Self-Directed IRAs – One of the Many Legs of the Three-Legged Retirement Stool

When Congress designed the current system of retirement savings in the 1970s, planners frequently referred to retirement income security as a three legged stool. The three legs, of course, were individual savings, workplace/government pensions, and Social Security. The Self-Directed IRA itself would fall under the category of individual savings, as the same or similar investments would if they were held in a taxable account.

The world has changed a lot since then. First, the private defined benefit pension plan has largely gone the way of the Dodo bird – replaced by defined contribution plans like 401(k)s and 403(b)s. These are quite valuable, but they require the investor to bear the significant risks of underperformance and undercontribution – two risks which we now know the individual worker, on average, is woefully unprepared to bear alone. Most people who own Self-Directed IRAs are doing fine, fortunately, but Self-Directed IRA owners are still only a small fraction of Americans.

So except for a fortunate few covered by solid corporate pensions and government employees, the three-legged stool as envisioned in the 1970s isn’t really a reality anymore. This is especially true with the long-term solvency of the Social Security system in doubt unless Congress stages a massive intervention – which of course will have to be paid for somehow, too.

So what are the new legs?

  • If you’ve got an old-fashioned, guaranteed, defined benefit pension in this day and age, count your lucky stars. Pensions are valuable because they provide workers with a guarantee that they won’t run out of income as long as they live – a benefit that would cost quite a bit if you bought the same guarantee from an insurance company with an annuity. Even if the pension fund itself, goes bust, benefits are generally covered by the Pension Benefit Guaranty Corporation. The problem is that except for government workers, these old, traditional oases of retirement security are few and far between, as they are very expensive for companies to fund.
  • These are financial products specifically designed to generate a defined income, either no or commencing at some point in the future, with a level of guarantee by the insurance company. Annuities provide workers with a way to create their own guaranteed income, similar to a pension. But you still have to save a substantial amount of money to get this to happen. However, annuities – especially single premium income annuities (SPIAs), which convert a lump sum into a guaranteed lifetime income.
  • Employer matching contributions. Your employer could be matching your contribution to a 401(k) or 403(b). Regardless of what kind of plan you have, it’s usually smart to contribute at least the minimum required to take advantage of your company’s match. Even if you’re trying to get out of debt, still, it’s still usually wise to pick up a company match of 50 cents to 100 cents on the dollar for the first few percentage points of your income. It’s essentially free money, with creditor protection, and it grows tax-deferred.
  • Conventional IRA assets. By these we mean investment and savings products, like mutual funds, publicly traded stocks and bonds, CDs and money markets. These can be held in traditional or Roth IRAs. They are usually easy to buy and sell and are, with some extent.
  • Self-Directed IRA and other retirement accounts. These can be in Roth or traditional accounts, and are made up of a more diverse array of assets not typically found in most retirement portfolios:
  • Rental property
  • Private equity
  • Private lending
  • Hedge funds
  • Closely held businesses
  • House flipping
  • Gold and precious metals
  • Foreign assets
  • Illiquid stocks and bonds
  • Non-publicly traded REITs and Business Development Companies
  • Tax liens and certificates
  • Land banking
  • Farms and ranches
  • Horse breeding/training
  • LLCs, Partnerships and joint ventures

Taxable investments. These are investments held outside of a tax-advantaged retirement account. You’ll have to pay taxes on capital gains, but long-term capital gains rates are generally lower than ordinary income taxes. Holding a mix of investments in traditional IRAs and 401(k)s and other tax deferred vehicles, Roth and other tax-free vehicles like municipal bond interest and loans against life insurance policies, and taxable investments subject to capital gains rather than income tax, provides for more tax planning and mitigation opportunities than holding in any one category alone. Pay attention to asset placement as well. Some assets do better under some tax regimes than others.

Home equity. A paid-for home works both ways: You don’t have to pay your mortgage anymore, and you can begin taking money out in the form of income using a reverse mortgage, beginning at age 62. There are some important disadvantages to reverse mortgages, so ensure you read carefully before committing to one.

Disability Income Insurance. Do you have a written contract from God promising you will not become sick or hurt and unable to continue working and earning the income that allows you to save for retirement in the first place? Neither do we. Disability income insurance protects your ability to save and invest. It’s vitally important for many reasonably affluent people who rely on income from their jobs as their chief resources for their retirement security.

