Promissory Notes and Secured/Unsecured Loans in a Self-Directed IRA
As we wrote about last fall, promissory notes are one way that self-directed investors—individuals with a self-directed IRA or other retirement plan—can provide funding assistance to other parties while building retirement savings. In that article, we focused on real estate notes, also called private mortgage notes; these are promissory notes secured by a piece (or multiple pieces) of real estate.
Self-directed investors can also include promissory notes in their retirement plans. Also known as commercial paper, these are issued by organizations to raise short-term capital for business purposes. Investment notes are essentially loan agreements that guarantee investors that they will receive a return on their investment within a specified time frame.
There are various reasons why a company issues commercial paper—to finance payroll, accounts payable, inventory purchases, or to meet other short-term liabilities. The maturity term is generally from a few weeks to a few months; the loan is based on the borrower’s promise to repay and the lender’s confidence in that ability.
Another type of loan that can be funded through a self-directed IRA is a student loan. The IRA lends money to someone to pay a student loan and the debtor pays back the self-directed IRA with interest.
When promissory notes and other loans come from a self-directed IRA, the repayment terms (such as maturity date, payment schedule, interest paid on the loan, and a default clause) are worked out between the parties involved, instructions are sent to the self-directed IRA administrator, and the repaid funds with interest go directly back into the IRA.
While investing in notes can be a great way to help others get the funding they need in the short term, investors should always be aware of the risks and should fully understand the nontraditional investments they are considering. As with any investment, we strongly recommend that our clients conduct full due diligence in order to protect the tax-advantaged status of their account(s).
When it comes to questions about self-direction as a retirement wealth-building strategy, we’re here to help. We offer many ways to get in touch with us to learn more. One of those ways is to arrange a complimentary educational session with one of our representatives. Alternatively, you can contact us via phone at 888.857.8058 or email NewAccounts@NextGenerationTrust.com.
Impact Investing Through a Self-Directed Retirement Plan
Younger investors are changing the investing landscape as they start putting more of their dollars into sustainable investments. This category of investments includes those that consider environmental, social, or government practices.
More and more, millennial investors want to include investments that align with their values within their retirement plans—including their self-directed IRAs.
According to the Morgan Stanley Institute for Sustainable Investing, interest in sustainable investing (SI) has grown among the general population and even more so among millennial investors in recent years.
- In 2015 among the general population, 71% of those surveyed indicated they were interested or very interested in SI in 2015. In 2019, that rose to 85%.
- In 2017, 84% of millennials were interested or very interested, which rose to 95% in 2019.
- When it came to actually having sustainable investments:
- In 2017, 42% of the general population and 50% of millennials had sustainable investments.
- Today, 52% of the general population and 67% of millennials do.
- Investment into sustainable funds has nearly tripled in 2019 from the prior year ($13.5 billion to date).
To name a few ways that social impact investing is showing up in self-directed retirement plans, investors have been including assets such as organic farmland, FINtech, innovative startups, or renewable energy. Popular target investments cited in the Morgan Stanley report were those related to plastic reduction and climate change.
The social impact side of this is important to investors – a majority (83% of the general population and 89% of millennials) said they believed their sustainable investments could create economic growth and reduce poverty. Around one-third of these investors (33% of the general population and 36% of millennials) are also screening investments in order to avoid putting money behind something they object to.
Sustainable investments in a self-directed IRA
Given that self-directed investors have more options in terms of the types of investments their plans can include, it’s no surprise that those interested in supporting environmental and social causes, innovations, and companies are including organic farmland, renewable energy resources, or innovative startups within those plans.
Some other examples of social impact and sustainable investing are:
- Climate mitigation projects
- Clean energy projects or companies (wind, water, solar)
- Organic farms, sustainable tree farms
- Affordable housing
- Equity funding in companies that produce devices that increase water or energy efficiency or life-saving medical equipment for rural areas or Third World countries
Self-directed investors make all their own investments decisions – usually based on experience with assets they already know and understand. Self-direction can be a powerful way to put what moves investors most into their retirement plans because it can give investors better control over their earnings. Added benefits of self-direction include portfolio diversification for investors who also wish to continue investing traditionally, and a hedge against stock market volatility.
If you’d like to learn more about the many options available through self-direction as a retirement strategy, register for one of Next Generation’s complimentary educational sessions. Alternatively, you can contact our team directly by phone at 1-888-857-8058 or by email at NewAccounts@NextGenerationTrust.com.
All That Glitters Could be Gold: Investing in Precious Metals in a Self-Directed IRA
Gold, silver and platinum figure big in holiday gift giving. But did you know that not all precious metals are destined to become jewelry? For many investors with self-directed IRAs, precious metals are part of their retirement portfolios.
You may have heard the terms “gold IRA” or “silver IRA.” They refer to the self-directed retirement plans that include these precious metals. In these cases, physical gold, silver or other approved precious metals are held in custody for the benefit of the IRA account owner. Instead of paper assets, there are physical coins or bullion bars, referred to as hard assets.
