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Should You Roll Over Your Old 401(k) Into An IRA?

February 15, 2016 by IRA Services

If you’ve got an old 401(k) at a former employer, it might be a good time to transfer that account to an IRA through a rollover. This would give you more control over your retirement savings and provide additional investment options. However, there are situations when keeping your old 401(k) makes more sense. To figure out whether you should make a rollover into an IRA, there are a few points to consider.

How does a rollover work?

When you make a rollover, you’re moving your savings from one retirement plan to another. If you have a 401(k), the easiest move is to transfer that money to a Traditional IRA because you won’t owe any taxes on the rollover. If you’d like to transfer your savings to a Roth IRA you can do that as well. However, you’d need to pay income tax on your entire 401(k) balance to roll over the funds into a Roth IRA.

There are two ways to transfer money into an IRA. First, you can have the investment companies directly transfer the funds between the two accounts so your 401(k) balance would just move straight into your IRA. Another option is for your 401(k) administrator to send you a check for your savings and then you would deposit that money into your IRA. If you go this route, you need to put that money into an IRA within 60 days. Otherwise, it will count as a withdrawal in which you’ll owe income tax, and possibly a 10% early withdrawal penalty on your savings.

Reasons to rollover

Convenience – Once you’ve left your old company, you can no longer contribute to their 401(k) plan. Opening an IRA lets you continue saving for your retirement. Rolling over your old 401(k) into your IRA keeps all your money in one place. Managing your 401(k) this way is convenient and helps you keep track of all your savings- versus having to manage multiple retirement accounts.

More investment options – When you invest through a 401(k), your investment options are limited to what your employer chose for the plan. This may not fit your ideal investment strategy. When you invest through an IRA, you have a wider range of options. This is especially true with a self-directed IRA which lets you invest in alternative assets, such as, precious metals, real estate, and business partnerships. You will not have these options available in your old 401(k).

Lower fees – The fees in your old 401(k) depend on your former employer. Some plans charge higher fees than what you could get by investing through an IRA. If this is the case, you’re losing money every year in extra fees that you could avoid with a rollover.

Investment advice – When you set up an IRA, the broker managing your new IRA can give you investment advice for your portfolio. Your old 401(k) won’t offer this support. Even if your former employer offered investment advice as a benefit, you won’t be able to use this service anymore after you’ve left. Setting up an IRA would get you access to professional advice again.

Reasons not to rollover

Lower fees in the 401(k) – Sometimes, 401(k)s charge lower fees than IRAs. This can happen if your employer was large enough to qualify for institutional rates that are lower than what you’d pay as an individual. If you’re happy with your portfolio in your 401(k) and your research shows that the fees are lower than in an IRA, you may be better off not making a rollover.

Early retirement – You can start making retirement withdrawals from your old 401(k) earlier than from an IRA. You can make retirement withdrawals from an old 401(k) when you turn 55 whereas you’d have to wait until you turn 59 ½ with an IRA. If you’d like to retire early, a rollover could prevent you from accessing your money.

Company stock in the 401(k) – If you own shares of your former employer’s stock in your old 401(k), a rollover may not be a good idea. There are special tax advantages that apply when you own your employer’s stock in their work-sponsored retirement plan that would be cancelled out if you make an IRA rollover. You should double check with a tax advisor to see what strategy would end up working out best in this special scenario.

No matter what situation you are in, make sure you have a plan for all your retirement savings. By reviewing your accounts, you can decide if your best move is to make a rollover or to keep the funds in your old 401(k).

The Best Retirement Plans For The Self-Employed

January 25, 2016 by IRA Services

IRA-Services-SEP When you work for yourself, saving for retirement can feel like an uphill battle. Since you are not a part of a company retirement plan, you cannot take advantage of common company perks like matching 401(k) contributions. Instead, you have to take the lead on retirement planning using nothing but your own income.

For the self-employed, it is crucially important to start saving as soon as possible and to pick the right retirement plan. Fortunately, there are several good options for those building a self-employed career.

Individual Retirement Accounts

One of the easiest ways to save for your retirement is through an Individual Retirement Account, or IRA, which you can open at any time with IRA Services.

An IRA offers the same types of tax benefits you’d receive in a 401(k) through an employer. IRAs delay taxes on your investment earnings until you withdraw money which, ideally, will not be until retirement.

There are a few types of IRAs, each with different benefits and tax schedules. With a Traditional IRA, contributions are tax deductible, while Roth IRAs feature tax-free investment earnings, as long as you withdraw your earnings after you turn 59 ½.

For both types of accounts, you are allowed to contribute up to $5,500 a year if you are younger than 50, and up to $6,500 a year if you are 50 or older.

