Blog – Page 2

The Reason Investors Are Exchanging Stocks For Alternative Assets

July 5, 2016 by IRA Services

If you are nervous about the where the stock market is headed, you are definitely not alone. At the start of this year, BlackRock, the world’s largest asset manager, reported that it was seeing many of its biggest clients pulling out of the stock market in favor of more tangible assets like real estate, private credit, and commodities.

If you are thinking of adopting the same strategy, don’t forget that the right retirement account can be a useful investment vehicle.

Stock market volatility – knowing the right signs

Over the long term, stock purchases can earn a high return. However, in the short term, they are extremely volatile investments. The market will inevitably swing up and down, dragging the value of your portfolio along with it. It can be difficult – either psychologically or financially – to stand by your stock investments in the midst of huge market changes. This uncertainty can lead to poor investment choices, like selling low during a temporary downturn.

Beyond short term shifts, there are larger cycles to the stock market. After years of gains, many believe that the stock market is long overdue for a bear market, which is one reason so many of BlackRock’s clients are taking a cautionary approach and moving their money elsewhere. Alternative assets, like real estate and loans, can generate similar returns to stocks, without as much risk and volatility. Compared to stocks, these types of investments are also easier to understand for someone without a financial background.

The limits of traditional retirement plans

Traditional retirement plans like the 401(k) and non-self-directed IRAs offer limited investment options and usually do not include alternative assets, mainly for cost reasons. As a result, investors are often left to choose between either risky stocks, or bonds and certificates of deposit (CDs), which are less volatile but typically earn lower returns.

Many people looking to put their savings into alternative assets often overlook retirement plans as an investment vehicle, and so they miss out on some great tax benefits. Even worse, some make an early withdrawal to access their retirement savings, triggering a 10% penalty if you are younger than 59 ½ years old.

But there are retirement plans out there that can broaden your investment horizons. Self-directed IRA accounts allow you to reap the tax benefits of retirement plans while also giving you more flexibility in your investments.

The self-directed IRA

Self-directed IRAs are structured like traditional IRAs, and carry the same tax benefits. The main difference between these two plans is that the companies that run self-directed accounts allow you to invest in alternative assets like real estate, personal loans, and precious metals. Despite the advantages and growing popularity of alternative investments, many investors remain unaware of self-directed IRAs – only about 2% of IRA investors use these accounts.

Setting up a self-directed IRA is easy – just contact a company that handles this type of account. If you already have money in an existing IRA, you could transfer those funds to your new account through a rollover at any time. However, if your retirement savings is in a work-sponsored plan, you will need to wait until you leave that job to facilitate a rollover. Once you complete the rollover, you can start moving your savings out of the stock market and into new alternative assets through your self-directed IRA.

Investing always comes with some degree of risk, but you can help minimize that risk with a more diverse portfolio.

Is My Retirement Plan Safe From Lawsuits?

June 5, 2016 by IRA Services

Financial lawsuits can be a nightmare in more ways than one. One potential result with long-term consequences is a full or partial seizure of your retirement plan. If you end up losing a lawsuit, the creditor may be able to go after most of your assets for payment, including certain retirement plans.

While some plans are fully shielded from lawsuits under federal law, others are not. Depending on your plan and your state of residence, the assets in your retirement plan will have varying levels of protection. Of course, most people never intend to be involved in a lawsuit, but it is always better to be safe than sorry. Here is a quick explainer on retirement plan asset protection, and how you can keep your money as secure as possible.

ERISA work retirement plans

Large employer-sponsored retirement plans like 401k’s, profit sharing plans, and pensions offer the best protection against lawsuits. These plans fall under a federal law known as the Employee Retirement Income Security Act, or ERISA, which stakes out important protections and standards around retirement plans. As part of the law, your benefits under an ERISA-eligible retirement plan can never be taken away by another party, meaning it is safe from collections stemming from most lawsuits. In addition, since it is a federal law, ERISA protections apply no matter where you live in the United States.

