is Extended to May 17

Taxpayers get an extra month to pull together their reports and receipts for their accountants, now that the Internal Revenue Service has issued a tax return deadline extension until May 17. The reason given was pandemic related, as many Americans are dealing with economic upheaval. You may recall that last year, the deadline was pushed to July 15 as the country underwent extraordinary circumstances, high unemployment, and general distress related to COVID-19.

The May 17 target date allows those who’ve been out of work, had hours cut, or are just getting back into the workforce time to figure out their finances and review tax changes that went into effect with the American Rescue Plan. For example, unemployment benefits up to $10,200 received in 2020 are tax free for individuals with incomes below $150,000. A few things to note:

At Next Generation, here’s a caveat we like about this filing extension: it gives taxpayers more time to contribute to their retirement accounts and reduce 2020 income (since the prior year contribution deadline was also extended to May 17) using stimulus money or compensation from their restarted or new job. Contributing to your retirement plan has the potential to qualify an individual for stimulus funds by reducing income on the tax return (for tax year 2020). And of course, if you have a self-directed IRA or other self-directed retirement plan, health savings account (HSA), or education savings account (ESA), you can also leverage the power of alternative assets to build a more diverse portfolio and a hedge against stock market volatility.

Weather-related extensions for affected taxpayers

In Louisiana and Texas, people affected by the bitter February storms and cold snap now have until June 15 to complete activities related to retirement plans (IRAs and employer-sponsored plans), HSAs and ESAs. These time-sensitive activities, which typically must occur by the tax filing deadline, include:

If you are in the affected areas, you can read more here.

It’s always a good time to invest in alternative assets

All those retirement plans and other accounts noted above can be self-directed—including HSAs and ESAs.

Savvy investors who self-direct their retirement plans (as well as other plans) enjoy the benefits of portfolio diversification. They can also take advantage of investment opportunities as they arise or invest in assets that align with their values or goals. Examples of alternative assets allowed in self-directed IRAs are real estate, precious metals, notes/loans, private equity, cryptocurrency, impact investments and more. We recently presented webinars on how to invest in music royalties and impact investments, so you can see the field is quite open for including nontraditional investments you already know and understand—any time of year.

Here’s another tip: you can schedule a complimentary educational sessions with someone from the Next Generation team; or contact us directly via phone at 888.857.8058 or email NewAccounts@NextGenerationTrust.com to get answers to your questions about self-direction as a retirement wealth-building strategy.

Using a Self-Directed IRA to Invest in Music Royalties

A royalty is essentially the income stream generated from certain intellectual property—usually music, books, and films—and earned by the rights holder of said published or produced properties. Singers, songwriters, producers, labels, publishers and authors are among the individuals or companies that can have legal claim to the income generated from the intellectual property (IP).

Did you know that music royalties are considered an alternative asset that can be bought or sold and included in a self-directed IRA?

Self-directed investors can invest in music royalties to diversify their retirement portfolios with a non-publicly traded asset. Like many other nontraditional investments allowed through self-direction, music royalties are considered uncorrelated assets, meaning they perform unrelated to public markets (such as the stock exchange); therefore, they provide a good hedge against market volatility.

Royalties as revenue streams

Royalties are legally-binding payments from a licensee to a licensor—the party with the legal claim to the intellectual property. In the music world, royalties are paid based on album sales, song/album downloads, streams, or whenever a song is used in a commercial or movie—any sales channel. They can generate a consistent cash flow, especially in today’s age of digital streaming. Think Taylor Swift, Ed Sheeran, and other pop music artists who’ve created the asset one time but earn income for years; their songs and records climb the charts and continue to sell or be downloaded time and time again, year after year.

Royalties are a long-term asset, paid for the life of the artist plus seven years, creating the potential for capital appreciation over time.

Artists may sell royalties to their back catalogs or even current works to raise capital in the short term or create financial security, enabling them to earn money immediately from their works, or even have the proceeds donated to charity. Sometimes estates auction off the catalogs.  Investors can earn passive income when holding the IP asset in their self-directed IRA.