It’s important to note that there are income restrictions on these accounts. If you are single and your adjusted gross income is over $132,000 annually, you cannot use a Roth IRA. If you are married, the joint adjusted income limit rises to $194,000.

For Traditional IRAs, income restrictions only apply if you are married and your spouse has a retirement plan at work. In this case, contributions are not deductible if your joint adjusted gross income is over $184,000. However, you can still add money to a Traditional IRA to take advantage of tax-deferred investment growth.

Keep in mind that while it may be tempting to use IRA accounts as a “back-up” fund for your business, it is not financially wise. Since IRAs are meant for retirement savings, early withdrawals come with a penalty. No matter what type of IRA you have, you will owe income tax plus an extra 10% penalty on any withdrawals made before you turn 59 1/2. While there are circumstances in which you may avoid the extra penalty, business expenses do not qualify, so be sure that you have enough money on-hand to run your business before contributing to your IRA.

Self-directed IRAs

Self-directed IRAs are a different class of IRA that offer a wider variety of investment options. Unlike other types of IRAs, with a self-directed account you can invest in alternative assets like real estate and precious metals.

For some business owners, these accounts are especially attractive because they allow you to invest in closely-held, small businesses. But, while it is possible to use a self-directed IRA to invest in a business that you partially own, it can be very complicated. There are many restrictions – for example, you are not allowed to invest in any business in which you own more than 50%.

There are repercussions for breaking these rules. The IRS can force you to remove the value of the business from your account, which would lead to income tax plus the 10% early withdrawal penalty on the total value. It is much safer to fund your business through alternate means and invest your IRA funds in companies that you do not personally own or manage.

SEP IRA

While a regular IRA can help provide a head start for retirement savings, contribution limits are frustratingly low compared to a 401(k). With a 401(k), employees younger than 50 years old can invest up to $18,000 a year, or $24,000 for those 50 or older.

For self-employed workers looking for more ambitious contributions limits, a Simplified Employee Pension Individual Retirement Arrangement, or SEP IRA, is a good option
A SEP IRA – which is specifically for self-employed workers – is similar to a Traditional IRA, except that you can contribute up to 25% of your annual earnings, to a maximum contribution of $53,000 a year. The higher contribution limit can be especially helpful if you want to use a self-directed IRA to invest in real estate. SEP IRAs allow you to save up enough money for a down payment on a property in a fraction of the time of a regular IRA.

The downside of a SEP IRA is that if you have full-time employees through your business, you must make contributions on their behalf every time you add money to your account.

Self-Employed 401(k)

If you’re the only employee of your business, a self-employed 401(k) is another great choice. As the name implies, these plans are designed for businesses where the only employees are the owner and his or her spouse. You cannot use a self-employed 401(k) if your business has additional employees. This design makes the filing paperwork much simpler and the plan less expensive.

The self-employed 401(k) offers straightforward paperwork and lower plan fees, and it also has the same annual contribution limit as the SEP IRA. In addition, it has the unique benefit of allowing you to take loans through the plan and borrow up to $50,000 of your retirement savings to run your business.

Finally, if you set up your self-employed 401(k) with a broker that handles self-directed IRAs and alternative assets, they can design your 401(k) so that you can also invest in alternative assets.

The downside of a self-employed 401(k) is that if your company expands and starts hiring employees you can no longer use the account. In this scenario, you could upgrade to a regular 401(k), but this is quite expensive and usually not cost-effective for most small businesses.

To read more about how to make the most of your retirement savings and plan for a successful future, read our article about diversifying your retirement plan with a self-directed IRA.

The Advantages Of Investing In Real Estate Through Your IRA

December 22, 2015 by IRA Services

Real estate has become an increasingly popular investment for a growing number of Americans, due in large part to the consistent property appreciation and rental income that it promises.

Many people do not realize that they can invest their retirement in real estate; as a result, they purchase real estate without reaping the tax benefits of a 401k or IRA.

With a self-directed IRA, you can invest your retirement plan in real estate with several significant advantages, enumerated below.

Delayed taxes on investment gains

When you invest in real estate outside of a retirement plan, you owe tax right away on your rental income. When you sell the property for a gain, you’ll also owe taxes on your gain even if you plan on reinvesting that money in other real estate investments. An IRA delays taxes on your real estate income as long as you keep the money in your retirement account. This can help you earn a higher after-tax-return on your real estate portfolio.

Tax-free growth through a Roth IRA

If you invest through a Roth IRA, your investment earnings are tax-free when you take a withdrawal after the age of 59 1/2. By investing in real estate with a Roth IRA, you will not have to pay taxes on your rental income, your capital appreciation, or your gains from selling a property. In exchange, you do not receive a tax deduction for your contributions into the Roth IRA like you would with a Traditional IRA. However, with a large real estate investment the tax-free growth offered on a Roth IRA may be a better incentive than the initial tax savings on a Traditional IRA because gains in a Traditional IRA are taxable when you start to make withdrawals during retirement.

