Potential Reforms Could Affect Self-Directed IRAs, 401(K)s

Some in Congress are looking at some retirement reforms that, if enacted, could affect Self-Directed IRA and 401(K) investors.

First, there is a proposal to increase the maximum contribution age for IRAs beyond 70½. Naturally, this would affect Self-Directed IRAs, too, since they are governed by the same rules.

This means that, if enacted, you would no longer have to cease Self-Directed IRA contributions once you turn age 70½. You would still be able to contribute up to $6,500 per year up until the new cap, which is still being worked out.

If contributions are still tax deductible, this would essentially render RMDs moot up until the new cutoff age. What is more likely is that the age cap will not be lifted altogether but just increased by a few years, and the age at which IRA and Self-Directed IRA investors have to begin taking required minimum distributions would be raised to match them.

If Congress makes this law, then chances are good they will do the same for other retirements as well, including 401(K)s, Self-Directed SEP IRAs and Self-Directed SIMPLE IRAs.

On the whole, this would significantly benefit self-directed retirement investors, though if the ages are lifted across the board, it could mean a little less flexibility for people who are using health savings accounts as a retirement plus-up strategy, since, if the age change is applied to Self-Directed HSAs, they may have to wait longer before they can make penalty-free withdrawals for non-health-related expenses.

The other potential reform would require 401(K) plan sponsors to inform beneficiaries what income their current balance would generate if converted into an annuity.

There are a lot of details to be worked out about how precisely this would work. For example, any meaningful projection would require a lot of assumptions about inflation, as well as applicable interest rates at retirement time, which nobody can forecast with any reliability.

Unless there is some sort of exception carved out for Self-Directed Solo 401(K)s, this could get tricky. It is a simple matter for large investment companies to reprogram their computers to include an annuity income projection on monthly statements, using whatever set of assumptions Congress tells them they can use.

Self-Directed Solo 401(K) plans with self-directed investments do not have teams of computer programmers and analysts on the payroll to do this kind of work – which are a big part of why mutual fund expense ratios and annuity administration fees are such murder and can consume up to 25-30 percent of a retirement nest egg over a career!

(This is why we are big believers in our own flat fee-based pricing – it saves many investors thousands of dollars over time, and often thousands of dollars each year on larger accounts!)

The other difficulty is that the system would not apply very well to real estate 401(K)s. Rent yields, mortgages and leverage and the effect of eventually paying off those mortgages and leverage would be very difficult or impossible to account for in designing an algorithm suitable for all 401(K) beneficiaries.

So, we will have to see how this part of it plays out. We will keep you posted!

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.

Excess Personal Debt Can Hamstring Self-Directed IRA Investors’ Retirement Plans

Making all your allowable contributions to your Self-Directed IRA or other retirement plan is a good start. The more you can put in, the more you may be able to take out of your Self-Directed IRA in the future.

But too many seniors are learning a painful lesson about retirement: If they carry too much personal debt, retiring can feel like swimming against the tide.

According to a recent survey from the American Economic Association, over 7 out of 10 Americans between the ages of 56 and 61 reported being in debt. That is an increase from 56 percent in 1994.

To make matters worse, the average debt balance carried by seniors in this age range has increased substantially: Using constant 2015 dollars, the median debt balance of seniors who carried personal, non-retirement fund debt was $32,700 – up from $6,760 in 1992.

The study’s authors pointed out that these increased debt levels can lead to several severe financial problems among those affected:

  • A steady drain on cash flow as those borrower’s struggle to make interest and principal payments.
  • The need to extend one’s working life.
  • Substantial interest rate risk: Debt service payments increase with each uptick in interest rates, resulting in more pressure on cash flow, or longer repayment periods or both.
  • Less ability to help family members in financial need.
  • Increased vulnerability to job loss and other economic shocks.
  • Pressure to take more in income from retirement funds than may be prudent.

With some 40 percent of single retirees receiving most or all of their retirement income from a Social Security check, excess debt is a particularly acute problem, says study co-author Annamaria Lusardi, the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business. “More and more, the current generation will have to deal with debt close, and into, retirement,” warns Lusardi. These debt levels contribute to what Lusardi calls “financial fragility.” The more debt you have relative to your asset levels, the more vulnerable you are to economic shocks and setbacks, she says.

Furthermore, the lower your consumer debt level, the more likely it is you will be able to make the maximum contribution to your Self-Directed IRAs and other retirement accounts.