How to invest in music royalties

In the past, investing in royalties had been limited largely to private equity investors or institutional funds. Today, royalties are bought and sold on exchange platforms created specifically for this purpose, making this alternative asset more accessible to a wider pool of investors (including those with self-directed retirement plans).

There are four main categories of music royalties:

The account owner invests in a percentage of the royalties through auction and can earn a healthy yield. According to Royalty Exchange, one of the exchange platforms for entertainment IP, music royalties earned 10% or more average ROI (annualized asset return) in the first six months of 2020. Other exchanges are SongVest and Lyric Financial.

Other types of royalty investments

Self-directed investors may include royalties in trademarks, patents, mineral rights, educational materials, pharmaceuticals, or invest in royalty trusts. When investing in items with copyrights or patents, the income – and the percentage ownership – lasts for the lifetime of that copyright or patent.

At Next Generation, our clients invest in a broad array of alternative assets through their self-directed IRAs, from real estate to royalties, private equity to precious metals. Next Generation offers custodial and administration services for these accounts, and as part of our white-glove service, we offer client education through webinars and our complimentary educational sessions. Alternatively, our helpful team is available to answer your questions directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.

America Saves Week is Feb. 22-26. Are you Saving Enough for Retirement?

America Saves Week is an annual event, and a call for Americans to commit to saving successfully—as individuals and families, for reducing debt and for retirement, to have something for emergencies, and to create the habit of saving automatically. According to its website, America Saves encourages us all to set goals and make a plan to achieve better financial stability. The week’s daily focus changes; yesterday, Wednesday, February 24th was “save to retire.” We like that!

It’s no secret that most Americans need better overall financial habits, especially when it comes to saving for retirement. Between the Great Recession and the COVID-19 pandemic, it’s been tough for many people to stay on track (or get back on it) with their retirement savings. Moreover, the pandemic has led to many people retiring before they had planned to do so, for various reasons. However, there’s an interesting flip side to this issue: for some retirees or those nearing retirement, they are opting to work longer, even part-time, because they find working remotely to be a viable option or they are waiting for more of the economy  to rebound. With nowhere to go, they might as well still work.

Whether you aren’t on Medicare yet and can still contribute to an HSA (which you can use later on for non-medical expenses without penalty), or you’re still contributing to your workplace retirement plan or your IRA, America Saves Week is the perfect time to educate yourself about wealth building..

Investing those funds through a self-directed IRA could get you to your retirement goals sooner.

Saving and Investing with a Self-Directed IRA

Self-directed retirement plans come in all types, with the same tax advantages as their traditional counterparts. However, unlike typical retirement plans, you are not limited to stocks, bonds, and mutual funds when you self-direct your investments. Instead, you can include a wide range of alternative assets—ones you may already be investing in outside of your existing retirement plan—and build a more diverse portfolio based on what you know and understand.

You can self-direct a Traditional or Roth IRA, a SEP IRA or SIMPLE IRA – as well as a health savings account or education savings account. If you are a small-business owner or sole proprietor with no common law employees, you may also open a Solo 401(k).

When you self-direct your investments, you can include alternative assets such as real estate, private equity, precious metals, notes/loans, impact investments, cryptocurrency (and more) and take advantage of diverse investment opportunities. As with all self-directed investing, you as the investor conduct your full due diligence on the alternative assets you wish to include, all income and expenses related to the assets flow through the retirement plan, and you must avoid prohibited transactions.

Post-retirement contributions

As you may know, the SECURE Act has made it possible for you to continue contributing to a Traditional IRA after you’ve retired, as long as you have earned income (similar to a Roth IRA). To continue contributing to a Roth IRA, you must also meet certain income criteria as set by the IRS. That is good news when it comes to saving for retirement.

Here’s more good news: the professionals at Next Generation are here to help you understand the many options and benefits of self-direction as a retirement wealth-building strategy. You may schedule a complimentary education session to get answers to your questions and learn more about getting started—whether you’re many years away from retiring, in your mid-level career, or wish to change the way you’ve been investing your retirement savings. You can also contact the Next Generation team by phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.