Social Security. Yes, it’s still there, and it’s still a vital resource – especially for lower-income workers and retirees, since the net impact of Social Security is redistributive. Younger workers may be disappointed to learn that the program may not be able to pay the benefit levels currently expected.

Part-time Income. We hope you’re working because you want to work, not because you have to work. But part-time income can be an important and rewarding part of your retirement income picture. We recommend investing now in developing a skill set that people will pay you for in your later years, when your health is in decline. You don’t want to be in your 80s doing construction. But there are a lot of other things you can do that you can expect to be doing well into your senior years. The sky’s the limit!

Grandchildren. Yes, children are expensive. But a happy family is an immense source of wealth, too – not just emotionally and spiritually – which is important – but also as a future form of support in your declining years.

Want to learn more? Call us at 866-7500-IRA(472) – or download our exclusive guides to Self-Directed IRA investments, available free on our website, www.americanira.com. We look forward to working with you!

 

 

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Are Self-Directed IRAs Legal?

Yes. There is no doubt that it is legal to invest money within a self-directed IRA. For that matter, it’s also perfectly legal to invest in a self-directed 401(k), SIMPLE IRA, SEP IRA, and even in a self-directed Coverdell or Health Savings Account, provided you are otherwise qualified, and you observe the rules governing prohibited transactions.

There is simply nothing in the law, nor even in Internal Revenue Service Regulations that mandates that everything you invest in within an IRA or other retirement account be a bank product or registered investment or annuity.

The landmark tax court case that established the right of the individual investor to take more personal control of his or her IRA assets was the 1996 case Swanson v. Commissioner. The plaintiff formed two corporations within his IRAs, and named himself the director of both companies. But the stock ownership remained vested in the IRAs themselves. Swanson never took personal control of a single share.

Furthermore, Swanson arranged for dividends to be reinvested within the IRA. Dividends did not leave the IRA, but were left to compound within it, just as any mutual fund or bond dividends received in cash, as opposed to reinvested in the same fund or stock or DRIP program, would accrue within the IRA.

The IRS challenged the practice, and even went so far as to accuse Swanson of creating a number of “sham transactions” for the purpose of tax avoidance. But the Tax Court ruled with Swanson, saying that ownership of a closely held corporation within an IRA was not a prohibited transaction as defined in IRC Section 4975. This was because the sale of stock to Swanson’s IRA did not comprise a transfer between a disqualified persons, as defined in 4975(c)(1)(A).

What’s more, the IRS also lost its challenge to the reinvestment of dividends within the IRA.

Finally, the IRS argued that the fact that Swanson personally directed the two corporations was a violation of the law. And again, the IRS’s attorneys were struck down by the Tax Court, which ruled that simply acting as a director did not create a prohibited transaction.

Remarkably – and unusually in the case of Tax Court disputes, the Courts not only shot the IRS’s case full of holes, but also directed that they reimburse Swanson for any attorney’s fees.

Eventually, the IRS had to recognize that it had lost the ruling in its own internal memoranda – specifically, IRS Field Service Advice Memorandum 200128011, in which internal counsel for the IRS advised other IRS lawyers not to pursue other similar IRA setups.

Since then, the use of closely-held corporations, LLCs, partnerships and joint ventures within self-directed IRAs has become quite well established, both in practice and in case law, and the legality of owning closely-held entities within ones’ own IRA is no longer in doubt.

For more information, call American IRA, LLC today at 866-7500-IRA(472), or visit us online at www.americanira.com. We look forward to working with you.

 

Getting Started in Self-Directed IRA and Conventional Retirement Saving

Getting Started with Self-Directed IRAsFor too many people, the time to start saving for retirement never seems to come. There is always one more competing priority. “Maybe when I get the promotion.” “Maybe when I get the bonus.” “Maybe after we buy that dream home.” “Maybe after the kids are grown.” “I just don’t know enough about Self-Directed IRAs yet” (that’s where we come in!)Even for Self-Directed IRA owners, who tend to be more affluent than most, too many seem to put off making serious contributions until later in life – leaving a lot of money on the table or forfeiting it needlessly to the Internal Revenue Service.

And then, seemingly in the blink of an eye, they are staring retirement in the face and they have nothing saved up for it.

In a recent survey by TIAA-CREF, over half of today’s near-retirees surveyed wish, with the benefit of hindsight, that they had started saving for retirement earlier. Furthermore, 47 percent wish they had saved more of their paycheck. And fully a third, 34 percent, wish they had saved for retirement more aggressively.