Are you financially fragile?

The study’s authors developed a quick test, so readers can quickly tell if they meet the standard for financial fragility:

  • Your total debt to total asset ratio is greater then 0.5 percent.
  • You have less than 50 percent equity in your primary residence.
  • Your total net worth is under $25,000, or half the median annual income, which represents about six month’s worth of earnings for most people.

If any or all of these conditions apply to you, it is time to get busy. Your chances of a successful and secure retirement may depend on you getting a handle on and reducing or eliminating this debt.

  • Get aggressive about paying down credit card balances. Interest rates on credit cards are relatively high, even in today’s low-interest rate environment.
  • Call creditors and ask if they would be willing to accept a lump sum at a discount in exchange for ‘settled in full’ status on credit reports. This gets some debt off your balance sheet and may help boost your credit score as your debt utilization ratio falls. This in turn, may help you pay off debt that much faster. Keep in mind that forgiven debt is generally taxable as ordinary income.
  • Get a free copy of your credit report from com. You can do this at each major credit bureau once per year, and whenever you are declined for a new credit offer. Check your report, and challenge inaccuracies.
  • Sell assets to pay off debt. For example, selling assets in money markets and CDs may not be returning anywhere close to the interest rate you are paying on credit cards or other high-interest debts.
  • Be mindful of tax consequences. You may want to balance assets sold at a loss against assets sold at a gain to minimize capital gains taxes.

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 Update: North Carolina Multi-Family Market Remains Strong

It has been a nice run for Self-Directed Real Estate IRA owners focused on the multi-family residential market, but we are starting to see some signs of a slowdown in investment activity.

New data from CBRE and Real Capital Analyst indicate that total multi-family investment activity slipped by 6.9 percent year-over-year, as of the close of Q2 2018. Capitalization rates, defined as the annual net operating income of the property divided by the property value, edged down to 5.5 percent, largely due to a declining investor interest in so-called ‘garden-style’ apartment buildings.

However, the high-rise market continues to attract strong investment activity, with 12.4 billion in sales marking an increase of 12.2 percent on a year-over-year basis.

A disproportionate share of investment dollars is flowing to the already highly-appreciated markets in Los Angeles and New York, with the hot Dallas market coming in third, well behind the other two metros. But that may well leave opportunities in the underserved Southeast, including here in North Carolina, where economic growth, employment prospects and housing demand remain strong, and where rental yields are still attractive to Self-Directed Real Estate IRA investors interested in multi-family housing.

Data from the Apartment Loan Store, a lender that specializes in the multi-family market, indicates that cap rates in and around Charlotte, North Carolina, are in line with national averages, though they vary by type of property:

New Luxury Metro                 4.62%

Class A                                                     5.14%

Class B                                                     5.67%

Class C                                                     6.45%

Value-added Acquisitions     6.34%

The average multi-family rent in Charlotte has increased 2 percent over the past year, also according to the Department Loan Store, though the trend has been towards flattening, overall.

Baby boomers who have recently sold their homes have been migrating to the rental market, offsetting Millennials who are increasingly joining the ranks of homeowners.

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.

Employing Leverage in a Self-Directed IRA

It is a common misconception that IRS rules prohibit Self-Directed IRAs from borrowing money. In fact, IRAs take on mortgages, margin debt, and borrow for all kinds of other purposes every day. Self-Directed Real Estate IRA investors, like most real estate investors, routinely borrow money to finance purchases, and many who engage in private lending within their Self-Directed IRA borrow funds at low interest rates in order to lend at higher ones. And, of course, companies owned by IRAs issue bonds and take on bank debt and other debt financing all the time. This is true of nearly all publicly-traded companies at one time or another in their development. All of the above is possible using a Self-Directed IRA.

However, those interested in employing leverage within their Self-Directed IRAs should be very careful not to commingle their own personal funds or financial affairs with the IRA in any way. By law, all debt the Self-Directed IRA takes on must be on a non-recourse basis.

Here’s what that means:

When you have your Self-Directed IRA borrow money – whether to buy a property, or buy stocks, or to lend out, or for any other reason – the lender’s only collateral or security must be the property or assets bought with the debt or held within the Self-Directed IRA.

This is different from conventional financing arrangements, where the lender routinely requires the borrower sign a personal guarantee, putting the borrower’s personal assets on the hook in case of a default. The lender can potentially get a default judgment against the borrower, and then begin garnishing wages or seizing assets held in the defaulted borrower’s name.

