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Diversify into Alternative Asset Classes with a Self-Directed IRA

February 18, 2019/in Blog, Self-Directed IRA /by Jim Hitt

If you opted out of alternative investments and Self-Directed IRA approaches in favor of just taking long positions in conventional IRA investments, 2018 was not your year. Equities have had a great run: The bull market that started in March of 2009 – when everyone hated stocks and blood was running in the streets – was the longest in U.S. history.

But every bull market ends, and as 2018 came to a close, we saw that the bear still has the power to seriously maul the unwary, uninformed and undiversified at any time.

This is why we have always been big believers in diversifying retirement investments into what investment professionals call “alternative” investments.

These are not necessarily exotic derivatives or highly-leveraged commodity positions – though these certainly have their place in an economy. Alternative investments are simply investments selected because they have a low historic correlation to the broad U.S. stock market – while still offering value and a reasonable expectation of a return commensurate with the risk.

No, we do not advocate the complete abandonment of long positions in conventional IRA assets like stocks, bonds and mutual funds. These are important building blocks for most individual portfolios, as they align with the general positive direction of the economy of the greatest country in the world.

But stocks are volatile by nature – as are many bonds, other than those on the very short end of the spectrum. Exposure to alternative asset classes can help add balance to your overall retirement portfolio, so that when the bears come to Wall Street, you have got a sizeable portion of your portfolio away from the bears, over on Main Street.

What are these alternative asset classes? There are thousands of possibilities, but here are just a few of the types of investments our own clients commonly hold within their own self-directed retirement accounts:

Rental real estate (both residential and commercial)
Hedge funds
Private equity
Gold and precious metals (select coins and bullion of consistent high purity – call us for details)
Closely-held corporations
Private debentures
Crowdfunding initiatives
Partnerships
LLCs
Tax liens and certificates
Land banking
Farm and ranch land
Mortgage lending
Private lending
Trust deeds
Property flipping
Structured settlements

Setting up a Self-Directed IRA with American IRA makes it easy for you to make these investments, gaining valuable diversification for your portfolio, while still retaining the benefits of tax-advantaged retirement accounts.

For example, if you are concerned about current income tax rates or paying capital gains taxes on highly-appreciated stock, you can do so using a Self-Directed IRA or Roth IRA without having to worry about current tax liability

Note: There are some exceptions to this favorable tax treatment if you are employing leverage within a Self-Directed IRA or other retirement investment – if you hold a mortgage or other debt within an IRA, you may be liable for unrelated debt-financed income tax on the portion of any gains or income attributable to money you borrowed, but not to those attributable to your own money. For more information, contact your tax professional).

American IRA can help you set up either a traditional or Roth IRA, or both, for your retirement portfolio. These can hold new contributions, or you can roll funds into a self-directed Traditional IRA from 401(K) accounts or other IRAs.

Many of our clients who are self- employed or who own their own corporations or LLCs establish self-directed Solo 401(K)s, Self-Directed SIMPLE IRAs or Self-Directed SEP IRAs for their own businesses. Again, contact us for more information on which of these small business retirement plan account types my best fit your personal situation.

Investors should remember that many of these investments have low liquidity. They may not be appropriate for those who may have a short-term need to access the cash. Many of the best long-term opportunities may require you to tie up the cash for a number of years.

Prohibited investments.

The law allows tremendous flexibility in selecting investments for Self-Directed IRAs and other retirement accounts. However, there are a few investments that are actually prohibited by law:

Life insurance
Jewelry and gems
Collectibles such as art, oriental rugs and antiques
Alcoholic beverages
Coins and bullion of insufficient or inconsistent purity.

The bull market is not going to go on forever. If past is prelude, as the great mutual fund innovator John C. Bogle is fond of saying, we are long due for a serious market correction. When it arrives, you want to be as diversified into many different asset classes as possible, to minimize your risk exposure.

Interested in learning more about Self-Directed IRAs? Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation. Download our free guides or visit us online at www.AmericanIRA.com.

Self-Directed Real Estate IRA Corner: How Much Should You Have Saved by Now?

Experienced Self-Directed IRA investors know: You need to monitor your investments, and how they perform over time. This is true with any individual security, and it is true with a Self-Directed Real Estate IRA rental property: If you own a house as a Self-Directed Real Estate IRA investment, you would want to know, how is it holding up to the elements? Is the roof in good repair? Is the wiring up to the demands of the modern household? Is the plumbing in good condition? Is it reasonable to expect that the home will generate acceptable income and capital appreciation in the future?

