Boost Tax-Free Retirement Income with a Back-Door Self-Directed Roth IRA

October 10, 2018/in Blog, Roth IRA /by Jim Hitt

Self-Directed Roth IRAs provide a powerful combination of tax benefits and features: There is no up-front tax deduction on Self-Directed Roth IRA contributions, but as long as the assets remain in your IRA for at least five years, there are no taxes on any income or any growth of capital for as long as you or your surviving spouse shall live. This means you can combine the current income, potential for growth of income and potential capital appreciation of real estate with decades of tax-free compounding. With proper planning, the tax benefits of the Self-Directed Roth IRA can even extend into the next generation, using the ‘stretch Roth IRA’ technique.

But real estate investing, even with leverage, is capital-intensive. It takes a significant amount of money to acquire a property, and you will need more in reserves to handle those little emergencies that plague all landlords, sooner or later. But ordinary contributions to Self-Directed Roth IRAs are limited to $5,500, or $6,500 for those ages 50 and older.

In other cases, higher-income individuals are prevented from making direct Self-Directed Roth IRA contributions at, because their income is above the $120,000-$135,000 income phase-out and cap. Your eligibility to make Self-Directed Roth IRA contributions begins to phase out when your adjusted gross income reaches $120,000 and phases out completely at an AGI of $135,000.

But there is another way: The ‘back-door’ Self-Directed Roth IRA technique.

Converting a Traditional IRA to a Self-Directed Roth IRA.

Here is how it works:

You can turn any Traditional IRA into a Roth IRA, including a Self-Directed Roth IRA, by undergoing a process called conversion. The major consequence is you have to pay income taxes on any amount you convert to a Self-Directed Roth IRA. Essentially, you are paying the tax bill you avoided when you took the deduction for the original Traditional IRA contributions, plus taxes on compounding.

Once this conversion is complete, all the dollars remaining in the account after you pay the income taxes are Self-Directed Roth IRA dollars, and grow tax-free within the Roth IRA, provided they stay in the account at least five years.

If you take a distribution before then, you will be liable for the income tax on any growth. A 10 percent penalty also applies on any distributions from the Self-Directed Roth IRA prior to age 59½, unless certain hardship circumstances apply, or you elect to take distributions in the form of a series of substantially equal periodic payments over your life expectancy or the joint life expectancies of yourself and your spouse.

Converting Other Qualified Retirement Accounts

Many people interested in establishing Self-Directed Roth IRA. But the low annual contribution limits make it difficult to do so in a reasonable amount of time using new contributions. These same people often have much more substantial balances in old 401(K) plans, SEPs and SIMPLE IRAs. These plans can also be converted to Self-Directed Roth IRAs. For these plans, conversion is a two-step process:

Execute a tax-free rollover from the tax-deferred retirement account to a Traditional IRA with American IRA, LLC.
Execute a taxable conversion of your new Traditional IRA to your new Self-Directed Roth IRA as outlined above.

Note: A recent tax court ruling affirmed that each taxpayer is limited to one IRA tax-free rollover in a given tax year. So, if you have multiple Traditional IRAs or other accounts you want to combine into a single account, you may need to spread the rollovers over several years. Your tax professional can help you with the details. Or call us at 866-7500-IRA (472) and we can walk you step by step through the process. However, American IRA, LLC does not give individualized tax advice. For information on your specific circumstances, we suggest you retain the services of a qualified tax professional.

Note: The conversion strategy works particularly well for those who can afford to pay the income taxes on the amounts rolled over out of pocket, rather than using funds from within your Self-Directed Roth IRA.

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 Roth IRA Conversions

August 27, 2018/in Blog, Roth IRA /by Jim Hitt

A qualified rollover contribution is one of the many ways in which a Self-Directed Roth IRA can be funded. With a qualified rollover contribution, assets are moved from a traditional retirement savings account to a Self-Directed Roth IRA. For the purpose of this overview, we will refer to qualified rollover contributions as Roth conversions.

A Roth conversion is a two-part transaction, with a distribution occurring on the traditional account side and a rollover occurring on the Self-Directed Roth IRA side.

This outline provides a high-level overview of Roth conversions.

Roth Conversion Defined

A Roth conversion occurs when amounts are moved from a traditional retirement account to a Self-Directed Roth IRA. The options for doing so are:

A conversion of assets from a Traditional IRA, Self-Directed SEP IRA or Self-Directed SIMPLE IRA[1] to a Self-Directed Roth IRA.
A rollover of assets from a traditional account under an employer sponsored retirement plan[2] to a Self-Directed Roth IRA.

In either case, the amount must first be eligible for rollover, in order to be converted to a Self-Directed Roth IRA.