An IRA is different. A Self-Directed IRA owner cannot sign a personal guarantee, nor pledge any assets as collateral other than those held within the affected IRA. If he does, the IRS could disallow the tax-favored status of the IRA.

In practice, most traditional banks do not like to lend on a non-recourse basis. Banks that do lend to Self-Directed IRAs typically require a higher down payment on real estate than traditional lenders – often between 35 and 50 percent, depending on the lender and the property.

Tax Consequences of Self-Directed IRA Leverage

If you do choose to leverage your Self-Directed IRA via borrowing, be prepared to pay taxes on part of any income or capital gains your IRA realizes. While taxes on investments made with your own money are deferred within a Self-Directed IRA (or, in the case of Self-Directed Roth IRAs, tax-free after five years), any gains or income attributable to borrowed money is subject to a special tax called unrelated debt-financed income tax, or UDIT. You may be able to avoid UDIT liability by electing to use a Self-Directed 401(K) structure, rather than an IRA.

This tax frequently catches Self-Directed IRA owners by surprise. Your tax adviser can provide more information on this specific tax and how it may affect you.

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.

Breaking News! The DOL Fiduciary Rule is Now Officially Dead

The Department of Labor’s (DOL) controversial and short-lived fiduciary rule is now deceased, and, as expected, there are few mourners in the financial services industry. The rule, which was conceived by the Obama administration, went into effect on June 9, 2017, and officially flatlined on June 21, 2018, when the DOL failed to ask the Supreme Court to hear an appeal of a March appellate court ruling that voided the rule. The deadline for a petition was June 21st.  This has little effect on Self-Directed IRA investors because they choose their own investments.  It becomes important to all investors including Self-Directed IRA investors since a majority have investments in the stock market.

What was the fiduciary rule?

The rule compelled all investment professionals, who were offering advice on retirement accounts, to place their clients’ interests ahead of their own. Consumer advocates and groups such as AARP hailed the rule as a way of preventing financial representatives and brokers from foisting high-commission products on their clients. Critics, of which the U.S. Chamber of Commerce was one of the biggest, responded that the rule was overly burdensome, raised the costs of compliance, and made it too expensive for firms to carry some brokerage accounts.

The rule was on shaky ground after the election of President Trump, who has typically opposed financial regulations. Unsurprisingly, a mere two weeks into his presidency, he ordered a review of the rule, seeking “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”

What might replace it?

While the DOL’s fiduciary rule is gone, it does not mean that the idea of holding advisors accountable to retirement savers has vanished. The Securities and Exchange Commission (SEC) is looking into its own version of the fiduciary rule. Known as the best-interest rule, it is seen in the financial community as being less restrictive than the DOL rule. As such, it will probably generate complaints from congressional Democrats and consumer groups that it is too lenient. Here are some of the highlights of the SEC’s proposal:

  • The SEC’s version would not ban any single conflict of interest, such as sales contests that brokers run to beef up sales of particular products, but it would require brokers to disclose conflicts of interest and try to diminish their impact.
  • Brokers would generally need to disclose conflicts of interest to their clients. These conflicts would include receiving bonuses for selling certain products or fees they earn for guiding investors toward certain mutual funds or insurance products. Brokers would be required to lessen the impact of the conflicts or eliminate them completely.
  • The SEC’s best-interest rule does not establish a new basis for investors to sue their brokers for violating the best-interest standard. So, investor complaints will still be decided in arbitration hearings. The financial industry was in revolt over the DOL’s rule because it allowed clients to sue their brokers in class-action lawsuits.
  • The SEC’s proposal would require brokers and advisors to produce a brochure explaining their various legal duties and the fees they charge.
  • The SEC also proposed banning brokers from using titles–“financial advisor,” for example–that might blur the line between their business model and the fiduciary duty that binds investment advisers.

The proposal’s 90-day public comment period ended on August 7th and now awaits an SEC vote to finalize it.

What about those firms who have already spent millions to comply with the DOL rule?

Wall Street spent time and money preparing to comply with the DOL’s fiduciary rule. Estimates for the total cost of preparation to banks and investment advisors ranged from $3 to $5 billion.

One industry giant, Merrill Lynch, was among several financial companies that started moving toward fee-based advisory models in response to the new Labor Department rule, and they continued moving forward with it even after President Trump ordered his review of the rule back in early 2017.