(Interestingly, TIAA-CREF’s report didn’t spell out the number of surveyed near retirees who had been less aggressive, but that’s a different conversation.

The numbers come from the mutual fund and pension giant’s 2014 Ready To Retire Survey, which polled a sample of 1,000 adults nationwide about their workplace retirement plans and how they used them.

The results are dismaying: 65 percent of those surveyed report they did not take advantage of saving in an IRA. Only 35 percent ever met with a financial advisor, and only 32 percent reported going through a process assessing their expected retirement income and how much they would likely have to save in order to reach their income goals in retirement.

Despite the lack of preparation in retirement planning, these people aren’t exactly resting easy about their prospects, either.

  • 45 percent worry about running out of money in retirement.
  • 42 percent worry about declines in their physical health.
  • 35 percent worry about the impact of health care costs on their retirement savings.
  • 32 percent worry about how inflation may eat away at their purchasing power over time.

Nevertheless, 42 percent report they plan to work part time in retirement. That means 58 percent aren’t planning to work part time, which still leaves a big gap between those who aren’t planning on continuing to work in retirement and those who have actually planned for the loss of income from work!

What to do

The good news is, it’s never too early to prepare for retirement, and if you’re still working, it’s not too late to take steps to save. The tax code is there to encourage retirement saving. And with recent tax increases taking effect last year, the incentives to save money within tax-advantaged retirement accounts are even greater, no matter what your income level is.

Here’s what you can do:

Roll back on expenses. Cook at home more, rather than eating out. Take your vacation at home this year. Become more spending conscious. Cancel needless subscriptions and eliminate impulse buying. A few months of doing that will give you some money to invest right from the get go.

Live on less than you make. If you can do this, you can succeed. If you cannot do this – and you’re not already extremely wealthy through no fault of your own,

Start reading great books that get you thinking about money, and how to make it your master, rather than your servant. Some of our favorites for new investors and people focused on budgeting and getting out of debt include:

The Millionaire Next Door – By Thomas Stanley and William Danko

                        Generation Debt – By Anya Kamanetz

                        Credit Card Nation – by Robert D. Manning

                        Total Money Makeover – by Dave Ramsey

                        The Richest Man in Babylon – By George Clason

                        Think and Grow Rich – By Napoleon Hill

For you folks who’ve been at it a while, and who have had a few successful investments under your belt already, we recommend these two by the great Benjamin Graham:

                        Security Analysis – By Benjamin Graham and David Dodd

                        The Intelligent Investor – Benjamin Graham

                        A Random Walk Down Wall Street – By Burton Malkiel

                        Common Stocks and Uncommon Profits – Kenneth Fisher

                        Irrational Exuberance – By Thomas Shiller

                        Against the Gods: The Remarkable Story of Risk – by Peter Bernstein

                        Think, Act and Invest Like Warren Buffett – by Larry Swedroe

                        Tools & Techniques of Investment Planning – by Stephan Leimberg

Meet with an advisor. If you’re just starting out, almost any trained and experienced advisor can help you identify the basic steps you can be taking, whether it’s by starting or contributing to an IRA, Roth IRA or making better use of your 401(k). For most people, it’s far more important to build the habit of saving and investing now rather than wait until you have the perfect advisor with access to all the perfect products on the market. Such advisors don’t exist, anyway.

Consider a Self-Directed IRA

A Self-Directed IRA allows you to invest in a wider variety of assets than you can get in an off-the-shelf IRA from an investment company. Think of it: Your stockbroker doesn’t get a commission if you choose to own a house within your IRA. So you’re unlikely to hear much about the option from them. But the fact is you can own an immense variety of asset classes within a Self-Directed IRA, from leveraged real estate to precious metals to private equity and beyond.

Regardless of your level of sophistication as an investor, however, the important thing is to start your road to retirement prosperity now. The laws are such that if you don’t take advantage of a tax-advantaged account for a given year, you can’t turn back the clock, and you can’t make retroactive contributions. If you let a year-end deadline for a 401(k) contribution or an April 15th deadline for an IRA contribution pass, that opportunity is gone forever.

Carpe Diem is the order of the day!

If you’re a mature and seasoned investor, and you want to achieve greater potential returns, or greater diversification than you thought possible within your retirement funds, give us a call today at 866-7500-IRA (472), or visit us online at www.americanira.com. From there, you can read our vast resource library of articles and blog posts, or download our seven exclusive guides to self-directed retirement account investing.