Because if you fail to monitor the status of your investment, you will not know if it’s time to take some corrective action – fix the roof, for example – until it’s too late and the damage is irreparable.

The same is true of an individual’s retirement portfolio as a whole. It’s important to take some vital signs from time to time, to ensure that your total retirement portfolio is in good shape, and that you are making acceptable progress toward your goal: An investment portfolio that is sufficient to continue to generate adequate income and financial security when you leave the work force.

Fidelity Investments – the Boston-based mutual fund behemoth, came up with a useful concept that may make it easier for you to check your progress toward a successful retirement: Their analysts estimate that the minimum amount an individual should have saved by the age of 67 should be about ten times his or her annual income.

This, combined with Social Security, should be enough to see most people through, if they’re careful about expenses.

Well, if you know your target is 10 times your income at age 67, then it’s possible to work backwards from that number, given reasonable savings rates and assumptions about expected future returns over time, to arrive at a target multiple for other ages, too.

Here’s what Fidelity came up with:

If you want to be on track to hit that 10 times income multiple at age 67, then you should be hitting the other guideposts along the way:

Save your income by age 30, and twice your income by age 35. Save triple your income by 40, and so on.

Fidelity’s analysts calculated that this is very doable, for those who contribute at least 15 percent of their incomes to their 401(K)s beginning at age 25 – just a couple of years out of college.

If you got a late start, or if you are falling behind, then you’ll need to take some corrective measures. Specifically, you are probably going to need to take some combination of these actions:

Increase the amount you are saving each year.
Increase your annual expected returns (but this probably involves taking on more investment risk).
Reduce the amount of unnecessary fees and expenses you’re paying within your retirement account.
Reduce your lifestyle expectations in retirement.

Nearly everyone falls behind at one point or another. Some fall behind because of bear markets. But these can be great opportunities to increase your retirement savings contributions, because you can buy great assets at big discounts. They are also great opportunities to increase your annual expected returns: Those who moved heavily into Self-Directed Real Estate IRAs and stocks in 2009-2010, for example, made profits that substantially exceeded the long term returns of either the S&P 500 or the residential real estate market – simply because they bought at the bottom.

And as Warren Buffett points out in this great speech to Columbia University students, buying assets everybody else thinks of as “risky” at the bottom isn’t necessarily so risky at all.

That’s where Self-Directed IRA investing can play an important role: You want to buy assets that are on sale – that sell at low prices compared to their intrinsic value or discounted expected future income streams. But those are not always publicly traded securities. Stocks and bonds are both pretty expensive these days, as are most mutual funds that rely on them.

A Self-Directed IRA does not limit you to publicly traded securities. Those are the securities that Wall Street wants to sell, anyway.

Instead, using a Self-Directed IRA (or Self-Directed Solo 401(K), Self-Directed SEP IRAs, Coverdell education savings accounts and health savings accounts for that matter) let you combine the tax advantages you get with IRAs with the freedom to diversify into any asset class you like (except life insurance, jewelry/gems, alcoholic beverages and collectibles).

This also helps you increase expected returns without taking on much more risk with your overall portfolio: Adding alternative asset classes like rental real estate, tax liens and certificates, private lending, farm and ranchland, LLCs, partnerships and other common Self-Directed IRA investments can help cancel out volatility in other areas, smoothing overall portfolio performance without forcing you to ‘pull in your horns’ by buying low-risk, low-reward assets such as money markets and other cash equivalents.

6 Tips for Taking Distributions from your Self-Directed IRA

February 13, 2019/in Blog, Self-Directed IRA /by Jim Hitt

You might believe that finding the best way to accumulate funds for retirement is difficult. Well, guess what? Withdrawing those funds is just as hard–if not harder–if you want to do it in a tax-savvy way. Failure to meet this challenge could result in you losing over half of your retirement money to income, estate, and state taxes.

Taking your distributions too early or failing to take the required distributions from your traditional Self-Directed IRA are the two most common and costly mistakes that retirement savers make. Here are seven tips to help you avoid financial disaster:

Taking money from your Self-Directed IRA too soon can be expensive

Even though you are allowed to take distributions from your traditional Self-Directed IRA at any time, you almost always need to be 59½ years old to avoid a 10 percent early withdrawal penalty. And that penalty is in addition to the income taxes you will owe.