These alternative assets are easy to own and to manage for savvy investors who already know and understand the precious metals markets. And, precious metals have historically been an excellent way to diversify investment holdings and preserve capital. Gold and silver provide a hedge against inflation and precious metals’ value usually move independently of the stock market, which can make a precious metals IRA a good hedge against market volatility.
Precious metal assets allowed in self-directed IRAs
There are three categories of precious metal assets investors can include in their self-directed retirement plans:
- Investment-grade gold and silver bars and rounds, including Credit Suisse-Pamp Suisse bars. Gold must be .995 percent minimum fineness and silver .999 minimum fineness.
- Gold, silver, platinum and palladium bullion – these assets must meet applicable purity or fineness standards. For platinum and palladium this is .9995 percent minimum fineness.
- Investment-grade gold and silver coins as well as some platinum coins. These include gold and silver American Eagles (including proof sets) and Buffalo Bullion coins, as well as foreign coins: gold or silver Austrian Philharmonics and gold, silver or platinum Canadian Maple Leafs, gold Australian Kangaroos, silver Australian Kookaburras and Mexican Libertad coins, and platinum Australian Koalas. Note that certain IRS restrictions apply, so be sure to thoroughly research the investment beforehand.
As with other nontraditional investments that are prohibited from self-directed IRAs, rare and collectible coins are NOT acceptable precious metals for this investment purpose.
Setting up a precious metals IRA
- Open a new precious metals IRA with a custodian, a neutral third party that will act as an administrator on behalf of your account and provide account administration services.
- Fund the account in one of three ways:
- A transfer from an existing like account to your new self-directed IRA (NOTE: your current custodian may request a medallion stamp guarantee to process the transfer form);
- A rollover from your current custodian or a former employer 401(k) into your new self-directed IRA;
- Make a contribution by check.
- Choose a precious metals dealer. This is part of the research that a self-directed investor performs as part of his/her due diligence about investing in this alternative asset.
- Select a depository. You will not hold the coins, bullion or bars on your premises. These assets are stored in an off-site depository that specializes in holding precious metals. You can choose segregated or non-segregated storage. Ask about the depository’s security measures, inventory audits, and reporting.
- Decide what precious metal products to buy.
- Send purchase instructions to the custodian, who will execute the transaction.
Liquidating your assets
You can liquidate precious metals assets any time you wish and your IRA custodian can advise you on the process. Proceeds from the sale of the assets go back into your self-directed IRA as they do with any self-directed asset, so they remain tax-advantaged. You also have the option of taking required minimum distributions in the form of bullion.
Do you have questions about opening a new self-directed IRA or how to execute a transaction concerning a precious metals investment? You may schedule a complimentary educational session or contact our team about self-directed IRAs and the many types of nontraditional investments these plans allow. We’re available via phone at 1-888-857-8058 or by email at NewAccounts@NextGenerationTrust.com.
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.
Private Equity Investing Using a Self-Directed IRA
Do you know someone who is starting a company and is seeking investors? Is there an established privately held company you’d like to invest in to help it expand—and earn some equity in the process?
If you have a self-directed IRA, you could include private equity investing for startups and other private companies within your retirement plan. The investment gives you shares that represent ownership or an interest in the entity. Private equity investments are among the many alternative assets in which you can use to build a more diverse retirement portfolio through self-direction.
What is a private equity investment?
Whether via accredited online crowdfunding platforms or direct investment, private equity is a capital investment in an entity that is not publicly traded; rather, it’s an investment in a privately held company. Once only utilized by high-net-worth investors, both accredited and non-accredited investors may now take advantage of this investment opportunity. Including private equity investments in one’s retirement portfolio also provides a hedge against the volatile stock market.
Examples of private equity investments are:
- Private common stock, preferred stock; options, rights, and warrants – shares in a private company, primarily held by its founders, venture capitalists, and private equity firms
- Private hedge funds – investors pool their assets with others to take advantage of investment strategies laid out by the fund manager
- Limited liability corporations (LLCs), limited partnerships (LPs)
- Foreign private equity – investment in privately held in non-U.S. companies
- Convertible notes – relatively short-term loans repaid through conversion to an equity stake in the company
When using a self-directed IRA, the plan invests directly into the business, partnership, or other entity, with terms worked out between the parties (in the case of a private placement, this is typically done via a subscription agreement). The entity gets needed capital and the self-directed investor diversifies his/her retirement portfolio by including this nontraditional investment within the retirement plan.
Ask your financial advisor if a private equity investment is right for you
As with any self-directed investment, account holders should conduct full due diligence about an investment opportunity before sending instructions to the self-directed IRA administrator. At Next Generation, we also strongly recommend that you check with your trusted advisor as to whether private equity and the potential tax liabilities associated with the investment fit with your financial goals. After all, every asset class has its risks – be sure you fully understand the upsides and potential downsides of any self-directed investment before making your decision.
For individuals who would like to invest in private equity, Next Generation offers complimentary educational sessions, so you can learn more about how these investments are structured with a self-directed IRA. Alternatively, you can contact our team with any questions about this or other self-directed investments by phone: 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.