We look forward to working with you!

 

 

 

 

 

 

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Asset Location: What Goes Where? Are Self-Directed IRA Clients More Experienced?

Self-Directed IRA ClientsMany Self-Directed IRA clients are more experienced and often navigate this question better than most.

For years, investment advisors have harped on helping investors figure out their optimal asset allocation. That is, what is the theoretical optimal mix of stocks, bonds and cash – and maybe a smattering of other asset classes – that provides for the best expected return for the minimum expected risk?

And still, their clients got clobbered!

The problem is that backward looking analysis tools like Ibbotson asset allocation software and Monte Carlo simulation tools lent a sort of false illusion of precision to their projections. The fact remains that the markets don’t behave like bullets. They are more like knuckleballs. If you’ve ever tried to hit a good knuckleball pitcher you know what I’m talking about: There’s no telling what the ball is going to do, because even the pitcher and the catcher don’t know what the ball is going to do!

Most of Self-Directed IRA clients investing in the form of, say, a Real Estate IRA, a Precious Metals IRA, or who own privately held companies, partnerships and joint ventures understand how to make money in these fields much better than the average financial advisor understands and can predict the markets. The markets are too big for any one person to really understand – but anyone can understand a small portfolio of real estate investments – even more so if it is fully under your control!

That’s why we advocate self-directed retirement investing for many people – especially those with a track record of success in business and investing on their own.

But the problem of what assets to hold within a tax-deferred account, a tax-free account (like a Roth IRA), or a fully taxable account (outside of an IRA) is a common one.

While the specifics are always highly fact-dependent, there are some generalities we can mention:

High-capital gain, low-income assets are often best held outside of retirement accounts. There’s not much current income to worry about paying taxes on, so the idea is to capture the advantage of long-term capital gains rates on these assets, rather than paying ordinary income on them, which you would have to do if you distributed them from an IRA.

Low-capital gain, high-income investments are ideal for retirement accounts, including Self-Directed IRA clients. Often these investments include rental real estate, because despite some wild swings in real estate prices in recent years, the long-term price appreciation rate for residential real estate is quite modest, compared to stocks. By holding them in a retirement account – whether it’s a Roth or traditional tax-deferred IRA or 401(k) doesn’t matter for this scenario. That’s a separate calculation. But because capital gains are modest, giving up the long-term capital gains treatment on these assets is less of a sacrifice.

In both cases, the higher your marginal income tax bracket, the stronger the recommendation, from a pure tax standpoint.

Low-capital gain, low-return assets are usually best sold. But you may hold them as a hedge against market catastrophes. Precious metals may fall into this category, since obviously a hunk of metal doesn’t pay a dividend. These can be held either in or out of retirement accounts to good effect. But holding them within a retirement account qualifies them for substantial asset protection benefits. If you held them personally, they would be fair game for creditors.

High capital gain, high-return assets. If you have lots of these, you have few worries. At least financially. However, we would still steer these rare gems to the retirement account, because if you’re doing that well, you become a target for lawsuits and you’ll want the asset protection Self-Directed IRA clients get with their IRA or 401(k) account. And, of course, congratulations are in order.

Now, in some cases, an asset that is normally a capital gain generator could become an income generator, instead. For example, people who buy and sell houses a lot could fall under IRS dealer rules, under which profits are treated as ordinary income rather than capital gains. So you can’t just assume because it’s a capital asset you would treat it the same way as everyone else does. Personal asset protection planning varies from individual to individual as well.

To learn more, visit us online at www.americanira.com, or call us at 866-7500-IRA (472). We are experts in Self-Directed IRA planning, and we look forward to working with you!

 

 

 

 

 

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Beware of Accidental Self-Directed IRA Prohibited Transactions

Self-Directed IRA Prohibited TransactionsA recent tax court case illustrates the importance of understanding and abiding by Self-Directed IRA prohibited transaction rules that govern self-directed IRAs and other retirement accounts. Yes, on the surface, these rules seem simple enough. But the Devil, as always, in the details – and so we still see owners of self-directed IRAs run into problems as courts apply the rules in unexpected ways.

Here’s what happened:

Two taxpayers wanted to buy an existing business for their IRAs. The two taxpayers were not related. The two taxpayers founded a new corporation in August of 2001, then in the very next month, each of these taxpayers had their self-directed IRAs purchase 50 percent of the stock, and then within days directed the new corporation to acquire the assets of the older existing corporation.