Amounts that are not eligible for rollover, and therefore not eligible for a conversion include required minimum distributions (RMD)s and excess contributions. A Self-Directed Roth IRA owner should consult with his/her tax professional for assistance with determining whether an amount is eligible for rollover.

Roth Conversion Methods

A Roth conversion can be direct or indirect.

With a direct conversion, the amount is paid by the delivering (non-Roth IRA) custodian/trustee to the receiving Self-Directed Roth IRA custodian/trustee, for the benefit of the Roth IRA owner; and is deposited directly to the Roth IRA. In some cases, the delivering and the receiving custodians/trustees are one and the same. There is no time limit for direct conversions.
With an indirect conversion, the amount is paid to the Self-Directed Roth IRA owner, who then has 60 days from the date of receipt to deposit the amount to the Roth IRA.

Tax Treatment of Roth Conversions

Roth conversion amounts are treated as ordinary income for the year in which the distribution side occurs. For example, if a Self-Directed Roth IRA owner takes a distribution from a Traditional IRA in December 2018 and deposits the amount to a Roth in January 2019, the amount is treated as a 2018 Roth conversion; and reported on the individual’s 2018 tax return as ordinary income.

Withholding Rules for Roth Conversions

Because the delivering side of a Roth conversion is a distribution, it is subject to the same tax withholding rules that apply to distributions. These are as follows:

For Conversions from Traditional, Self-Directed SEP IRA and Self-Directed SIMPLE IRAs

The IRA owner can choose to have 10% or more withheld for federal income tax.
If no withholding tax election is made, the custodian must withhold 10% for federal income tax.

For Rollovers from Employer Sponsored Retirement Plans

If the amount is processed as a direct rollover to the Self-Directed Roth IRA, then there is no tax withholding.
If the amount is paid to the account owner, the payor must withhold 20% of any taxable amount for federal income tax. The account owner can elect to have more withheld.

Tax Reporting

There are two sets of tax reporting that must be done for Roth Conversions; tax reporting by the IRA custodian/plan trustee and tax reporting by the Self-Directed Roth IRA owner.

The IRA custodian/plan trustee must issue IRS Form 1099-R for the distribution side of the Roth conversion and IRS Form 5498 for the funds deposited to the Self-Directed Roth IRA.

The amount must be reported on the Self-Directed IRA owner’s tax return as ordinary income.

For employer sponsored retirement plans, the plan administrator is responsible for indicating the taxable amount on IRS Form 1099-R.

For Self-Directed IRA, the IRA owner’s tax preparer is responsible for determining how much of the converted amount is taxable.

Recharacterizations

A recharacterization is a reversal of a Roth conversion[3]. Any recharacterization must be made to a Traditional IRA, even if the conversion was made from an employer sponsored retirement plan.

Any conversion amount that is recharacterized must be accompanied by any net income attributable (NIA) to the amount. The NIA must be calculated using the IRS formula provided in IRS Publication 590-A (Worksheet 1-3).

A recharacterization must be completed by the Self-Directed IRA owner’s tax filing due date, plus extensions. An IRA owner who files his or her tax return by the due date, receives an automatic 6-month extension to complete a recharacterization.

Caution: Roth conversions done after December 31, 2017 are not permitted to be recharacterized[4]

A Roth conversion amount that is properly recharacterized reverses the tax effect of the Roth conversion, and restores the amount to the Traditional IRA.

Additional Information

Assets can also be converted from the traditional side to the Roth side of an employer sponsored retirement plan. This process is referred to as an in-plan conversion. The Roth side of these plans are referred to as designated Roth Accounts (DRA).

In-plan conversions may not be recharacterized.

Individuals should consult with their plan administrators for information about in-plan conversions.

Tax Advice

Individuals should consult with their tax advisors about whether to perform Roth conversions and recharacterizations.

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.

[1] An amount may be converted from a SIMPLE IRA to a Roth IRA, only if it has been at least 2-years since the first SIMPLE contribution was made to the SIMPLE IRA

[2] Qualified plan, such as a 401(k) or pension plan, 403(b) and governmental 457(b)

[3] A recharacterization can also be used to change a regular traditional IRA contribution to a regular Roth IRA contribution and vice versa

[4] Repealed under the Tax Cuts and Jobs Act (Pub. L. No. 115-97)

Upgrading Your Retirement Plan with a Self-Directed Roth IRA

June 29, 2018/in Blog, Roth IRA /by Jim Hitt

The retirement plan is simple: invest as much money as you can while you are working so that you can enjoy a retirement full of wealth and security. But when it comes to making individual decisions—which types of assets to invest in, which types of accounts to use—most people do not know where to start. But those who have used a Self-Directed Roth IRA often find that this one decision had such a dramatic impact on their ultimate bottom line that they almost wonder if the process should be more complicated.