The financial industry is in a kind of limbo, left with a lot of unanswered questions. What about those financial firms and advisors who have already changed their policies and procedures, so they would comply? Will they be returning to previous policies and procedures, or will they be modifying the new ones?

How those questions are answered is still uncertain. But one thing is for sure: The Department of Labor’s fiduciary rule is dead and gone.

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.

Estate Planning with Self-Directed Solo 401Ks and Self-Directed IRAs

If you are like most retirement investors, your accounts— Self-Directed IRAs and Self-Directed Solo 401Ks—make up a large part of your overall savings. Statistically, they make up over a third of all investments in the U.S. After your death, distributions from those accounts will be required, and transferring the assets to your heirs could be a thorny issue if you have not designated your beneficiaries properly.

Those designations are an important part of your estate plan, so you want to make sure you get them right, or your heirs could end up paying more income and estate taxes than necessary. You can adapt your designations to match your wishes. The most frequent beneficiaries are:

  • Spouse
  • Children
  • Grandchildren
  • Other loved ones
  • Trust
  • Charity
  • Almost any combination of these

With all these choices, it is not surprising that Self-Directed IRA and Self-Directed Solo 401K owners often make mistakes–some of them are errors of omission–when designating their beneficiaries. These mistakes can be costly to your heirs since they could receive less (possibly nothing), and much of the money you worked a lifetime to save might not end up with the people you love.

Here are some of the most frequent mistakes and tips for avoiding a future nightmare for your heirs:

Not naming a beneficiary

This mistake is first on the list because it is probably the biggest blunder you can make on your retirement accounts. When you die without designating beneficiaries, those accounts will go through probate, an expensive and time-consuming process. The person who becomes beneficiary might not be someone you would have chosen, and even if they are, they will not be able to stretch the benefits over their lifetime because the account would need to be liquidated within five years.

Not having contingent beneficiaries

It is not unusual for Self-Directed IRA and Self-Directed Solo 401K owners to designate their spouse as a beneficiary and leave it at that. But what if something happens to both of you. Once again, your accounts would end up in court. It is much better to have designated contingent beneficiaries. If something like that happens, your accounts will avoid probate.

Not using a trust to protect assets

Designating a beneficiary will ensure that your assets are transferred properly, but some financial planners advise that you place those assets in trusts to protect them from an ex-spouse or creditors. You can even protect the beneficiary from his or her careless spending habits by using a “spendthrift” restriction on the assets.

Trusts are complex. Make sure you have experienced, professional help in setting them up.

Naming the wrong contingent beneficiaries

You can run into potential problems by naming a contingent beneficiary with a short life expectancy. For example, you name your children as beneficiaries. If they die before you, your grandchildren are next in line, and if they should all die, your brother is next.

Even though your brother will probably never inherit your assets, he has the shortest life expectancy, and his age will determine how quickly the assets must be withdrawn. It is critical to have an estate attorney look at your designations to avoid potential problems like this.

Not checking and updating the beneficiaries regularly

If you have an ex-spouse, here is an unsettling thought: If you neglected to update your beneficiaries after the break-up, guess who’s in line to receive your retirement assets when you die? Do you really want your current spouse to have the hassle of going to court to try to get your assets?

You need to check and update your beneficiaries regularly. Some of them might not be alive any longer, and some might not have been born when you last updated them. Make sure your retirement assets are going where you want them to by confirming that your designated beneficiaries are current.

Missing out on the “stretch”

Younger beneficiaries can “stretch” mandatory withdrawals over many decades, keeping their assets’ tax-deferred status in place and allowing the account to grow. As mentioned previously, choosing an older beneficiary could reduce the stretch considerably and increases taxes for your heirs as funds are withdrawn sooner and in larger chunks.

Not coordinating estate and retirement planning

When estate planners and investment advisors do not work together, the chances that your assets will end up where you hoped they would are reduced quite a bit. It is crucial that you set up your Self-Directed IRA and Self-Directed Solo 401K beneficiaries and work closely with estate planning professionals, so problems can be spotted early enough to take care of them.

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.

 

Early Distribution from Your Self-Directed IRA

Life happens. A big expense you had not planned comes along, and you need more money than is readily available. It could be a job loss, major medical expense, tuition, or mounting interest charges adding to a large debt. While it may be a temporary need, borrowing the money with interest charges and a payback program may not be a viable solution either.  This is where a Self-Directed IRA may come into play.