Show Your Retirement Portfolio Some Love this Year

Whether you’ll be staring adoringly into your partner’s eyes on Valentine’s Day or celebrating with a Galentine’s/Malentine’s Day get-together with friends, February is the month of love and friendship—and your retirement plan also deserves some special attention.

The first way to give your retirement plan a loving boost is to open a self-directed IRA. Why a self-directed plan? Two words: alternative assets. And those non-publicly traded, alternative assets provide you with many ways to diversify your retirement portfolio with an array of investments you may already be “engaged” with outside of a retirement plan. In most IRAs held with a brokerage, those alternative investment options are not always available to you. Hence, the self-directed IRA.

Sure, you may love playing the stock market and enjoy the thrill ride of that roller coaster by way of its volatility. However, as a self-directed investor there’s no reason to limit your investing to stocks, bonds and mutual funds. In fact, most advisors may actually encourage diversification and alternative investing to allow you added control over your investment returns while providing a hedge against that volatility. Investment options include real estate, private equity, notes and loans, social causes, cryptocurrency, precious metals and more.

What do you already love?

Think about the investments you already know and understand—the ones you already love investing in, like real estate, precious metals, or private equity. As explained before, the list of possible investments through self-direction is long and enables individuals to take advantage of market opportunities and apply what they know to their tax-advantaged retirement account. For example:

Many types of retirement plans can be self-directed—a Traditional or Roth IRA, SIMPLE or SEP IRA, or solo 401(k), even health savings accounts (HSAs) and education savings accounts (ESAs). Depending on your goals and situation, you have plenty of options in terms of the type of plan to open. That flexibility may come in handy when you do retire and want a combination of tax-free and tax-deferred income, for example, or if you are self-employed or own a small business with employees.

Here’s more to love: opening a new self-directed IRA is easy and you can fund the new account the same way as you would any other plan—with a transfer from a like account, a rollover, or a personal contribution. At Next Generation, we simplify the process with our electronic starter kits that walk you through every step from opening the account through sending your instructions to our transaction specialists. As a third-party administrator and custodian of self-directed IRAs and other plans, we will review and execute investment transactions, custody asset(s) for our clients, provide recordkeeping and complete all necessary tax reporting.

If you are comfortable making your own investment decisions and conducting your full due diligence on the investments you wish to include, we invite you to learn more about this retirement strategy by scheduling a complimentary education session with one of our knowledgeable representatives. You may also contact our team directly via phone at 888-857-8058 or via email at NewAccounts@NextGenerationTrust.com.

What’s Your Retirement Planning Strategy?

If you’re a younger worker, it’s easy to think you have your whole life ahead of you to plan for retirement. And if you are nearing retirement, you may think you’ve got it covered through your employer’s retirement plan or other means. But with so much uncertainty swirling around us right now and with the cost of living rising, a proactive approach to your retirement planning strategy is always wise.

Plan ahead to be less dependent on Social Security or someone else’s bank account. Many older adults may feel that Social Security benefits will keep them financially secure or their adult children will help them out. But with real concerns about the Social Security Trust Fund’s sustainability and Generations X and Y facing their own savings issues, there are no givens. Besides, Social Security was meant to be a supplement to retirement income, not a main source of income.

Plan ahead for how (or if) the sale of your home will fund your lifestyle. Those who own a home may feel confident about living off the proceeds of the home’s sale, especially if the house is paid off already—but a lingering mortgage cuts into proceeds, capital gains may be a factor to consider, and if you’re thinking of moving into a retirement community, the rents can be quite high.

Plan ahead for possible early retirement. The pandemic has wreaked havoc on employers nationwide. Businesses are closing or tightening their financial belts in response to market conditions; extended furloughs may become permanent, and this may motivate some people to consider an early retirement.

Plan ahead for a smaller pension plan. Part of the corporate belt tightening has been the steady disappearance of traditional pension plans. Plus, many pension plans are in distress and may have to reduce distribution levels due to various factors such as poor ROI on investments, lower participant rates, and economic factors brought on by COVID-19.