However, there are a few special types of lawsuits in which the creditor could still take some of your retirement savings. For example, if you get divorced, your ex-spouse could receive some of your retirement plan value as part of the divorce settlement. Or, if you do not pay the taxes you owe to the IRS, the agency could force payment through your retirement plan. if you are facing a fine from a federal criminal judgment. In this example, the government may be able to seize funds from your retirement plan.

Non-ERISA retirement plans

Not all retirement plans fall under federal ERISA standards. IRAs and small business employer plans like SEPs and Simple IRAs are excluded from ERISA protection, so each state sets its own rules and the level of protection for these plans varies across the country.

Some states, like Ohio, offer very strong protections that could potentially shield your entire account from lawsuits. Others, like Nevada, set a protection cap, so that a maximum of $500,000 of your balance is safe from seizures, leaving anything above that threshold potentially open to creditor seizures.

Still other states, like California, do not offer pre-set limits. Instead, the court reviews your personal financial situation on a case-by-case basis to decide whether you can afford to lose the IRA money. If you have a large amount in your IRA and are relatively young (and thus able to replace any lost funds), you are more likely to have your IRA savings taken through a court decision. You should review the creditor protection laws in your state to better understand your exposure to potential lawsuits.

Even if your plan is protected against normal creditors under state law, there are still situations in which you could be forced to make a withdrawal- for example to settle a divorce or pay back taxes to the IRS.

Strategies to protect your IRA

If you want to invest through an IRA plan without ERISA protection, but are worried increased exposure to lawsuits, a rollover could be a good option. If you transfer money from an ERISA-covered plan to an IRA, those transferred funds retain the same ERISA protection against lawsuits. This could be a useful move if you want to take advantage of the expanded investment options in a self-directed IRA, without sacrificing legal protection.

If you are currently facing a lawsuit and already have money in a Traditional IRA, you could make a Roth IRA conversion in an attempt to protect more of your savings. Because many states set a minimum balance as a threshold to decide whether the creditor will receive any of those funds, it is in your interest to minimize the funds in that account. Lowering your IRA balance through a conversion could push you below that threshold, thus leaving your assets whole.

Note that when you make a Roth IRA conversion, you first need to pay income tax on the money in your Traditional IRA, but your investment earnings are income-tax free from that point forward. Generally speaking, it is better to pay the taxes on a Roth conversion rather than losing that money to the creditor.

If you ultimately lose your lawsuit and your financial position is irreparably harmed, you could consider declaring bankruptcy in order to protect your IRA. You are able to exempt up to $1 million in an IRA from creditors during bankruptcy, which would be useful if you live in a state that offers minimal IRA protection.

Before taking any action, you should always first consult with a legal expert who understands the creditor protection rules and your particular situation.

Five Key Attributes Of A Successful Self-Directed IRA Investor

May 16, 2016 by IRA Services

Flexibility is one of the hallmark benefits of self-directed IRAs – but it can also be a double-edged sword. In the hands of an inexperienced or misinformed investor, the extended range of options under a self-directed IRA can sometimes lead to financial trouble.

But for a certain class of investor with the right mindset, the flexibility offered by a self-directed IRA can prove to be an invaluable retirement resource for growing retirement savings.

Here are five key attributes of a successful self-directed IRA investor.

1. Investment expertise

A self-directed IRA allows you to invest in what you know. Investments such as real estate, privately held companies and promissory notes can sometimes earn higher returns than traditional investments in stocks, bonds, mutual funds and ETFs but may be illiquid and offer higher risk. When self-directing IRA investments, it is crucial that the investor have the necessary expertise to make informed decisions about the targeted investment.

2. Follows the rules

In order to maintain an IRS-compliant self-directed IRA, you must be aware of extra rules that apply when investing in non-traded alternative investments. For example, you are not allowed to use a self-directed IRA to purchase a piece of real estate you already own; you can’t borrow money from the IRA as a down payment and you can’t use IRA funds to invest in a company where you have a 50% or more ownership interest. If you decide to self-direct your IRA investing in alternatives, you should be prepared to pay close attention to identified prohibited transactions with disqualified persons. The IRS does not take ignorance as an excuse and if you break the rules you could be facing a full distribution of the IRA, taxes and penalties.