Depending upon your circumstances, your IRA or Self-Directed IRA could provide the help you need, although there are several important points to consider before making your important decisions.

Taking funds or assets from your Self-Directed IRA (or qualified plan) is known as a Distribution. When taken prior to age 59 1/2 it becomes an “Early Distribution”. (There is an RMD, which stands for Required Minimum Distribution, which you must take on a yearly basis once you reach age 70 1/2 which only applies to a Traditional IRA and not a Self-Directed Roth IRA.)

If you elect to take an Early Distribution, the IRS implements a 10% early distribution tax (except for a Roth IRA which has different rules). In addition, the IRS classifies your withdrawn amount as income. This means that you would be responsible for paying tax on the full amount distributed (in addition to the 10% early distribution tax) from a Traditional IRA or Self-Directed SEP IRA. For those over age 59 1/2, the amount is still considered taxable income, although you would not be subject to the 10% Early Distribution cost.

There are several exceptions allowed by the IRS on the 10% Early Distribution penalty. We suggest you verify with the IRS or a tax professional.

One exception is for a Self-Directed Roth IRA, which has been open for a minimum of five years, from which you are eligible to distribute any of your original contributions tax free and without any penalties.

Other possible exceptions include certain medical related circumstances. This includes if you have unreimbursed medical expenses which are at least 7.5% of your adjusted gross income if you are under the age of 65 (at which it becomes 10% of adjusted gross income) or become totally and permanently disabled. Exceptions also apply if the amount is not more than the cost of your medical insurance due to unemployment.

Non-medical exceptions could include if you are using the distribution(s) to buy or build a first home, if the distributions are less than your qualified higher education expenses, or if you have a Self-Directed Inherited IRA as beneficiary of a deceased Self-Directed IRA owner.

Please keep in mind that any tax penalties you may incur are imposed directly from the IRS and not through your Self-Directed IRA administrator or custodian. This is another reason why you need to be aware of any and all exceptions prior to the actual distribution of funds. The administrator or custodian has the responsibility of reporting an Early Distribution to the IRS, which will then issue you a 1099R form for any and all taxable amount(s).

When requesting a distribution specifically from your Self-Directed IRA, you begin by completing a Distribution Form. Accuracy is of the utmost importance so as not to cause a delay in receiving the funds you need.

One question that comes up is whether or not needing the funds on a short-term basis has an impact on your cost. The answer depends on how short of a term you need, with the magic number being 60 days. If you are able to replace your Distribution funds in full within 60 days of the effective date of the original distribution, the IRS would consider this a “Rollover”. You would not be subjected to the entire tax amount. Depending upon the circumstances and type of Self-Directed IRA involved, you may not be subject to any taxes under this 60-day circumstance. (Your tax professional can advise.) The IRS does allow individuals to complete one rollover every 12 months.

This scenario could be helpful to you in the event of expecting a tax refund, inheritance, or legal settlement within 60 days, but needing funds prior to its arrival.

Overall, it is wise to compare all of the options available to you when faced with a financial challenge. This information gives you the ability to compare your cost of a distribution against a conventional loan, credit cards with low interest rates, a home equity loan, or other possibilities available to you.

Be sure to have all of the facts before you make your final decision.

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.

Buying Florida Properties in your Self-Directed Real Estate IRA

A recent article in the Sarasota Post features the basics of investing in Florida properties using your Self-Directed Real Estate IRA. Of course, the principles are the same everywhere: The laws governing IRAs, including Self-Directed Real Estate IRAs and the broader category of Self-Directed IRAs, are federal. They are the same in every state. But there are a few considerations that make Florida unique.

Booms and Busts

Florida has been attracting real estate speculators for decades – and is famous for big Florida land booms followed by devastating busts. Many have gotten wealthy from Florida real estate investing, and if you time things well and get in while one of the great Florida land booms has some room to run, you can do extremely well indeed.

On the other hand, many have bought into Florida property at the top of the market and been devastated by one of the big real estate crashes that seem to happen in Florida from time to time.

Those who have been investing in real estate for a while will easily recall that Miami, Fort Lauderdale and Palm Beach real estate investors were all seriously hurt by the 2008 market crash. But they have also done very well in the recovery.