They structured the purchase, in part, using a promissory note to the seller, which they secured via personal guarantees.

Over the next few years, these two taxpayers converted their self-directed IRAs from traditional to Roth accounts. In 2006, both individuals directed their IRAs to sell the company, at a profit, to a third party buyer, who was also unrelated.

Personal Guarantees on IRA Loans Lead to Trouble

The IRS took a close look at the transaction and found a problem: The personal guarantees, the IRS held, violated Self-Directed IRA prohibited transaction rules. As most of our clients are aware, if you do use leverage within your self-directed IRA, you cannot pledge anything outside of the IRA as collateral. The loan must be on a non-recourse basis. A personal guarantee, even if not tied to a specific asset, still provides recourse to the borrower – in this case against everything the guarantors own outside of the IRA.

The law defining a Self-Directed IRA prohibited transaction, in this case a loan, is pretty broad: Section 4975(c)(1)(B) prohibits lending of money “or other extension of credit,” whether direct or indirect. So even though the loan was not secured by any piece of property outside of the IRAs, the loan guarantees, the court held, still involved the indirect extension of credit by a prohibited third party.

That wasn’t all: The IRS claimed upheld that the company’s payment of wages and salary to the taxpayers was also a prohibited transaction, as was the shell company’s payment of rent on property that was owned by an entity controlled by the two taxpayers’ spouses. As it turned out, the issue was moot, because the court disqualified the IRAs as of the date of the loan guarantees. Had the guarantees not been an issue, though, the IRAs would still have been in significant jeopardy of disqualification on these two counts, as well.

The court also disallowed the use of a shell company as a defense: If a prohibition on a transaction between two disqualified entities could be “easily and abusively avoided simply by having the IRA create a shell subsidiary,” that would not cut the legal mustard. The protections against potential conflicts of interests posed by improper transactions with prohibited entities, the courts ruled, were substantive and not merely cosmetic.

The penalty, in this case, was substantial: The immediate disqualification of the IRA, and an immediate and heavy tax liability to the respondents – made worse because of penalties, interest, court costs and attorneys’ fees.

The Importance of a Qualified, Expert Custodian or Administrator

The case underscores the importance of having an experienced custodian or third-party administrator in the process of running your self-directed IRA. It also underscores one of the drawbacks of a pure ‘checkbook IRA’ approach: The checkbook IRA model advanced by some may be appropriate for some, but without some serious and frequent consultation with tax and legal experts, it leaves taxpayers too directly exposed to administration mistakes that can have disastrous consequences. Had these individuals used American IRA, LLC (that’s us!) or some other similarly qualified administrator or custodian to handle transactions on their behalf, some of these transactions may have raised a risk flag in time to correct the issue before the IRS got involved.

As it stands now, the taxpayers lost their IRA, wound up paying a substantial amount in taxes, fees and penalties, and have no recourse to recoup their losses.

If you want an independent review of your IRA strategy – especially if you currently include or are interested in using self-direction as part of your strategy, call us today at 866-7500-IRA(472), or visit us at www.AmericanIRA.com. We look forward to working with you.

 

 

 

 

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Income-Focused Retirement Investing – 4 Crucial Questions for Self-Directed IRA Owners

Self-Directed IRA OwnerAs you transition from a net retirement saver to a net retirement spender, it’s important to ask yourself a crucial set of questions that go directly to your retirement income strategy. This is true whether you are a Self-Directed IRA owner or whether your approach is more conventional – though we will take a closer look at income-generating investments in the self-directed context in an upcoming blog.

  1. What is my monthly nut? Think of it in terms of what you must have to maintain your bare minimum desired lifestyle. How much income does it take per month, times 12, for you to keep food on the table and a roof over your head? If you don’t have access to public transportation, you’d better include the cost of keeping a car running as well. This is income you need to have wrapped up in something pretty safe. One option is a lifetime income annuity, of course, and that should be on the table – especially if you’re not too worried about passing on a legacy to the next generation, or if other money or life insurance is taking care of that.
  1. What is the likely rate of inflation? You need to counter the effects of inflation, as well. Consider: If both of you retire at age 65, chances are good at least one of you will make it to at least age 85. That’s 20 years. Apply the rule of 72s to a 3 percent inflation rate, though, and you’ll see that the cost of living doubles every 24 years. Can your portfolio support nearly double the expenses, or even more, before you exhaust your savings? Will you be able to keep up the bare minimum level of expenses you need to cover, even as you spend more on prescription medications and medical aids?