There are, however, some exceptions that will waive the penalty:

You become disabled
You have medical expenses that are greater than 10 percent of your adjusted gross income
You use the money for qualified education expenses
You convert your Traditional IRA to a Roth IRA
You purchase your first house with the funds
If you die, the balance in your Self-Directed IRA account is paid to your beneficiary without penalty

There are other exceptions, so talk to your accountant to make sure that you qualify.

Become familiar with the rules for Required Minimum Distributions (RMD)

You must take your first RMD by April 1st of the year after you turn 70 ½. So, if you turned 70 ½ in 2018, you have until April 1^st of 2019 to make your initial withdrawal. From then on, you have until December 31^st. Do not take this rule lightly: The penalty for missing the deadline or taking out less than the required amount is a heart-stopping 50 percent excise tax!

You will probably be using the Uniform Lifetime Table to calculate your RMD

Unless your spouse is more than ten years younger than you are, you will be using the IRS’s Uniform Lifetime Table to determine your withdrawals. Remember, these are the minimum amounts you must withdraw. You can always take more.

If you have IRAs at several institutions, it doesn’t matter from which of these you take the distributions, as long as all of them add up to the required amount. That’s why it’s essential that you know your RMD numbers, so there is no confusion when multiple institutions hold your accounts.

Your RMD could be smaller if your spouse is significantly younger

If your spouse is more than ten years younger than you, the Joint Life and Last Survivor Table will allow you to make smaller RMD withdrawals. For example, a retiree turning 70 ½ this year and makes his first withdrawal next April will have a life expectancy of 26 ½ years. If, however, he had a 56-year-old wife, their joint life expectancy would jump to over 30 years, and their annual RMD would fall from about $7,550 to $6,650 on a $200,000 account.

Consider a Roth IRA

The beauty of the Roth is that you are not taxed on withdrawals and are not required to take minimum distributions. If you own a Traditional IRA, it might make sense to convert to a Roth, but do not do it without consulting a tax advisor. Depending on your age and the goals you have for your retirement funds, it may not be your best move.

You are allowed to make “in-kind” withdrawals from your Self-Directed IRA

Maybe you have some assets in your Self-Directed IRA that you prefer to keep. In-kind distributions make it possible for you to move these assets into a taxable account without first turning them into cash. The assets are assigned a fair market value when they are moved and will count toward your RMD.

Let us help you reach your retirement goals

At American IRA, we believe that Self-Directed IRAs are the best vehicles for growing your retirement account. And we have the experience to handle your transactions, no matter which direction you choose to go with it.

Advantages of Self-Directed IRA Investing

February 11, 2019/in Blog, Self-Directed IRA /by Jim Hitt

Doing at least part of your long-term investing using a Self-Directed IRA has a number of important advantages:

Opportunity for diversification. Most off-the-shelf retirement plans offered by Wall Street investment companies do not provide a way for you to access anything beyond stocks, bonds, funds and cash products. Some may offer annuities, but they are all run-of-the-mill financial products that generate a commission or income stream for the investment company.

A Self-Directed IRA lets you hold any of the above conventional retirement account asset classes, if you choose, but also lets you add a variety of alternative asset classes to your retirement portfolio:

Direct ownership of real estate
Tax liens and certificates
Private lending
Certain gold coins and bullion
Closely-held C corporations, partnerships and LLCs
Farms and ranches
Lumber
Oil, gas and minerals.
Mortgage notes
Promissory notes and debentures
Private equity
Private debt placements
Venture capital
Angel investing

And much more. Each of these different types of assets can help you improve the risk-adjusted return potential of your portfolio.

Including alternative asset classes like these in your retirement portfolio is particularly effective since the correlation between these investments and the general stock or bond market tends to be relatively low.

Tax advantages of Self-Directed IRAs

If you choose a traditional Self-Directed IRA, or another tax-deferred vehicle that allows you to self-direct, such as a Self-Directed Solo 401(K), Self-Directed SEP IRA, Self-Directed SIMPLE IRA, Self-Directed CESA or even a Self-Directed HSA, your contributions are generally pre-tax, provided you meet certain income limits and requirements, and they grow tax-deferred until you take them out – normally in retirement.