Be Patient

So, Florida is a market that is best for Self-Directed Real Estate IRA investors who plan to buy and hold, or who have a number of years before they expect to need to cash out. Meanwhile, the great thing about real estate is that thanks to the generous and increasing rental income yields available on real estate, Self-Directed Real Estate IRA owners can get paid very handsomely to wait.

No State Income Taxes

Florida is an ideal home for Self-Directed Real Estate IRA investors because it is one of a handful of states that do not have a state income tax. This means that rental income from your Self-Directed Real Estate IRA is only taxed at the Federal level, and if you own the property in a Roth IRA, it is not taxed at the federal level, either.

The lack of state income tax goes a long way to helping make a Self-Directed Real Estate IRA a compelling value proposition, and it makes Florida a great destination for retirees who expect to rely on taxable income from an IRA, 401(K), or real estate portfolio.

Self-Directed Real Estate IRA financing

Because Florida real estate prices so historically volatile, lenders may be more careful about lending to Florida Self-Directed Real Estate IRA investors. For example, in most markets nationwide, it is pretty easy to find financing from a Self-Directed Real Estate IRA lending company for about 65 percent of the value of the property securing the loan. However, some of these Self-Directed Real Estate IRA lenders will not lend on Florida properties. The ones that do may require a 50 percent down payment rather than the 35 percent standard elsewhere in the country.

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.

Combining Roth and Traditional Accounts in Your Self-Directed IRA

Lots has been written on the advantages and disadvantages of Self-Directed Roth IRAs and Solo 401(K) accounts versus their traditional pre-tax counterparts. And no one knows for sure what tax rates will be in effect in five years, much less 25 years from now, when many of our Self-Directed IRA and Solo 401(K) owning clients will be drawing down their accounts in retirement.

Fortunately, it is not an ‘either/or’ proposition: You can have both! And given the uncertainty about future tax rates, it may be a very good idea to hold both types of accounts, side-by-side!

Let’s review the differences:

With Traditional IRA and 401(K) accounts, contributions are not included in your income, provided your income falls under the income limits in the case of Traditional IRAs. There are no income requirements in effect to qualify for pre-tax 401(K) contributions. However, even if your income is high, you can still contribute to a Traditional IRA on a non-deductible basis – up to $5,500 per year ($6,500 for those ages 50 and older). You will still get the benefit of tax deferral and substantial protection against creditors on non-inherited IRA assets.

Moreover, if the income limit for Traditional IRA is a problem for you, you may also be able to contribute to a simplified employee pension, or Self-Directed SEP IRA, depending on your circumstances. This may be a good option if you have self-employment income or if you own your own business and have no or few full-time employees.

All these options provide the benefit of pre-tax contributions and tax-deferred growth. They also support self-directed retirement investing techniques such as Self-Directed Real Estate IRAs, Self-Directed Gold IRAs and Self-Directed IRAs and other retirement accounts that hold alternative asset classes.

You pay income taxes as you take the money out in retirement, though non-hardship withdrawals and 72(t) withdrawals in substantially equal periodic payments are assessed a 10 percent excise tax penalty.

Furthermore, there is a limit to how long you can defer taxes on these accounts: You must begin taking money out not later than April 1st of the year after the year in which you turn age 70½, and make similar withdrawals thereafter, spread out over your actuarial life expectancy. These mandatory withdrawals are referred to as required minimum distributions, or RMDs. Call us for details, if you are not familiar with these.

With Roth accounts, including Self-Directed Roth IRAs and Self-Directed Roth 401(K)s, the taxation is reversed: You do not get a tax break on contributions. But all growth in the accounts are tax-free, as long as the moneys stays in the account for at least five years. The 10 percent penalty on non-hardship distributions still applies, but only on earnings, if the assets you are taking as a distribution have stayed in the account at least five years.

Withdrawals in retirement are generally tax-free, however – and not subject to required minimum distributions. You can let these assets grow indefinitely.

The income limit for the Roth IRA – including the Self-Directed Roth IRA – is $5,500 per year, or $6,500 for those age 50 and older. You can contribute up to $18,500 per year in employee salary deferrals to a 401(K), including Self-Directed IRA and Roth 401(K) accounts, However, with Roth account contributions, you will still have to pay income taxes on amounts contributed.

If your employer contributes or matches, those matched funds are not taxable in the year contributed but will still grow tax-deferred. They will generally be taxed similarly to

Traditional 401(K) contributions – the tax-free treatment of withdrawals only applies to assets you contributed to a Roth 401(K) and growth attributable to those amounts.