While a pure income strategy may appeal to investors in the short run, when people take a longer view, they often find that they need to consider growth in income as well, over time.

This means your portfolio should probably have at least some growth component in it, reserved for spending needs 5 to 10 to 20 years off.

  1. Do I have a stable income base besides Social Security? A stable income base is one with guarantees. If you have a secure and adequately funded pension, or a military pension funded out of the general obligation fund of the United States Treasury, you have a stable income base. If not, you can create your own, to some extent, using guaranteed or risk-free assets like life annuities, U.S. Treasuries, and even to some extent a diversified portfolio of investment-grade bonds, each with a low likelihood of default and plenty of assets behind the company’s ability to make interest and principal payments.

If you have a stable income base, and it’s sufficient to cover your minimum monthly nut or year, you can take more risk with the rest of your portfolio. You’ve protected your bare necessities, so you can be somewhat more aggressive.

If you don’t have a stable income base, you’ll need to be more careful about taking risks with your overall portfolio.

  1. Can your surviving spouse manage your portfolio? What happens when you pass on? You’re the one reading investment-related blogs. Will your spouse be able to unravel and utilize the investment portfolio you’ve built? You may have extensive expertise in private lending, or in running your venture capital empire. But when something happens to you, what is the plan to turn this into something your spouse can grasp and effectively monitor, and turn this into something he or she can rely on as a source of support for the rest of his or her life?

This is a crucial question, especially for Self-Directed IRA owners, because of the occasionally complex or high-maintenance nature of some of these investments.

Working with an eye toward liquidity, as well as taking steps to ensure transparency and simplicity sufficient for a surviving spouse to take the reins will go a long way to helping ensure your strategy works when theory meets practice.

For more information, or to download our seven free guides to self-directed IRAs, 401(k)s, SEPs, SIMPLE IRAs and other options, call us today at 866-7500-472(IRA).

American IRA, LLC is a nationwide leader in self-directed retirement account administration, and we can work with clients in all 50 states.

Most of all, we look forward to working with you.

 

 

 

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Pre-Foreclosure Properties as a Real Estate IRA Investment

Real Estate IRA InvestmentFor those of you with an interest in real estate, yes, you can buy pre-foreclosure properties as a Real Estate IRA investment. The same goes for other self-directed retirement accounts, including 401(k)s, SEPs, SIMPLE IRAs, and even Coverdell Education Savings Accounts and Health Savings Accounts, if your balances are large enough to make it work!

There are a number of advantages to using a retirement account to acquire these properties:

If your plan is to fix them up and flip the house, and you do this a lot, you may fall under dealer tax rules. That means that unless you are conducting your flipping activities within a retirement account, all your profits will be taxed as sales of inventory – and therefore subject to taxation as ordinary income.

Furthermore, outside of retirement accounts, those

who are classified by the Internal Revenue Service as dealers lose their ability to defer capital gains under Section 1031 of the Internal Revenue Code concerning like kind exchanges. And furthermore, the income may also become subject to self-employment tax of up to 15.3 percent.

On the other hand, if you choose to own these properties and sell them within a tax-advantaged retirement account, none of that matters: All capital gains and all income is tax deferred. If you pay cash for the property through your Self-Directed IRA or other retirement account, you only pay income taxes on the money when you take a distribution (subject to early retirement penalties as with other retirement accounts).

If you employ leverage to acquire the property within a retirement account other than a 401(k), however, you may be subject to unrelated debt-financed income tax. You are then liable for income tax on any appreciation attributable to borrowed money. That is, if you borrowed 50 percent of the purchase price to acquire a property within a Self-Directed IRA, then you would pay unrelated debt-financed income tax on 50 percent of your profits from the deal.

A few things to keep in mind when finding and purchasing pre-foreclosure deals as a Real Estate IRA investment:

  • You cannot handle the transaction directly in your name. Instead, you should have third party administrator – such as American IRA – handle the transaction in the name of your IRA. You give us your written direction as to what property you want us to purchase (or sell) on your IRA’s behalf, who the counterparty is, and at what price. We handle the rest.
  • Your Real Estate IRA or other retirement account cannot purchase or sell anything with you, your spouse or ascendants or descendants as counterparties.
  • You cannot use the property for your own personal purposes, nor can your spouse, decedents or antecedents. You must maintain an arm’s length separation in all the Real Estate IRA investment transactions your IRA or other retirement account makes.
  • You cannot remain overnight in the property, even for the purposes of working on it to prep it for sale or rental.
  • You cannot rent the property to yourself, a spouse, decedent or antecedent, nor to any entities controlled by a prohibited party.
  • You can use leverage. But any money you borrow must be borrowed on a non-recourse basis. That is, you may not pledge anything outside the retirement itself as collateral.