If you choose a Self-Directed Roth IRA, or if you contribute to a Roth account within a Self-Directed 401(K), your contributions are after tax, but they grow tax-free, and you can take distributions in retirement both tax and penalty-free after age 59½, provided you kept the assets in your Roth account for at least five years.

Asset protection

Federal law and most state laws provide significant asset protection benefits to IRAs, including Self-Directed IRAs. This also extends to Self-Directed Solo 401(K)s, Self-Directed SEP IRAs and other forms of retirement accounts serviced by American IRA, LLC.

Courts generally protect assets in Self-Directed IRAs and other retirement accounts against the claims of creditors in lawsuits and in bankruptcy proceedings – especially if you fund the Self-Directed IRAs and other retirement accounts with your own money, as opposed to an IRA you inherited. This means if you file bankruptcy, creditors will generally not be able to place claims on your retirement accounts.

Specifics vary by state, so speak with an attorney licensed in your state for details.

Intergenerational planning

With careful planning, investors can use Self-Directed IRAs and 401(K) plans to pass assets on to future generations with very significant tax advantages, including the ability to “stretch” tax free Roth IRA or Roth 401(K) growth over the entire lifetime of a very young heir – an extremely important financial tax advantages, particularly if the heir has many decades of life expectancy in front of him or her.

Self-Directed IRA Investors Benefit as Fed Knocks the Wind out of Stocks

February 8, 2019/in Blog, Self-Directed IRA /by Jim Hitt

In a widely-anticipated development, the Federal Reserve elected to increase interest rates for the fourth time this year. Alan Greenspan advised investors to head for the proverbial hills, but the selloffs began well before the rate hike as traders built their assumptions around the increasing certainty of the hike, and around some reduced assumptions about economic growth rates thanks to the Federal Reserve tapping the brakes on the economy. Which turned out fine for alternative investment fans and Self-Directed IRA owners.

The yield curve is starting to writhe sideways, with three-year treasury yields exceeding the yields on five-year treasuries as of Monday, December 17^th. An inverted yield curve is a traditional harbinger of a looming recession, though the sign is not terribly bearish until the 3-year rate gets higher than the 10-year rate, and we are not there yet. But the gap between short-term and long-term yields, fell to just 13 basis points between the two- and 10-year Treasury yields late last week – which creates a tough environment for banks and other lenders trying to make money, since that whole model requires them to pay low rates borrowing short so they can earn high rates long.

However, the decline in treasury rates all along the spectrum in recent days tells us that we are seeing a substantial migration of assets to perceived safety, as institutional investors move out of stocks and into historically less volatile assets – including assets that are frequently held by Self-Directed IRA investors: Mortgages, real estate assets and hedge funds.

The overall sentiment is one of increasing pessimism over prospects for economic growth. “The biggest theme developing is that you are going to have significantly weaker growth, near recession-level growth in 2019, based on our measures, and the markets are generally not pricing that in,” said Greg Jensen, the co-chief investment officer of Bridgewater Associates to Reuters editors on December 20^th. Jensen is expecting 2019 economic growth of just 1% – not even enough to outpace inflation rates. Meanwhile, the Federal Reserve revised its 2019 growth expectations from 2.5 to 2.3 percent.

The Fed’s inflation projection was also reduced, from 2.1 percent inflation in 2018 to 1.9 percent.

Will we see the kind of meltdown we saw in 2008? That’s not likely. A decade ago, the economy was leveraged to absurd levels. We have a much healthier foundation now across all asset classes than we did at the time of the 2008 financial crisis. But we do expect corporate earnings around the world will see significant shortfalls against projections made only recently. Other people see that too, which is, of course, why we saw a big pullback in stock prices this week.

So, what’s the best course of action going forward? As always, we are big fans of diversification, including diversification into alternative asset classes – particularly where the investor has specific industry knowledge that can be leveraged into a real market trading advantage over other participants. We also encourage healthy allocations into precious metals, real estate, private lending portfolios and other investments in or closely related to tangible assets.

If the 2009-2017 bull market in stocks left you dangerously overexposed, it is not too late to roll back and move assets over to Self-Directed IRAs. There is still some room for stocks to fall, despite the lousy third week of December 2018, and there’s still ample room for less glamorous asset classes to have a good run, especially as the economy slows down and more investors move assets toward alternatives and safe havens.