3. Knows that investing takes work

When you choose to self-direct you and you alone are responsible for your investment choices. It takes time and effort to learn the rules, identify the right investment, consult with trusted advisors, perform due diligence on the investment and principals involved in the offering and select the right service providers for administering the assets in your self-directed IRA.

4. Desire for portfolio diversification

Some people are happy with a simple investment strategy that focuses on stocks, bonds, mutual funds and ETFs – and that is perfectly fine. Self-directed IRA investors seek further portfolio diversification in an effort to offset the extreme ups and downs of the markets. For experienced investors, self-directed IRAs allow them to expand beyond traditional markets and add unique investments to their retirement portfolios in a tax advantaged manner.

5. Risk tolerance

Investing always carries some degree of risk. Some alternative assets under a self-directed IRA plan are particularly risky, meaning they have a higher chance of a short-term loss than traditional assets. For example, large companies like Apple and Exxon are unlikely to go bankrupt in the next year – so your stock investment should be safe – but a brand-new business partnership (which you can invest with through a self-directed IRA) might not fare so well.

In the long-run, this extra risk can potentially earn higher returns than traditional investments. If the business partnership in your hypothetical example above succeeds, then you would receive a much larger share of the profits than what you could ever earn as an Apple investor. But taking those long-term gambles requires a strong stomach tolerant of short-term risk, otherwise you risk making emotional decisions that deter long-term investment strategies.

A self-directed IRA is not for everyone, but the benefits can be rewarding. Read more about following IRS rules here.

5 Mistakes That Can Derail Your Retirement Plan Rollover

April 16, 2016 by IRA Services

Rollovers A retirement plan rollover – moving your savings from an employer-sponsored retirement plan to another employer’s plan or individual retirement account such as an IRA – is something you are likely to encounter at least once in your lifetime.

Rollovers of funds from a former employer’s plan are commonly used when you join a new company and consolidate the old plan with the new one in order to take advantage of employer matched contributions. Some company-sponsored plans also allow for partial “in-service” rollovers that are usually limited to 50% of the amount of the fund not to exceed $50,000. Other times, individuals choose to rollover funds from an inactive plan to an individual retirement account that can hold a wider variety of investment options (sometimes referred to as a self-directed IRA).

Handled properly, rollovers should not create unnecessary fees, taxes or penalties. Here are a few considerations when deciding to rollover an inactive retirement plan.

1. Missing the 60-day window to deposit a rollover check

There are two ways to rollover your savings when you change employers. One option is to have your plan administrator transfer the money directly into the new company-sponsored retirement plan (making the check payable to the new plan administrator or account custodian). The second option is to collect a check from your previous investment manager, and then deposit it into the new account.

If you opt for the second option, you must deposit the check into another retirement plan within sixty (60) days. If you don’t, the IRS will consider the check amount as a distribution, not a rollover, and you will owe taxes on the full amount withdrawn. And if you are younger than 59 ½ (the age at which distributions are allowed), you will also be charged an additional 10% early withdrawal penalty.

A direct transfer arranged through your plan administrator is usually the safest route, but if you do go for a rollover check, remember to move quickly to avoid unnecessary taxes and penalties.

2. Tax considerations of Roth conversions

You can rollover your old 401(k) or other retirement plan to one of two types of accounts – a Traditional IRA or a Roth IRA – both of which have benefits and tradeoffs. A Roth IRA allows your savings to grow tax-free, so that you do not owe any income taxes once you start withdrawing money in retirement. The tradeoff is that you have to fund the Roth IRA with after-tax money.

Additionally, if you rollover an old 401(k) or convert a Traditional IRA into a Roth IRA, you will be transferring pre-tax money. As a result, the funds being converted will be treated as income, claimed on that year’s income tax return and taxed at your current income tax rate. With a Roth IRA you pay taxes now which means your future distributions are tax free.

3. Multiple Traditional IRA rollovers per year

Under IRS rules you are allowed to roll over one distribution for each IRA owned per year. This rule is in place to prevent people from making multiple rollovers per year and effectively using their IRA funds as a short-term loan. Making more than one rollover in one calendar year will count as a withdrawal, triggering taxes and an early withdrawal penalty.