Plan ahead for “I’m that old already?!” When getting our careers in gear, many of us think we have “forever” to get started on saving for retirement. Then suddenly, 20 years have passed and that time horizon for putting money away is much shorter.

Plan ahead for retirement through self-direction

Self-directed retirement plans offer an alternative strategy to traditional investing, by including non-traditional assets that brokerage accounts do not allow. For seasoned investors who are comfortable making their own investment decisions and are confident about conducting their own full due diligence on those investments, a self-directed IRA can be a great way to build retirement income with a powerful hedge against stock market volatility. Self-directed IRAs also allow for retirement portfolio diversification and greater control over your investment returns.

If you have an employer-sponsored plan, it is likely limited to stocks, bonds and mutual funds that are susceptible to the ups and downs of the market. You may also have an IRA (or brokerage account) that offers a “self-directed” option; however, it is not truly self-directed. The true definition of a self-directed IRA is a tax-advantaged retirement account that allows you to invest in non-publicly traded assets. These non-publicly traded assets, also known as alternative assets, can include real estate, private equity, social/impact investments, cryptocurrency, notes/loans, and more.

As a custodian and administrator for these self-directed retirement plans, the team at Next Generation is here to help. You can schedule a complimentary educational session to learn more about self-direction; or you may contact the Next Generation team directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.

It’s a New Year – Do You Have a New Outlook on Your Retirement?

The new year often brings promises and resolutions to create new habits, get back to something we enjoy, or try something new. Why not apply the “new year, new you” mindset to your retirement planning as well?

Do any of these scenarios sound like you?

Get a new plan for your retirement in the new year with a self-directed IRA

Self-directed investors are those who are comfortable making their own investment decisions (that’s where the “self-directed” part comes into play), and who are knowledgeable about (and often experienced in) investing in various alternative assets. For example, you:

  1. Already invest in real estate (residential, commercial, industrial, raw land, etc.)
  2. Understand how to make a secured or unsecured loan with interest and terms
  3. Are involved in private equity funding
  4. Trade in agricultural or energy commodities
  5. Buy and sell cryptocurrency
  6. Are passionate about investing in social causes

The list goes on and is as diverse as the investors who self-directed their retirement plans.

Open a new self-directed IRA at Next Generation

Whether you’re just starting out with your self-directed IRA or have one that needs some catchup contributions, Next Generation is here to help. As a self-directed retirement plan custodian and administrator, we work with investors who wish to include alternative assets in their self-directed IRAs. Our clients understand that this strategy enables them to diversify their retirement portfolios with investments they already know and understand, while also providing a hedge against stock market volatility and the same tax advantages as regular retirement plans.

The turn of the calendar page is a great time to consider opening a new self-directed retirement account and start putting your investing expertise to work through a tax-advantaged plan. We offer client education through webinars, on our blog, and  complimentary education sessions to help you evaluate if self-direction is the right direction for your retirement goals. If you have a specific question or want to know more, you may also contact the Next Generation team by phone at 888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.

Retirement Plan Contribution Limits for 2021

The IRS has announced 2021 contribution limits in its Notice 2020-79, which covers various types of retirement plans, including workplace retirement plans and individual retirement arrangements (IRAs). These figures apply to regular and self-directed retirement plans. The deadline to contribute to your retirement plan for the 2020 tax year is April 15, 2021.

Contribution limits remain the same. Note that once again, there is no change for Traditional and Roth IRA contribution limits, which remain at $6,000 per account holder per year. Note that taxpayers may be limited in their contribution limits to a Roth IRA, or be prohibited from contributing at all, based on modified adjusted gross income (for single filers and/or those filing jointly), as detailed by the IRS.

Catch-up contributions—the additional retirement plan contributions allowed for taxpayers ages 50 and over–will also remain unchanged:

Deductibility phase-outs. Depending on income levels and types of retirement plans, taxpayers may be eligible to take a yearly tax deduction for the money they contribute to an IRA each year (this does not apply to a Roth IRA, which is treated differently for tax purposes), but there are criteria for this. Contributions to a SEP or SIMPLE IRA are also deductible but you should consult your tax professional for guidance about those.