With S&P Earnings Yields Low, Now’s the Time to Diversify Using a Self-Directed IRA

February 6, 2019/in Blog, Self-Directed IRA /by Jim Hitt

It’s up! It’s down! It’s all around! The last couple of weeks on the stock market has been entertaining, if nothing else. But it is easy to maintain a healthy perspective on stock market volatility if one’s own retirement prospects are not hanging in the balance with every sickening swing in prices. And this underscores the value proposition of Self-Directed IRA investing and alternative asset classes: Diversify enough, and you do not have to worry much about it.

On December 26^th, 2018, the stock market as measured by the Dow Jones Industrial Average rose by more than a thousand points – logging its biggest single-day increase in history.

But just days before, the Dow logged one of its biggest single-day losses.

And it does not matter. What matters is this: Over the past ten years, the S&P 500 has delivered an annualized return of more than 14 percent. It is delivered nine positive years in a row, prior to 2018. As of this writing, 2018 will see U.S. large cap stocks finish underwater by about 7 percent, barring any major market moves in the next few days.

The 7 percent loss we will probably have for 2018, and the big single day moves over the last few weeks are healthy reminders: The market is risky. The market did not suddenly become risky: The market was risky all along!

And, paradoxically, stock markets are riskiest precisely when they appear the safest. That’s when stock prices get bid up the most.

Self-Directed IRAs Help You Get Off the Volatility Wagon

But large-cap U.S. stocks – the ones measured by the Dow Jones Industrial Average (which is a very narrow reading of just 30 ultra-big companies) and the S&P 500 appear to have outstripped earnings by a large margin: Stock prices increased by about 14 percent per year, but earnings did not increase that much: The trailing price-to-earnings ratio for the S&P 500 is 18.7 percent. Not crazy high, by any standard, but certainly toward the top of its long-term historical range, discounting some more recent outlying circumstances.

Price-Earnings Ratio, S&P 500 Index.

Source: Multpl.com.

Now, let’s look at this a different way: What is the earnings yield for U.S. large cap stocks, and what’s been the trend?

Earnings Yield Is What Counts – In or Out of Self-Directed IRAs

Earnings yield is what really counts – it is what real estate investors try to predict when they determine cap rates on investment properties, it is something all equity investors should be taking a look at no matter what the asset class is: The total all-in net earnings, divided by the stock price.

Currently, the earnings yield on the S&P 500 is 5.29%. That’s the return investors can expect going forward, if there are no changes in P/E multiples.

S&P 500 Earnings Yield, as of 26 December 2018

Source: Multpl.com

As you can easily see from the historic earnings yield chart, the 5.29 earnings yield figure is towards the bottom of its historic range, with the exception of the 2008 recession and the days following the burst of the dot.com

Subtract investment expenses from that – expense ratios, 12(b)1 fees, bid/ask spreads and commissions – and that looks a lot more like 4 to 4.5%.

Well, that’s ok, in the long run. But in the short run, you are still facing an awful lot of volatility in stocks: A market that can gain 1000 points in a single day, as it did yesterday, can lose them just as easily. And a market that lost 35 percent in 2008 can do it again in 2019, no problem.

A net earnings yield after expenses of 4 to 4.5 percent is not enough compensation, given the very real risks, to justify an outsize concentration in stock mutual funds and ETFs for most people. Not when there are a number of other asset classes that can generate similar returns with lower historic levels of volatility. That’s essentially bonds territory. Banks are lending on houses at that rate – and getting the security of real estate in the process.

A self-directed retirement account allows you to quickly and efficiently spread your assets out over several unrelated types of assets – many of which have similar earnings yields or expected returns and lower or equivalent levels of volatility. Even more have similar expected earnings and similar volatility levels, but they tend not to fall at the same time as stocks.

When you hold volatile assets in combination in your portfolio, the volatility of the multiple asset classes, constantly pulling in different directions, tends to even out. When stocks zig, real estate, private lending, precious metals or other alternative asset classes zag. The overall volatility of the portfolio tends to cancel out, but you still get the benefit of earnings in each asset class over time.