Why focus on the Self-Directed Roth IRA? Because this is a unique retirement account type that makes it possible to build a tremendous amount of wealth over the long-term, which then adds up to unique abilities come retirement age. For those who are comfortable forgoing some short-term wealth for long-term rewards, the Self-Directed Roth IRA may just be one of the most intriguing ways to plan retirement. Here is what you will need to know:

Understanding the Self-Directed Roth IRA

A Self-Directed Roth IRA is a unique kind of retirement account. Self-Directed Roth IRAs were first introduced in the Taxpayer Relief Act of 1997—ultimately being named for Senator William Roth of Delaware. The best way to understand the Roth IRA is first to understand how a Traditional IRA works.

A Traditional IRA uses pre-tax dollars for contributions; you then pay your income taxes when you take distributions from the account. This is a tremendously beneficial plan because it affords the account holder with plenty of protections for their wealth, including the ability to use that pre-tax income.

The Self-Directed Roth IRA works in reverse. You use taxed income to make contributions to a Self-Directed Roth IRA, which then grow tax-free. Then, when you reach retirement age, you no longer have to pay taxes on that money, as you already paid taxes on the income when you first made the investments. The taxes you do not pay (legally) because of this arrangement can add up to tremendous stores of value, especially if you have made contributions to your Self-Directed Roth IRA throughout life.

Why the Self-Directed Roth IRA Functions Like an “Upgrade”?

Many people give priority to their Self-Directed Roth IRA because of the tremendous amount of wealth that it can build while growing tax-free. Because you have used money that was already taxed, the money you take in retirement is then tax-free, which means that the additional gains that came about because of your investments are then not tax, either. This can represent one of the most transformative and efficient ways to build wealth, as it gives you a large nest egg that will not be subject to further taxation so long as you follow the rules.

But it is also important to know those rules, including:

You can take a “qualified distribution” only once you have contributed to a Self-Directed Roth IRA and five years has passed. This regulation is in place to ensure that people do not use the Self-Directed Roth IRA as a get-rich-quick scheme.
The Self-Directed Roth IRA, like any Roth IRA, has relatively low contribution limits—$5,500 for those 49 and younger in 2018, and $6,500 for those 50 and older. However, it is important to take note of the higher “catch up” contribution limits, which means that even older investors closer to retirement can take advantage of the wealth-building present in a Self-Directed Roth IRA.
Penalties on early distributions can be substantial, just like in any Self-Directed IRA, so do not get any delusions about how you will be expected to treat this account. Make no mistake: A Self-Directed Roth IRA is a retirement account like any other. It just so happens to have tremendous advantages.

The Self-Directed Roth IRA can be one of the most powerful ways to change the way you think about retirement. It can also serve as one of the most powerful upgrades to your retirement strategy. But because of the low contribution limits, the time to get started is now. For more information, contact American IRA at 866-7500-IRA, www.AmericanIRA.com or visit our Self-Directed Roth IRA page today.

A Comprehensive Guide to Self-Directed Roth IRA Income Thresholds

May 30, 2018/in Blog, Roth IRA /by Jim Hitt

The Self-Directed Roth IRA may be one of the most powerful wealth-building tools in existence—and yet many people do not quite understand how it works, what limitations it contains, or how it might best be utilized. One particular area of confusion: income thresholds. These income thresholds can play a major part in how you use a Self-Directed Roth IRA—or whether you even use them at all—which is why it is so important for investors to understand what they are. That is why we have put together this brief but comprehensive guide to income thresholds of which you need to be aware:

Self-Directed Roth IRA Limitations Based on Income

What is an “income threshold” in this context? The simplest explanation is that the IRS sets limits in the types of individuals that are qualified to invest in a Roth IRA—which includes the Self-Directed Roth IRA. Those limitations are clear when it comes to the income you can receive while also investing in a Self-Directed Roth IRA.

Want to make sense of these Self-Directed Roth IRA income thresholds? Here is what you will need to know about these limitations and qualifications:

To invest in a Self-Directed Roth IRA, you will have to earn an income in the year in which you make a contribution. Disability retirement benefits may also count as income. That establishes, essentially, a minimum income threshold: if you earn zero dollars, you cannot contribute to a Self-Directed Roth IRA.
There are also upward limits on income for Self-Directed Roth IRA For 2018, those limits are $135,000 for single filers and $199,000 for married couples filing jointly. (It is worth noting that both of those figures increased over the limits in 2017, which suggests a little more flexibility for higher-income earners).
Contribution limits change based on age. For anyone 50 or older, it is possible to make $6,500 in contributions to a Self-Directed Roth IRA—a so-called “catch-up” period that allows aspiring retirees to make up for lost time with higher limits. For those younger than this, the contribution limit remains at $5,500 for 2018.