Want to know more? Give us a call at 866-7500-IRA (472). We’ll be able to answer your questions, and we will be happy to send you, free of charge and with no obligation, our exclusive guide to self-directed real estate investing within your IRA. Or visit us online at www.americanira.com. We look forward to working with you!

 

 

 

 

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What To Do About the Coming Retirement Crisis: Self-Directed IRA Investors Hold the Key

Self-Directed IRA InvestorsAs a team that administers accounts for Self-Directed IRA investors, we’re very excited about the forthcoming publication of Falling Short: The Coming Retirement Crisis and What to Do About It (set for a January 2nd publication). The authors are Charles D. Ellis, Alicia H. Munnell and Andrew Eschtruth, and all of them are true heavy hitters when it comes to retirement investment theory.

Alicia Munnell currently heads Boston College’s Center for Retirement Research. According to her team, as many as 53 percent of Americans are at serious risk of not having enough money to maintain living standards in retirement.

While we’re waiting for the publication of the book, though, we did find a sneak preview of some of the team’s findings in this CRR working paper: Are Retirees Falling Short? Reconciling the Conflicting Evidence.

Among their key findings:

  • Households retiring in the future will be less prepared than they were in past generations.
  • Families tend to accept that they will be sharply reducing expenditures after children leave home, and therefore make retirement investing decisions on that basis.
  • Other studies find that consumption does not decline in later years. Families banking on a significant decline in expenditures after the children leave the nest will be severely stressed, and unable to maintain their desired or expected retirement lifestyles.
  • Most households are, indeed, falling short in retirement preparedness.
  • Policymakers considering Social Security reforms should bear in mind the unpleasant realities.
  • Government should seek ways to encourage more private saving, such as requiring 401(k)s to adopt auto-enrollment and auto-escalation polices, and to apply these policies to current hires.

All that is well and good, but it’s tinkering around the edges. It all comes down, in the end, to finding ways to substantially increase savings not just in 401(k)s, which apply to people who are W-2 employees, in the main, but also to encouraging people outside the system to become fully engaged in the problem of managing their own retirement preparations. It’s not just about 401(k)s for corporate employees: The solution must include massive improvements in the retirement preparation of independent contractors, small business owners just trying to keep their doors open, part-time and marginal workers, and everyone else struggling at the fringes of the economy.

“I think saving for retirement is really a hard thing to do,” said Alicia Munnell in a recent interview in Forbes. A lot of middle-income people are under enormous financial pressure because wages haven’t grown much.”

Only half of Americans even participate in retirement plans, for starters, Munnell argues, and even those trying to use IRAs and other individually-owned rather than corporate-sponsored retirement plans are struggling with stagnant wages and increasingly unstable employment.

Furthermore, despite current record highs in the stock market, actual returns on investment in diversified portfolios and income-based portfolios have been pretty lackluster, compared to past decades, thanks to stubbornly low interest rates, thanks, in part, to a Federal Reserve Board that is determined to boost current consumption at the expense of savers.

Among other measures, Munnell and the other authors argue that 401(k) plans shouldn’t just cover full-time workers – they should cover part-timers, as well.

They also argue that we should not allow people to take 401(k) distributions when moving from one job to another, and that we should do away with 401(k) loan provisions.

Self-Directed IRA Investors

Most of our clients are doing quite well. Self-Directed IRA investors in the first place tend to have been at least somewhat financially successful, and they have developed some expertise in some area of investing that they hope to leverage via the use of Self-Directed IRAs, 401(k)s and other retirement accounts.

If this describes you, you are at a big advantage over most people because you can declare independence from the stock market and to some degree, even prevailing interest rates. You are free to choose investments that don’t correlate to the stock and bond markets or to prevailing interest rates, and can therefore get an increased return on your investment at a given level of risk compared to most.

For those of you who have employees with less sophistication than you, however, you can probably make a substantial difference in their lives by adopting automatic enrollment and by making low-cost index funds available to them within your company –sponsored 401(k) plan or SIMPLE IRA.