Self-Directed IRAs let you diversify away from stocks and into:

Direct real estate ownership and rental
Oil and gas
Partnerships
Tax liens and certificates
Farms and ranches
Timber and minerals
Closely-held corporations
LLCs
Private lending
Mortgages
Venture capital
Private debt placement
Private equity
Hedge funds
Crypto assets

And many others.

30 New Year’s Resolutions for Self-Directed IRA Owners

February 4, 2019/in Blog, Self-Directed IRA /by Jim Hitt

As 2018 has come to a close, it is time for Self-Directed IRA investors to lay out a track to run on for 2019 – and ensure everything goes to plan as much as markets will allow.

This means taking some concrete actions, both within your Self-Directed IRAs, in your retirement accounts, and from a financial planning perspective in general.

Here is a modest list of productive New Year’s resolutions that nearly any Self-Directed IRA investor (or anyone who’s interested) can accomplish:

1.) Review and update your beneficiaries on all Self-Directed IRAs and all other retirement accounts, life insurance policies and annuities.

2.) Ensure that each account has both a primary and secondary beneficiary identified by name.

3.) Ensure that where there are multiple beneficiaries on any one account, that each beneficiary’s share is precisely defined.

4.) My attorney or financial advisor will have a copy of my beneficiary forms in his or her files.

5.) Finish funding your emergency fund – up to 3 to 6 months of estimated monthly household expenses.

6.) Complete or update your Last Will and Testament, updated to account for major new assets and investments, specific heirlooms and other properties of significant interest to family members, and reviewed for changes in familial status.

7.) Maximize allowable IRA and Self-Directed SEP IRA contributions for 2018 by April 15^th, 2019.

8.) Complete a living will or health care directive, as well as springing power of attorney documents that enable family members to take action on your behalf in the event you are incapacitated.

9.) Complete a life insurance review and purchase amounts necessary to protect your family against the unexpected death of a breadwinner.

10.) Contribute the maximum allowable for 2019 in various retirement accounts – either in a lump sum by _____ date, or by setting automatic monthly contributions to hit the maximum level (given your income and eligibility).

11.) Take advantage of tax loss harvesting opportunities.

12.) Contribute enough to your 401(k) to get the full employer match.

13.) Open a Self-Directed SEP IRA, Solo 401(K) or Self-Directed SIMPLE IRA account, as appropriate, to maximize tax-advantaged retirement savings opportunities and maximize potential for self-directed retirement investing.

14.) Set up your basic monthly household expenses.

15.) Purchase _____ new properties for your Self-Directed Real Estate IRA.

16.) Eliminate personal debt outside of a mortgage.

17.) Purchase disability insurance sufficient to protect your family against a devastating loss of your income if you should become unable to work

18.) Meet with your accountant mid-year and not just before April 15^th.

19.) Check your credit score for errors at annualcreditreport.com.

20.) Minimize your exposure to high assets-under-management (AUM) fees and expense ratios by moving long-term retirement holdings to American IRA, LLC, where you only pay fees on actual transactions, rather than paying a percentage to a custodian to do next to nothing every month but send you a statement.

21.) Diversify into more investment asset classes, including alternative asset classes such as precious metals, tax liens and certificates, direct ownership of investment real estate, REITs, private lending, hedge funds (if you are an accredited investor), private debt and equity placements, closely-held companies, oil and gas opportunities, LLCs and limited partnerships.

22.) Double-check your Social Security projections. You should get a letter from the Social Security Administration around your birthday.

23.) Bank or invest all windfalls, or pay off high-interest debts, such as credit cards.

24.) Increase your savings and investment levels compared to last year.

25.) Cancel useless subscriptions and use the savings to pay down debt or invest for retirement.

26.) Open or contribute to a Coverdell education savings account (possibly including a Self-Directed CESA) or a Section 529 plan for your children or another family member under age 18.

27.) Complete a business succession plan, to include buy-sell agreements and if necessary, adequate life insurance in place to fund these plans.

28.) Complete and execute a disaster recovery plan for your business.

29.) Inventory household valuables and ensure you have adequate insurance to cover the contents.

30.) Update property insurance to cover the replacement value or adjust savings to cover the risk if you cannot afford the premiums for doing so.