These limits are critical to understanding whether or not an individual can make a valid contribution to a Self-Directed Roth IRA. They should not only assist in the planning of retirement contributions but can also highlight any additional retirement account needs if you are able to go over these contribution limits.

Making Use of the Self-Directed Roth IRA Limits

How does an investor make “use” of a limit to something like a Self-Directed Roth IRA? By understanding them. For example—a single person earning less than $135,000 per year can make up to $5,500 in Self-Directed Roth IRA contributions. But if this same individual has more retirement money to set aside after that, knowing this in advance can lead them to opening an additional account, such as a Self-Directed Solo 401(K). These accounts come with high contribution limits and would give the investor plenty of flexibility to continue to put money aside for retirement with tax protections.

To properly strategize, it helps to know what you should expect in the calendar year. Your tax filing status and your current year’s income will both play heavily into whether or not you are capable of investing using a Self-Directed Roth IRA.

The Benefits of the Self-Directed Roth IRA

Why bother with a guide like this? Because a Self-Directed Roth IRA, in addition to allowing you to invest in a diverse list of assets from real estate to precious metals, allows you to use taxed earnings to create tax-free investments. By paying your taxes up front, you can create a truly tremendous amount of wealth as you utilize the power of compounding interest over time. For that reason, many people first make the maximum contributions to their Self-Directed Roth IRA when going about their yearly retirement strategies.

For more information on Self-Directed IRAs or Self-Directed Roth IRAs, call us today at 866-7500-IRA (472) or visit us at www.AmericanIRA.com.

Real Estate IRA – Benefit – Demand Exceeds Supply

April 11, 2018/in Articles, Blog, Individual Retirement Accounts, Investing, IRA Advantages, Real Estate IRA Investing, Roth IRA, Self-Directed IRAs /by Jim Hitt

The stock market got wobbly in early 2018. But Real Estate IRA investors are doing just fine.

Home sales rebounded 3 percent in February 2018 after a holiday slowdown to reach a seasonally-adjusted annualized rate of 5.54 million homes – soundly beating the consensus analysts’ estimate of a 5.42 million annualized rate of gain. That is good news for Real Estate IRA investors as we head into the traditional spring home sales season

Traditionally the busiest time of year for home sales as families prepare for their house search and move during summer when optimal weather is met with children out of school.

The housing market inventory also increased by 4.6 percent compared to January. It is down by over 8 percent however, compared to this time last year. Meanwhile, demand continues to exceed supply as record employment numbers make it possible for more and more families to qualify for a home mortgage. Though mortgage rates have been trending up, they are still near historic lows, which supports home prices and is leading homebuyers to work to lock in today’s relatively low rates in anticipation of future rate increases. A 30-year mortgage is currently 4.4 percent in late March 2018. That is a 3.78 percent increase since September 2017, according to data from Freddie Mac.

What results is a scarce housing market for a growing number of buyers. Historically, as this continues, house prices increase over time.

Sales increases hinted a regional focus. Home sales climbed in the South (6.6 percent) benefitting many American IRA real estate investors; and West (11.4 percent), while slipping in the Midwest and Northeast colder climates.

The Northeast region was particularly hard hit, with sales falling over 12 percent.

Existing home sales accounted for nearly 90 percent of purchases in February 2018 leaving new-construction homes remaining on the market.

The economy remains strong in the Southern and Western states as these regions continue to experience expansion and employment gains.

The current supply and demand is affecting first-time buyers trying to get their foot in the door. These buyers, represent 29 percent of the market, compared to 34 percent a year ago according to the 2017 Profile of Home Buyers and Sellers published by the National Association of Realtors.

The housing inventory is likely to remain tight for the foreseeable future. The strong job market is causing labor costs to increase, making new homes more expensive to build. Higher interest rates may also negatively affect construction loans, leading to higher hurdle rates on capital and restraining new construction.

There may also be some fallout because of tariffs on steel as other countries retaliate, which could affect commodity prices. It is too soon to tell.

In the jumbo loan market and higher end homes, the recent Tax Cuts and Jobs Act also reduced the favorable tax treatment of home mortgage interest on bigger loans. This may also lead to a modest reduction in demand for homes at the higher end.

From the point of view of the Self-Directed IRA investor, multi-family dwellings and the middle-class market appears to be the place to be.

First-time homebuyers are getting squeezed out, making entry level homes a tough sell. These people will be renting apartments for a while, boosting demand and rents in multi-family buildings.