It’s important to note that this rule does not affect an IRA owner’s option to transfer assets from one IRA directly to another IRA of the same type.

4. Not making a rollover

Retirement is probably not something you think about every day, and it is easy to get complacent about planning for the future. But if you just leave your money in an inactive retirement plan sponsored by a previous employer, there is a good chance that higher fees, no matching contributions and limited investment choices will slow down the growth in that account.

5. Not considering a self-directed IRA

So, you’ve decided that you need to do a rollover. Now, it’s important to consider all your available investment options. One of the most tax-efficient accounts that many investors overlook is the self-directed IRA. This type of account lets you invest in a much wider range of assets such as real estate, trust deeds and promissory notes, precious metals, private funds, private equity and crowdfunded offerings. This makes it a great investment vehicle for those looking to further diversify their retirement savings portfolios to grow retirement wealth or turn wealth into income.

Using Your IRA For A Financial Emergency

March 2, 2016 by IRA Services

Traditional-IRA In cases of severe financial emergency, it might make sense to pull cash from your traditional IRA – even if you’ll be subject to the 10-percent early-withdrawal penalty. Such crises are those that have serious negative impact to your life, family, and major assets.

What Constitutes a Financial Emergency?

Before resorting to your retirement fund, determine whether you can access other resources first. But if an IRA withdrawal is your only option, make sure it is to pay for one of the following:

Legal fees and court costs to minimize the risk of job loss and incarceration.
Necessary medical treatment for you, your spouse, or your child who is not covered by insurance.
Legal fees associated with maintaining custody of a child, including the cost of adoption.
Debt that must be paid quickly to avoid the partial or total loss of your vehicle, business, home, or other major investment. In some instances, Congress passes legislation to allow victims of serious natural disasters to receive distributions without paying a penalty.

Certain Expenses Could Save You 10 Percent

Depending on your situation, you might be able to avoid paying a penalty when making an early withdrawal from your IRA. Such circumstances include your inheritance and the cost of medical care, health insurance, and higher education.

Medical Care

Qualifying medical costs are expenses not reimbursed by your insurer. These must exceed 10 percent of your adjusted gross income. You must make the withdrawal in the same year you incur the cost.

Health Insurance

In order to be eligible for a penalty-free withdrawal, the cost of health insurance must pay for coverage for you, your spouse, or your dependents following a job loss. You must receive unemployment compensation for 12 consecutive weeks after becoming unemployed. You also need to receive the distribution in the same or subsequent year in which you received the unemployment benefits – and no later than 60 days after becoming re-employed.

Higher Education

Eligible higher education expenses include the cost of you, your spouse, and the children or grandchildren of you or your spouse to enroll at a college, university, or vocational school that participates in a federal student aid program. Expenses include tuition, school fees, books, and associated items such as lab supplies. Room and board are covered as long as the student attends at least half time.

Inheritance

An inheritance distributed to a beneficiary (or to your estate) are not subject to the 10-percent penalty if you pass before age 59½.

Home

Home-related expenses include a $10,000 distribution for an individual or $20,000 distribution for a couple to buy, build, or rebuild a first home. The home must be for you (and/or your spouse) or your children, grandchildren, or parents. First-time homebuyers are people who did not own a house in the two years preceding the sale of a new home or lot.

Disability

Eligible disability costs are those related to a lasting and continuous medical condition that prevents an individual from engaging in gainful employment. Proof from your doctor is required.

More Penalty-Free Situations

Other special circumstances could exclude you from paying the early-withdrawal fee. There may be additional forms and procedures associated with these scenarios:

If you are getting a divorce, you can split the IRA between you and your former spouse without penalty.
If you are converting a traditional IRA into a Roth IRA, you will not have to pay the penalty.
If you are a member of the military called to duty after Sept. 11, 2001 who served for at least six months, you will not have to pay a penalty if you withdraw during active duty.

Ask an Accountant

An attorney or accountant can help you effectively access funds in a traditional IRA. They can also help you determine the necessary paperwork and can advise you on how taking a withdrawal will affect your taxes.