How to Keep Your Self-Directed IRA Assets from Going Through Probate

February 1, 2019/in Blog, Self-Directed IRA /by Jim Hitt

Probate is a long, frustrating and expensive process. It takes time for court probate officials to notify and sort through all the potential creditors’ claims, deal with unpaid tax liability and track down all the heirs. It is expensive, too: All these court officials and clerks need to be paid, and with probate costs sometimes consuming up to 8 percent of your assets and more. But when it comes to IRAs, Self-Directed IRAs and other kinds of retirement accounts, there is good news: Probate is entirely voluntary. There is an easy and straightforward way for you to keep your Self-Directed IRAs, 401(K)s, Self-Directed SEP IRAs, Self-Directed SIMPLE IRAs and other tax-advantage investments out of probate and pass them directly to your heirs:

Designate beneficiaries by name.

When you name a designated beneficiary on a Self-Directed IRA or other retirement account, the assets in that Self-Directed IRA do not go through probate. They bypass probate law and go directly to the designated beneficiary under contract law, which is much more straightforward.

Creditors do not get to intercept the money, probate attorneys do not get to subtract their 3 to 8 percent, there are no taxes at the federal level, and the money passes to heirs in days, not months.

If you fail to designate a named beneficiary, the process is very different. First, the court will consider any Self-Directed IRAs or other retirement accounts for which you did not name a beneficiary to be part of your estate. As such, it will go through probate, and the attorneys, accountants, clerks and judges will each take their cut. Then the IRS and state revenue agencies will subtract their piece from what’s left over.

Then probate officials will subtract any money owed to any creditors who come forward out of what’s left over.

Often there is little, or nothing left over for heirs who are not named beneficiaries on your IRAs, Self-Directed IRAs and other retirement accounts.

Note: Simply writing a will does not avoid probate. A will can simplify the process of determining who is entitled to inherit what assets, and will generally overrule the state intestate laws, which are a series of defaults that courts must observe when someone dies without a will. But assets in wills still go through the probate process, unless you have named a designated beneficiary in writing.

In addition to named beneficiaries on your Self-Directed IRAs and other retirement accounts, you should also consider naming beneficiaries on your bank and brokerage accounts, annuities, pension plans and life insurance policies.

It is also important to revisit your beneficiaries every so often and make sure the beneficiaries on these documents still reflect your wishes.

If you are holding your investments with American IRA, LLC, naming your beneficiaries is very easy: Just contact us at the below phone number or website, or download the Change of Beneficiary Form from our site.

Self-Directed IRAs for Business Owners – The Self-Directed SIMPLE IRA

January 30, 2019/in Blog, Simple IRA /by Jim Hitt

Many business owners want to combine the tax advantages and flexibility of Self-Directed IRA investing with the higher contribution limits available in employer-sponsored plans. The Self-Directed SIMPLE IRA is a common and popular variant of the IRA designed for small businesses with 100 or fewer employees who do not want to go through the trouble of setting up and administering a full-fledged ERISA-qualified 401(K) plan.

Self-Directed SIMPLE IRAs allow contributions from both employees and employers. Employees can contribute up to $13,000 for 2019, or up to 100 percent of compensation. Those ages 50 and older can contribute an additional $3,000 per year.

Self-Directed SIMPLE IRAs do involve some commitment on the part of plan sponsors: The company must make contributions each year, which can be either a match of up to 3 percent of compensation or a non-elective contribution of at least 2 percent of each employees’ compensation.

Compared to a qualified plan like a 401(K), SIMPLE IRAs and Self-Directed SIMPLE IRA plans allow employees more flexibility in when they can take distributions. While 401(K) plans only allow for distributions upon reaching age 59½, death, disability and termination of service to the company, SIMPLE IRAs are eligible for distributions at any time.

However, distributions are taxable and subject to a penalty of at least 10 percent prior to age 59½. Distributions within the first two years of participation are subject to a draconian penalty of 25 percent, so participants should be very confident they will not need to access that money for at least two years.

However, unlike 401(K)s, SIMPLE IRAs, including Self-Directed SIMPLE IRAs, are eligible for ‘hardship’ exemptions to the 10 percent penalty.

Self-Directed SIMPLE IRA Employer Compliance

Plan sponsors must comply with deposit rules. Salary deferral (employee) contributions must be made within 30 days of the end of the month in which the salary would have been paid out had it been paid in cash. However, self-employed individuals have more flexibility in the timing of the contributions: They have until 30 days after the end of the plan year – normally until January 30^th for those businesses using a calendar year. Employer contributions must be made by the due date for the business’s tax return including extensions.