Wealthier buyers may hold off on buying luxury homes, since they cannot write off the entirety of the interest anymore. But the engines fueling strong demand for a shortage of houses are firing on all cylinders for homes in the middle market.

A Real Estate IRA in many ways is ideal for hold long-term real estate investments. The assets grow sheltered from income taxes. There are no tight timelines to meet or Section 1031 exchange rules to worry about if you want to exit real estate for a while or take your time finding a replacement property after selling an investment. Assets in Self-Directed IRAs enjoy substantial creditor protection.

You do give up the ability to take depreciation – but that is because there is no current tax liability on Real Estate IRA properties to depreciate against!

The biggest downside is that gains in a Traditional Real Estate IRA portfolio are eventually distributed as ordinary income in retirement, rather than as long-term capital gains, taxed at a lower rate. However, gains on Roth Real Estate IRAs grow tax-free and are normally distributed tax-free in retirement, if the asset has been in the Roth IRA for at least five years.

Getting started in Real Estate IRA investing and Self-Directed IRA investing is easy. To get a free investor kit and informational brochure, or to discuss your personal situation with one of our Real Estate IRA experts, call American IRA, LLC today at 866-7500-IRA (472). Or visit us on the Web at www.AmericanIRA.com.

Self-Directed IRA Savers Can Increase Contributions in 2018

April 6, 2018/in Blog, Roth IRA, Self-Directed IRAs, Solo 401K, Traditional IRA /by Jim Hitt

It is 2018. Are you still maxing your allowable retirement plan contributions?

The Internal Revenue Service announced the new contribution limits on retirement plans in early February. While the Tax Cuts and Jobs Act did not result in major changes to baseline contribution limits itself, limits for Self-Directed 401(k) plan contributions were increased by $500 for 2018, compared to the prior year.

Self-Directed 401(k) Contribution Limits

For 2018, employee beneficiaries of Self-Directed 401(k) plans can contribute up to $18,500 for the year on a pre-tax, salary deferral basis, or as after-tax Roth IRA contributions if their plans allow for Roth IRA contributions.

For those 50+ allowable ‘catch-up’ contribution limits for Self-Directed 401(k)s remained unchanged at $6,000.

The same salary deferral limits apply to Section 403(b) plans, most Section 457 plans and to the federal Thrift Savings Plan as well, though our Self-Directed 401(k) investors and small business owner readers will be most interested in the 401(k) provisions.

Self-Directed IRA Contribution Limits

Unchanged for 2018 are the contribution limits to Self-Directed IRAs remain at $5,500 for single taxpayers, and $5,500 each for married couples filing joint returns — provided they meet the income requirements listed below.

Taxpayers ages 50 and older may contribute an additional $1,000 in “catch-up” contributions, each for a total of $6,500 for single taxpayers, and $6,500 each for married couples. Remember, the above amounts reflect the total combined contribution limits for all Traditional IRA, Roth IRA, and Self-Directed IRAs. As such, if you have more than one of the aforementioned accounts, your total contribution to all may not exceed $5,500 or, depending on your age, $6,500.

Self-Directed IRA Income Thresholds

The Self-Directed IRA income threshold for those covered by workplace retirement plans has increased. The allowable income tax deduction for single taxpayers and heads of household now phases out when adjusted gross income reaches $63,000 and phases out completely at $73,000. This represents a slight increase compared to 2017. For married couples, the allowable deduction phases out with AGIs from $101,000 to $121,000 per year for 2018 – also a modest increase compared to the prior year.

Furthermore, when a Self-Directed IRA contributor is not covered by a workplace retirement plan but is married to someone who is a plan beneficiary at his or her workplace, the deduction phases out gradually when the couple’s AGI reaches $189,000 and phases out completely at a household AGI of $199,000 per year.

Roth IRA Contribution Income Thresholds

Roth IRA allowable income limits have increased for 2018. Single taxpayers can make a full contribution of $5,500 (plus another $1,000 age 50+) to a Roth IRA if their AGI for the year is $120,000 or below. From that point, the allowable Roth IRA contribution phases out gradually until the taxpayers’ AGI reaches $199,000 for the year.

For married couples, just as with Traditional IRAs, the allowable Roth IRA contribution for 2018 begins to phase out when the couple’s joint AGI reaches $189,000 and phases out completely when AGI hits $199,000.

Again, these more generous limits in 2018 may allow you to increase your contributions to these attractive retirement plans and take advantage of more favorable taxation as well as the asset protection qualities of retirement plans.

To increase your contributions, or to find out more about Self-Directed IRA investing strategies in general, call us today at 866-7500-IRA (472). Or visit our website at www.AmericanIRA.com.