Including Precious Metals in a Self-Directed IRA for a Golden Nest Egg
Are you looking for a way to lay a golden nest egg? If you’re a self-directed investor seeking another alternative asset to diversify your retirement portfolio, you might consider precious metals. Precious metals have historically been an excellent way to diversify investment holdings and preserve capital.
Some reasons to consider including precious metals in a self-directed IRA (also known as a precious metals IRA) are that gold and silver can be good hedges against inflation (when paper currency is devalued) and precious metals are a good hedge against stock/bond/treasury bill volatility, since their values typically move independently of the stock market.
What some people don’t know is that not all types of metals can be held in a self-directed IRA. In order for precious metals to be eligible, they must meet certain requirements as outlined in IRC 408(m)(3). The metals can be owned in bullion form (e.g. bars) that meet a minimum fineness, or they can be in certain approved coin form—one, one half, one quarter, one tenth ounce U.S. gold coins, and/or one ounce silver coins minted by the Treasury Department.
These coins, bars and bullion are hard assets (as opposed to investments on paper) and they are held in an off-site depository that specializes in holding precious metals. To learn more about the types of precious metals allowed in an IRA, download our free guide here. Please keep in mind that the metals cannot be stored with the account holder.
Getting started with a precious metals IRA
If you are just getting started, you must first open a new self-directed IRA with a custodian and then fund the account in one of three ways:
- Transfer funds from an existing IRA
- Roll over funds from an employer sponsored plan (401k, pension plan, etc.)
- Annual contribution
For clients opening a new precious metals IRA at Next Generation, our helpful guide will walk you through all the steps on how to purchase precious metals with your IRA. As outlined in the guide, once your self-directed retirement plan is open, there are a few actions to take:
- Decide which metals to buy – as noted above, your IRA can invest in certain coins, bullion, and bars. Research all your options in order to comply with IRS regulations.
- Select a dealer – we suggest you carefully research precious metals dealers to ensure you are getting the product and quality you expect.
- Choose the depository – this third-party storage facility must be IRS-approved. Depositories are equipped to safeguard your valuable investments under proper conditions, with a high level of security, inventory audits, and reporting. You may choose segregated (private) or non-segregated (communal) storage. As with all aspects of self-directed investments, the account holder is responsible for researching and selecting the depository, and providing instructions to the plan administrator. At Next Generation, we have a relationship with Delaware Depository, should our clients wish to use that entity.
- Direct your custodian to make the purchase – upon completion of your initial paperwork and asset review, the IRA custodian will execute the transaction (including payment from your account) and the dealer will ship the metals to the chosen depository.
You may liquidate your precious metals holdings at any time; and with a precious metals IRA, the account holder has the option of taking required minimum distributions in the form of bullion.
If you have questions about opening a self-directed IRA and including precious metals as one of the many nontraditional investments these plans allow, email us at NewAccounts@NextGenerationTrust.com, call (888) 857-8058, or visit https://www.NextGenerationTrust.com.
GE’s Fall off the Stock Market Cliff – a Lesson in the Value of Self-Direction
Over the past year, the value of General Electric Co.’s stock experienced a $140 billion drop. To give you an idea of the significance of this epic decline on the stock market, a Wall Street Journal article reported that this “was twice the amount that vanished when Enron Corp. collapsed in 2001 and more than the combined market capitalization erased by the bankruptcies of Lehman Brothers and General Motors during the financial crisis.”
This means that the retirement savings of untold people—employees with company stock and other shareholders—took a nose dive that will be extremely hard to overcome. The author pointed out some human errors that lay underneath the decapitalization and the stock market’s cyclical fluctuations. Lack of a financial plan, savings objectives, asset allocation, and understanding of risk were among them, as were:
- Overweighted portfolios with stock holdings that are not evaluated periodically. The author called this “survivorship bias.” What was once valuable may no longer be delivering the same high level of expected returns.
- Lack of portfolio diversity. Sure, it’s nice to get company stock as part of a benefit package (from the same employer that is paying your salary), but putting all of one’s retirement eggs in one nest, so to speak, lacks diversity in terms of risk and asset allocation.
As the author noted, the fall in GE’s shares caused a lot of financial pain for many stockholders. Investors who have self-directed retirement plans, however, don’t typically teeter on the edge of the stock market cliff. That’s because they include alternative assets in their plans, and avoid falling victim to the ups and downs of the stock market (especially those cataclysmic falls).
If you’re comfortable making your own investment decisions, understand certain alternative assets, and would like to include them in your retirement plan, self-direction can be a great way to diversify your retirement portfolio. If you’re already investing in real estate, precious metals, commodities, equity funding or other nontraditional investments, consider including them in a self-directed retirement plan. Want to know more? Read up on self-direction as a retirement wealth-building strategy in our white paper library and on our website… or contact our helpful team for answers to your questions at 1-888-857-8058 or Info@NextGenerationTrust.com.