Setting up a SIMPLE IRA for Self-Direction

With a Self-Directed SIMPLE IRA account, participants are not limited to mutual funds, stocks, bonds, and other paper investment. They can hold all manner of alternative investments, and hold assets like rental property, gold and precious metals, closely-held C-corporations and limited partnerships, farms and ranches, tax liens and certificates and others.

However, you need a custodian or third-party administrator that is set up to hold these types of assets and record these transactions. That’s where American IRA, LLC comes in. As an administrator that focuses on self-directed investing, American IRA can work with you no matter what types of assets you select. As long as the assets are legal to hold within an IRA, American IRA can support the transaction.

Interested in learning more about the advantages of Self-Directed SIMPLE IRAs, Self-Directed SEP IRAs and 401(K)s for small business owners and self-employed individuals? Download our free guides or visit us online at www.AmericanIRA.com.

Self-Directed IRAs, Correlation and Diversification

January 28, 2019/in Blog, Self-Directed IRA /by Jim Hitt

One of the key advantages of Self-Directed IRA investing is its tremendous flexibility: While retaining all the tax advantages of using conventional IRA accounts, self-directed investing also allows investors to range far and wide in search of assets that would effectively diversify against the behavior of a retirement portfolio that’s heavy on U.S. large cap stocks (think the S&P 500) and U.S. investment grade bonds that dominate most Americans’ retirement accounts.

Now’s the time to consider diversifying into a Self-Directed IRA.

That’s important today, as stocks continue to flirt with all-time highs (though in recent days, as of this writing, we have seen some significant downside volatility starting to show up in the stock market), and as interest rates continue to rise. Both portend danger ahead for those investing primarily in Wall Street paper assets. If you are not already diversified into other types of asset classes, now would be a good time to consider making some moves.

Conventional diversification measures and asset allocation is getting less effective over time.

Buying international stocks is no longer the diversifier it once was. During the 80s, the correlation coefficient between international and U.S. stocks was less than 0.50. That is, international stocks offered a meaningful way to maintain exposure to the long-term expected returns, while even a small addition of these more volatile assets could help offset the short-term volatility of the S&P 500.

But much of that diversification benefit for international stocks has vanished: Since 2000, the correlation coefficient of international vs. U.S. equities has increased to more than 0.87 through the end of 2016.

Investors looking for substantial diversification against the S&P 500 must get more creative.

According to this matrix from Morningstar, the most effective diversifiers against the performance of U.S. large cap stocks are cash (with an only slightly positive correlation coefficient of 0.052), commodities (0.141), U.S. investment grade bonds (0.230), emerging markets stocks (0.537) and real estate (0.588).

But cash tends to get swamped by inflation, bonds are getting drowned by a rising tide of interest rates in the short-term, and commodity investing is not palatable to most people, except as an inflation hedge.

Self-Directed IRAs Allow for Easy Diversification

Self-Directed IRA investing allows investors to take a much more granular approach to asset allocation and invest with a rifle scope approach rather than a scatter shot approach that most investors limited to fund and index investing must take.

This means that Self-Directed IRA investors can commit retirement funds to investments that are, from a diversification point of view, literally “off the chart.”

A REIT fund would likely behave very much like the real estate asset class as a whole, unless it was carefully targeted at a specific niche market. But any given rental property can behave radically differently from a REIT index, simply because so much of real estate investing is governed by hyperlocal trends, local employers, schools, tourism factors, seasonality and, of course, the investor’s own effort and skill in unlocking value in a closely-managed rental property.

Investments in tax liens and certificates would likely tend to generate positive returns even in falling interest rate markets – and therefore be an effective diversifier.

Self-Directed IRAs and Alternative Asset Classes

Both of these assets lend themselves very well to Self-Directed IRA investing – they are easily managed using a third-party administrator like American IRA, LLC, and investors can exercise very close control of these transactions without having to leave the decisions up to a money manager many hundreds of miles away.

This home court advantage can be invaluable for investors – and can be had without paying crazy ‘2-and-20’ fees to hedge fund managers.

In fact, due to the nature of the Self-Directed IRA market, American IRA is able to forego the inefficient expense ratio/AUM fee pricing model and charge a low flat fee for each transaction. In many cases, this saves hundreds and even thousands of dollars per year – especially on larger accounts.

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