50-Somethings: Is Your Retirement Saving Behind Schedule?

March 28, 2018/in Articles, Blog, Individual Retirement Accounts, Investing, Precious Metals, Roth IRA, Self-Directed IRA, Solo 401K /by Jim Hitt

Life happens. Maybe you had kids. Maybe you got clobbered by the Great Recession. Maybe you got divorced. Maybe it was all three. But your contributions to retirement accounts were not what you hoped they would be. Your dreams of a big Self-Directed IRA or Real Estate IRA generating awesome rental income in retirement fell behind schedule.

You are not alone.

But regardless of what happened in the past, now is the time to aggressively save and invest to secure your future.

If you are close to or into your 50s and you are still behind the power curve when it comes to saving for your retirement, here is a short list of things you can do to catch up:

Use “Catch Up” Contribution Limits

When Congress designed the IRA, Self-Directed IRA and 401(k) vehicles to help Americans provide for their own retirement security, they knew lots of people would need to play catch-up as they got into their 50s and 60s. Most of these people are now empty-nesters in their peak earning years. Since their kids’ previous college expenses are paid in full and they have no other debt, they are able to channel those savings towards the catch-up contributions.

So, if you are age 50 and older, you too should do your best to take full advantage of these expanded retirement account contribution limits:

Self-Directed IRAs

Whether you have a Self-Directed Traditional IRA or Roth IRA, the contribution limits are the same. Including your catch-up eligibility, you can contribute $6,500 to either account. It is important to note, however, if you have both Traditional IRA and Roth IRA accounts the $6,500 is the total contribution for all accounts. i.e., you cannot contribute $6,500 to your Traditional IRA and another $6,500 to your Roth IRA.

401(k)s and Self-Directed 401(k)s

401(k) plan beneficiaries can defer an additional $6,000 per year on top of the applicable $18,500 limit on salary deferral contributions. Max out your salary deferrals, including the expanded ‘catch-up’ contribution limit, and you can generate another $24,500 for your retirement over your baseline.

You also get the benefit of any employer matching contributions.

If you are self-employed, or you are the owner/operator of your own business with just you and/or your spouse as full-time eligible employees, you can also increase your company contributions to the 401(k) as well – up to a combined limit of $55,000 if under the age of 50 and $61,000 if 50 and older, per year.

If you have enough free cash flow to fully fund a 401(k) for you and your spouse to that level, consider doing so. That maximizes the amount of money compounding for you on a tax-advantaged basis and may help shelter those assets from creditors.

Own Investment Real Estate

Investment real estate is a proven long-term wealth generator. It provides both current income and the potential for future price appreciation. Additionally, real estate investment also comes with the potential for increasing streams of income, an important source of protection against inflation as well as stock market declines.

You can own investment real estate in your own taxable account, or you can own it within a Real Estate IRA. You can even own investment real estate directly in your Self-Directed Solo 401(k).

Whether you have real estate exposure via direct ownership of real estate or via REITs, some exposure to real estate can help diversify your portfolio and provide a vital source of income and inflation protection going forward.

It is also a lasting legacy you can pass to your children.

Do not Hide from Risk.

Markets are volatile. But it is important not to hide from risk entirely. Returns on ‘risk free’ assets like money markets and CDs are abysmal and provide no real hedge against inflation. You could be retired 25, 30 years or more. Going all cash will not generate a living income over time. Inflation and cost of living increases will eat away at your savings like a cancer.

Keep some exposure to stocks, possibly including private equity assets. Also consider income generators like pipelines, oil and gas investments and other limited partnership structures using a Self-Directed IRA or Self-Directed Solo 401(k). Or just keep money you will not need for at least 5-10 years invested in stock markets for the long run.

For more information, call us today, or visit our website at www.AmericanIRA.com.

Here’s Why 2018 Is a Great Year to Start a Self-Directed Roth IRA

March 14, 2018/in Blog, Roth IRA /by Jim Hitt

Roth IRAs have long been a good deal for Self-Directed IRA investors – and they are a better deal now. The reason: Tax rates are unusually low in 2018. That means the tax benefits of the Roth IRA – chiefly unlimited long-term tax-free growth for the life of the investor – are available at fire sale prices.

Currently, Republicans control the Presidency and both houses of Congress. The Tax Cuts and Jobs Act represents sweeping tax cuts for the vast majority of investors. But they will not last forever. A best case scenario means the tax cuts for individuals will sunset in 2025 and taxes will go back to the status quo ante. As such, distributions from your Traditional IRAs and Traditional Self-Directed IRAs will be subject to similar higher tax rates before the law took effect at the beginning of 2018.