Owning both kinds of retirement assets can help you diversify against legislative risk: The risk that future Congresses may impose a higher tax on income, or otherwise limit the benefits of retirement accounts.

It may benefit you to emphasize Roth accounts while you are younger and have not reached your peak earning years. As you get older and earn more and find yourself in a higher tax bracket, you may consider leaning towards traditional tax deferred accounts.

Meanwhile, when you own both Roth and traditional accounts together, you are less exposed to the risk that Congress may suddenly increase income taxes, leaving you with less after-tax retirement income from your Traditional IRA and 401(K) accounts.

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.

Things You Need to Know About a Self-Directed Inherited IRA

It is estimated that $30 trillion of intergenerational wealth will be passed down over the next decades, creating both opportunities and risks those inheriting these potentially large sums of money. Some of these transfers will come in the form of a Self-Directed Inherited IRA (a.k.a. a Beneficiary IRA), which will allow inheritors/beneficiaries to manage these inheritances that are passed down to them in the form of a retirement account.

Self-Directed Inherited IRAs allow the deceased account holders to pass along tax-advantaged savings to their heirs. Unfortunately, the first time most recipients become aware of a Self-Directed Beneficiary IRA is when they suddenly inherit a retirement account. Since it is someone else’s retirement plan, a Self-Directed Inherited IRA can be confusing to those who receive it, and it can generate many questions: What are my options with this account? What about taxes? How can I merge this inheritance into my own financial plan?

As baby-boomer heirs participate in the largest wealth transfer in history, it is more important than ever that they understand the details of the Self-Directed Inherited IRA. First of all, you will need to distinguish between a Self-Directed IRA you inherit from your spouse and one you inherit from a parent, sibling or someone else.

Here is what you need to know:

Inheriting a Traditional IRA from your spouse

Inheriting a Self-Directed IRA from your spouse is the simplest and most pain-free scenario. You can roll over the Self-Directed Inherited IRA into your existing IRA, and the earnings will continue to grow tax-deferred. You will pay no income taxes unless you take a distribution, and if you are older than 59 ½, you won’t owe the 10% tax penalty on early withdrawals.

Rolling over a Self-Directed Inherited IRA is attractive because you immediately gain control over the distributions. A word of caution, however: If you are at least 70 ½, make sure you adjust the amount of your annual Required Minimum Distribution (RMD) to include the amount from the Inherited IRA. Some special RMD rules apply to Self-Directed Inherited IRAs, and there are steep penalties for not following them!

Also, remember that if you do decide to take a Self-Directed Inherited IRA distribution, it could send you into a higher tax bracket because the money will now be earned income. If you would rather invest the money, talk to your financial advisor about incorporating the inheritance into your overall financial plan.

If you are a non-spouse inheritor

You will need to pay income taxes on distributions from the Inherited Traditional IRA. But you may not roll the Self-Directed Inherited IRA into an existing Self-Directed IRA, and you must begin withdrawing the assets no later than December 31st of the year after the account holder passed away.

Once again, these distributions are considered to be part of your annual income and could put you into a higher tax bracket. And if you do not take the necessary distributions, you will suffer a 50% tax penalty on the amount taken out below the RMD!

Self-Directed Inherited IRA distribution rules

Beneficiaries of Self-Directed Inherited IRAs can choose distributions from three options:

  1. Take distributions as an RMD over the course of their lifetime (life expectancy method)
  2. Take them over a five-year period
  3. Receive a lump sum.

The life expectancy option means an RMD will be set each year by the IRS, and you must make them to avoid the penalty.

The five-year option allows you to withdraw the funds over five years. There are no RMDs, and there is no early withdrawal penalty. After five years, all remaining funds must be withdrawn.

The lump sum distribution means a full payout of the account immediately after inheriting the Self-Directed IRA. While there is no 10% early withdrawal penalty, you will still owe income taxes.

What are the rules for Self-Directed Roth IRAs?

Since the Self-Directed Roth IRA was funded with post-tax income, the inheritor will not pay income tax on distributions, and the distributions will not count as taxable income when determining your tax bracket.

If you elect to take the life expectancy method, however, any distributions that fall below the RMD will still be subject to the 50% penalty.

Turn to the pros when you are ready to invest your Self-Directed Inherited IRA

At American IRA, we believe that Self-Directed IRAs are the best vehicles for growing your retirement account. And we have the experience to help you with your transactions.

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.