You can do this without giving up full control of your self-directed assets, even within the same 401(k) or SIMPLE IRA plan you offer to your employees, since joining the ranks of Self-Directed IRA investors is obviously an option, not a requirement.

Want to learn more? Call American IRA, LLC today at 866-7500-472(IRA), or visit us online at www.americanira.com. We can walk you through your options, take a look at your existing plan, and work with your current team of advisors to give you the most freedom of action and independence possible, while still honoring your fiduciary responsibilities to your plan participants.

 

 

 

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Beating Retirement Plan Inequality – The Power of Self-Directed IRAs.

Power of Self-Directed IRAsIt’s not what you have – it’s what you do with it. Understanding the rules of various retirement plans is the first step. Utilizing the Power of Self-Directed IRAs is the key that will take your investments to the next level.

That said, Scott T. Hanson has a point, in a recent editorial he penned for CNBC: It’s Time to Level the Retirement Playing Field.

In his piece, Hanson argues that in addition to an income divide that seems to divide the haves from the have-nots, we also have a significant problem with retirement plan inequality. Usually, we hear this line of thinking regarding the divide between workers with access to generous defined benefit pensions (now largely confined to government workers and a few old-line unions) and those without, who have to make do with defined benefit 401(k), 403(b) and other plans.

Hanson takes a different position: That now, many workers do not even have access to a defined contribution plan. Meanwhile, those in 401(k) plans are able to set aside up to $17,500 per year ($23,000 for those ages 50 and over) on a tax-advantaged basis. That amount is even higher when you consider the effect of employer matching contributions.

Meanwhile, other employees – those without access to an employer plan for whatever reason, have to make do with the meager contribution limits of IRAs – just $5,500 per individual, plus another $1,000 for those over 50. Because these are frequently lower income individuals, part-timers, or independent contractors on the fringes of the economy, they not only start out at a significant disadvantage not just in terms of income, but also in terms of what they are even allowed to save in a retirement plan.

For example, an employee with no access to a 401(k) making 35,000 can save the maximum in an IRA, but he or she will never be able to match the retirement savings of an employee making a salary of $45,000 and contributing the maximum into his 401(k), who can also fund a traditional or Roth IRA if they are frugal enough. Even discounting the effect of employee contributions, the higher earning worker also has a benefit enshrined in tax law, while the other employee, no matter how diligent, is locked out of the same option.

Hanson argues that we should have the same tax-deductible limits for all employees. That we should not favor the large company employee with a 401(k) over the small company employee whose employer cannot provide the same benefit for whatever reason.

I believe there’s a lot of merit to Hanson’s argument. However, we must deal with tax law as it is, not as we would like it to be. If you want to maximize the amount of income you can save on a tax-advantaged basis, then you have to take certain steps. Here are some ideas for those not covered by 401(k)s, or for small business owners:

  1. Arrange your affairs to maximize income as an independent contractor rather than as an employee. This allows you to declare income as Schedule C income and allows you to deduct expenses directly against income (otherwise you have to deal with the 2 percent threshold for unreimbursed employee expenses). But you also get to defer up to 25 percent of your income in a SEP plan, or a similar amount in a self-directed 401(k).
  2. Start a solo 401(k) plan. You may have heard that it takes a ton in administrative expenses, actuarial costs and long-term obligations to start a pension plan. But if you are a sole practitioner, or you work as part of a spousal team, you will find that you can start up an individual 401(k) plan for much less than you may have anticipated.
  3. Use a spousal IRA. Are you married? You can contribute to a spousal IRA, even if your spouse does not have earned income. This can effectively double your allowable IRA contributions to $11,000 per year provided you otherwise qualify and meet income limits.
  4. Maximize the return you get on available retirement assets. This is where the power of Self-Directed IRAs comes in. Do you have a particular expertise in real estate? Precious metals? Venture capital/private equity? Tax liens and certificates? All these are allowable retirement plan investments. But you have to use a Self-Directed IRA, which means you must use an administrator or custodian for your funds who is familiar with the unique rules and the power of Self-Directed IRAs.

And that’s where we come in. American IRA, LLC is among America’s leading self-directed retirement investing companies. We can help you arrange your retirement savings strategy to maximize the amount of money growing tax deferred or in some cases (using Roth IRAs and Roth accounts within 401(s), tax free.

For a free guide to self-directed retirement investing or to see what we can do for you, please call us today at 866-7500-IRA(472), or visit us online at www.americanira.com.

 

 

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