Further, it is likely that Democrats will retake some or all of the federal government by that time. Congressional Democrats opposed the tax cuts, citing the effect they would have on the deficit, as well as claiming the tax cuts overwhelmingly benefited the rich and corporations. Once they win some elections, they will probably be looking to increase taxes on the affluent.

Now is the time to make some big moves establishing a Self-Directed Roth IRA, or converting existing Traditional IRA or 401(k) assets to a Roth Self-Directed IRA. Having at least part of your portfolio in a Roth IRA is a useful hedge against future tax increases.

Roth IRAs, including Self-Directed Roth IRAs, have some other important advantages:

1.) There are no required minimum distributions to worry about. With tax-deferred retirement accounts, you must begin taking distributions by April 1st of the year after the year in which you turn age 70 1/2, or you will face severe penalties from the IRS. This is a complicated set of rules that needlessly tags a lot of investors who do not have professional help with their retirement assets. But those rules do not apply to Roth IRAs. You can allow your assets to accumulate tax free for as long as you like. The Roth Self-Directed IRA is a great choice for those who do not expect to need to tap their retirement accounts for many years into retirement.

2.) Roth IRA withdrawals do not count against you when it comes to calculating Medicare surcharges. If your income is higher than $85,000 ($170,000 for married couples), Medicare rules require you to pay a higher rate for Part B and Part D coverage. But any income you take out of a Roth IRA, including a Self-Directed Roth IRA, does not count toward this limit.

3.) Roth IRA income does not count against you when calculating Social Security Income Tax.

For these reasons, 2018 is an excellent time to start rolling over assets from tax-deferred retirement accounts to Roth accounts, or to open a new Self-Directed Roth IRA or 401(k).

About American IRA, LLC

American IRA, LLC is one of the leading third party administrators of self-directed retirement accounts in the country. Though our offices are in Asheville and Charlotte, North Carolina, we work with motivated and successful practitioners of Self-Directed IRA strategies and Self-Directed 401(k) strategies from all over the United States. Our founder and CEO, Jim Hitt, has been engaging in Self-Directed IRA investing in his own portfolio for over 35 years.

To learn more about getting started with Self-Directed IRA investing, or to open an account and begin investing, call us today at 866-7500-IRA(472). Or visit our website at www.americanira.com.

Tax-Free Real Estate Income and Real Estate Roth IRAs

February 27, 2015/in Articles, Blog, Real Estate Hub Page, Roth IRA, Roth IRA /by American IRA

Imagine if there were a way you could commit dollars to an investment that had substantial opportunity for growth, tax-free, and at the same time had the potential to provide you a steady stream of monthly income – also tax-free, usually with substantial downside protection. The good news is there is such a vehicle: The Real Estate Roth IRA. Here’s how it works:

Own real estate directly in Real Estate Roth IRAs

If you have a substantial balance in either a Roth or traditional IRA account, or even in something you can roll over to an IRA, such as a 401(k) balance from a former employer or a SEP or SIMPLE balance, you can quite easily take advantage of the unique and substantial advantages of the real estate asset class, combined with the advantages of the Roth IRA savings vehicle, by combining them into a Real Estate Roth IRA.

Advantages of Real Estate

Substantial current income from rent
Potential for long-term capital growth
Inflation protection: Unlike bond coupon payments, you can raise the rent each year, or whenever the lease expires, if the market will bear it. This is a crucial hedge against inflation, which otherwise eats away relentlessly at most other income-oriented investments.
Downside protection. Paper assets like stocks and bonds can easily become worthless if the company fails. Houses and land almost never fall to zero.
Opportunity for leverage. Lenders know that real estate enjoys substantial downside protection, and are for this reason generally much more willing to lend on real estate than they are for other asset classes.
Few people can grasp the complexities of holding stock companies in any number of technology, biotech, communications or related industries. But almost anyone can understand how a house or condominium or apartment building works: You rent it out, maintain it, and sell it at a profit down the road if all goes well.

Advantages of Real Estate Roth IRAs

Tax-free growth. As long as you leave the money to grow within your Roth IRA account for five years, all the growth in the account belongs to you. There is no federal tax due on that money. If it were a traditional IRA you’d have to pay income tax on any gains over your basis. But in a Roth IRA, your income tax on distribution is normally zero.

Tax-free income. Residential and commercial real estate are designed to generate a reliable and substantial monthly income. If you hold the property in a taxable account, you must normally pay ordinary income tax on rent you receive, minus deductible expenses. If you hold the property in a traditional IRA, you must pay income tax on everything you take out of the IRA as a distribution. Only the Roth IRA (and the similar Roth 401(k) designated account) allow for totally tax-free distributions, provided the money you take out has been in the Roth for at least five years.