For taxpayers who participate in employer retirement plans, there is an IRA deductibility phase-out based on modified adjusted gross income (MAGI); for 2021 this will rise slightly in each category as follows:

Roth IRA eligibility ranges will increase. Because Roth IRA contributions are made on an after-tax basis, the rules are different in terms of eligibility to contribute, based on MAGI:

Employer-sponsored plans. Most but not all workplace retirement plans will not see a change in annual additions, deferral limits, and other criteria. For example, defined contribution plan additions increase to $58,000 (up $1,000 from 2020) but there is no change for defined benefit pension plans. Certain income thresholds will go up. Your employer plan administrator should have that information available to you.

Potential tax credits. Taxpayers who make contributions to IRAs or deferral-type employer-sponsored retirement plans of up to $2,000 may be eligible for a special income tax credit, referred to as the “saver’s credit.” Depending on modified adjusted gross income, it could be 10, 20, or 50 percent of the amount contributed, and differs for joint filers, heads of households, and singles.

Potential retirement wealth boosters—self-directed IRAs

Whether you’ve already contributed your maximum allowed amount for 2020 or you are still making contributions to your retirement plan, you can boost your retirement savings with a self-directed IRA. Whether Traditional or Roth, SEP or SIMPLE, self-directed retirement plans put you in control of your investments by allowing you to include a broad range of alternative assets in your account. For individuals who are comfortable making all their own investment decisions, are able to conduct full due diligence about nontraditional investments, and want to create a hedge against stock market volatility, a self-directed IRA can be a powerful tool to build a more diverse retirement portfolio.

Read more about the many options and benefits of self-direction on our FAQs page.  If you have questions about this retirement strategy, you can arrange a complimentary educational session; or contact our team directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.

The Answer to the DOL’s Final Rule on Environmental, Social and Governance (ESG) Investments

The Department of Labor (DOL) has issued a final rule, “Financial Factors in Selecting Plan Investments,” concerning environmental, social and governance (ESG) funds in private employer-sponsored retirement plans, such as 401(k)s. While the final rule does not prohibit these investing choices for workplace retirement plans, its goal is to provide clear regulatory guidelines for ERISA plan fiduciaries, with the suggestion that ESG investing conflicts with their fiduciary responsibilities.

ESG investments advance positive social change such as improving the environment or promoting human rights. According to the DOL, decisions about these investments are not primarily pecuniary (in other words, determined and expected to be in the plan participants’ best financial interests, with a material effect on the risk and return), so plan fiduciaries may be cautious about recommending or including them in the workplace plans.

According to DOL Secretary Eugene Scalia, rather than further social goals or policy objectives, “This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives.”

Therefore, employees who are saving for retirement through a 401(k) or other workplace plan may now experience some roadblocks when it comes to including ESG funds or individual investments in their retirement plans.

ESG investments can be held in self-directed IRAs as an alternative
Self-directed IRAs allow individual investors to embrace social investing and include alternative assets that align not only with their financial goals but their values as well. For example, the self-directed IRA can invest in funds and initiatives that combat climate change, nefarious labor practices, or human trafficking; or support green energy, fair trade cooperatives, and other investments that address inequities in the economic landscape, promote sustainability, and support positive governance practices.

With a self-directed IRA, investors have access to the same types of account types as they would with a brokerage firm, such as a Traditional IRA, Roth IRA, SEP IRA, or even a Solo 401(k).  Individuals with these retirement plans can include a broad array of non-publicly traded alternative assets in addition to ESG-related assets, such as real estate, private equity, hedge funds, precious metals, private lending and more.

It is unclear whether there will be a lot of pushback about this final rule or how it may be amended in the future. However, for investors who want to proactive take control of their financial futures, opening a self-directed retirement plan is a great step forward. At Next Generation, we invite you to schedule a complimentary educational session to learn more about self-direction as a retirement strategy.

Alternatively, you may contact us directly via phone at 888.857.8058 or email at NewAccounts@NextGenerationTrust.com.