No RMDs. Unlike tax-deferred retirement accounts like SEPs, SIMPLE IRAs and traditional IRAs, you don’t have to start taking taxable distributions shortly after the year in which you turn age 70½. This means you can let whatever you don’t need for living expenses keep compounding – for you or for a loved one, if you have a named beneficiary.

Estate Tax Advantages. By paying income taxes up front instead of at withdrawal, you may lessen the amount of estate taxes you would have to pay. This is because the estate tax doesn’t care if you have a Roth or traditional IRA. The IRS will apply the tax to whatever happens to be in the account after your death and/or the death of a surviving spouse. Using a Roth rather than a traditional IRA may help you maximize the legacy you leave to your family.

Want to know more? Call American IRA today at 866-7500-IRA(472), or visit us online at www.americanira.com. Our experienced team is among the national leaders at helping investors coast to coast with their self-directed real estate IRAs and Real Estate Roth IRAs.

Want a Self-Directed Roth…Don’t Forget the “Back-Door” Option

February 4, 2015/in Articles, Blog, Home Link, Roth IRA, Roth IRA, Roth IRA /by American IRA

Imagine…taking income from a portfolio of real estate investments, tax-free. From a Self-Directed Roth portfolio that’s grown – tax free.

Imagine doing the same from a portfolio of stocks, bonds, annuities, mutual funds, or nearly anything else you can imagine! Now imagine your heirs stretching those withdrawals over the course of a lifetime – also tax-free. Imagine not just passing on that gift to a child but a grandchild who may outlive you by 70 years or more. That’s generations of tax-free growth in a ‘stretch Roth IRA’ And it’s a powerful concept indeed.

But some people make too much to make a Self-Directed Roth contribution. Currently, the IRS sets a maximum income threshold on contributing to a Roth IRA at 114,000 for singles or $181,000 for married couples filing joint returns for 2014 contributions. You have until April 15, 2015 to make your contribution for tax year 2014.

If you made more than this amount in 2014, though, all is not lost. You are not permanently locked out of eligibility to take the Self-Directed Roth IRA option.

Instead, you can take the “back door” into the Roth. Here’s how it works:

Make your contribution into a traditional IRA. With your income, you’ll have to do it on a nondeductible basis. But you wouldn’t get a deduction with a Roth IRA going in directly, so it’s a wash.
Execute a conversion.

See, in contrast to contributions of new money to Roth IRAs, the IRS sets no income limits on conversions. Congress removed the limits beginning with tax year 2010. You can execute a conversion at any income level. The IRS is happy to take your tax money this year, rather than potentially having to wait until you start taking RMDs.

Since then, the back-door Roth IRA has become extremely popular with higher income taxpayers – especially ones who can take a ‘long view’ with regard to passing on wealth to the next generation, and who are sensitive to estate tax concerns at both

Generally, doing a conversion is as easy as filling out a few forms – and paying some tax you would have paid anyway.

The potential tax savings are significant. According to research by Vanguard, “an investor who continues to contribute the maximum amount beginning at age 30 could accumulate almost $460,000 in an IRA by age 65. However, if those contributions stayed in a nondeductible traditional IRA, more than 15% would go to income taxes. By age 90, such an investor could lose more than $250,000 to taxes.”

If you took a tax deduction for your traditional IRA in prior years, and you want to roll that account over, you will have to come up with some additional taxes. Essentially, you will pay income tax for any amount you convert on which you haven’t already paid taxes. If you want the benefits of the Self-Directed Roth IRA, though, it’s likely worth the cost – particularly if you can pay the tax with money outside of the IRA.

You can pay taxes from within the converted IRA, too – but that lowers the amount of money that will be growing on a tax-advantaged basis. It still may be a good idea, but the most tax-efficient solution, long term, is to convert the full amount in the original traditional IRA, and then pay the taxes with money from outside the retirement account.

You can do the same concept with self-directed IRAs, too. The only difference is if you have assets in a self-directed IRA that are highly illiquid, it could be difficult to pay the taxes from within your IRA even if you wanted to. In these cases it’s more important to have some liquidity outside the IRA, or in other accounts, that’s available to pay the tax bill.

American IRA is a leading authority on Self-Directed IRAs and the rules that govern them. We work with independent-minded investors in all 50 states. If you have questions or would like to explore whether a self-directed IRA or conversion is right for you, call us today at 866-7500-IRA(472), or visit us online at www.americanira.com.

The stock market got wobbly in early 2018. But Real Estate IRA investors are doing just fine.

Use “Catch Up” Contribution Limits

Imagine…taking income from a portfolio of real estate investments, tax-free. From a Self-Directed Roth portfolio that’s grown – tax free.

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