Leveraged growth

When you invest in real estate, you do not have to pay off the entire purchase at once. You may choose to pay off a portion of the cost and then take out a mortgage for the rest. As such, you can leverage your money through borrowing to earn a higher return. For example, if you put down $100,000 to buy a $250,000 property, your rental income will be coming out of an asset worth $250,000. Even when you take into account the borrowing costs, your return should be higher than if you had just bought an asset worth $100,000– and even better, that higher return is growing tax deferred in your IRA.

Upon purchasing real estate with a mortgage in your IRA, the mortgage can’t be titled in your name; instead it must be titled in the name of your IRA. Furthermore, it must be a non-recourse loan which means the loan is only backed by the value of the real estate that it’s paying for. Therefore, if you default on the loan, the lender is able to seize the property, but your other assets or personal credit score won’t be affected. Thus, while a non-recourse loan may charge a higher interest rate than regular mortgages, it also enables you to better protect your finances.

Protection against inflation and market volatility

The real estate market tends to be more stable than the stock market, as the real estate market lacks the same daily volatility of stocks. As a result, many view investment in real estate as a less stressful and lower-risk opportunity to invest retirement savings. Furthermore, real estate returns historically outpace inflation, allowing your retirement spending power to grow.

Rental income

When you purchase real estate property, you can rent it out for steady rental income. This rental income can then be used to pay off the mortgage and other expenses on your investment property, meaning you just need to come up with the down payment. Any extra rental income can stay in your IRA, where it will grow tax-deferred, and can be used for future investments. When you retire, you may continue to receive rental income to supplement your other savings.

A chance to pay for your dream retirement home

Do you have a dream retirement home in mind? Then your IRA can help you finance that dream. By purchasing retirement property through an IRA, you can use the property’s rental income to pay off the mortgage, as the IRA tax savings will allow you to do so quickly and effectively. When you’re ready to retire, you can withdraw the property title from your IRA and then move into your new home.

If you wait until you are at least 59 ½ to take the property out of your IRA, you’ll avoid the 10% early withdrawal penalty. In addition, you can’t live on the property while it’s still owned by your IRA, as this can lead to tax problems; however, nothing’s stopping you from driving by and seeing your future home, knowing that it’s steadily being paid off with your rental income.

If you’re going to invest in real estate, why not invest with all the possible tax benefits? By using your IRA benefits to their fullest, you can make real estate a more effective part of your retirement plan.

6 Myths About IRAs That Hurt Investors

December 16, 2015 by IRA Services

IRA-Myths IRA accounts are one of the most popular ways for Americans to save for retirement. These accounts are synonymous with security and reliability and are used by millions. However, despite their popularity, IRAs are still poorly understood by many and there continues to be some popular misconceptions about these investment vehicles.

Is your retirement strategy falling victim to any of these IRA myths?

1. “I earn too much to use an IRA”

It’s true that the Roth IRA eligibility rules are pretty much set in stone. If you are single and earn more than $132,000 or are married and earn more than $194,000 combined you cannot use a Roth IRA.

However, Traditional IRA accounts are only subject to income limits ($71,000 if you are single and $118,000 if you are married) only if you have a retirement plan through your employer. If you do not have a work retirement plan, you can use the Traditional IRA and receive the tax deduction for your contributions, no matter how much you make.

Even if you do have a retirement plan through your job and earn more than the Traditional IRA income limits, you can still contribute to a Traditional IRA, however, you won’t receive a tax deduction. Some people in this situation may find it still makes sense to use the Traditional IRA, even without the tax deduction, because investments in the account would grow tax-deferred.

2. “I can’t use an IRA because I already have a 401k”

You are still eligible for a self-directed IRA, even if your employer provides a 401k or some other retirement plan, but the income restrictions still apply. Depending on how much you earn, your work plan may prevent you from receiving a tax deduction for a Traditional IRA (see above for income limits).

3. “I don’t need an IRA because I already have a 401k”

Even if you have a 401k, an IRA could still play a valuable role in your retirement plan. IRAs offer a wider range of investment options and the fees on an IRA could be lower than those on a 401k. Also, with a Roth IRA, you can earn tax-free income in retirement. While some companies offer a Roth 401k, many do not which means you’d owe taxes on your 401k withdrawals during retirement. This isn’t to say you shouldn’t use your 401k, just remember that a good retirement plan takes advantage of multiple investment types.

4. “I can only invest my IRA in stocks and bonds”

Not true. While most brokerage firms limit client investments to traditional assets like stocks, bonds, and mutual funds, the IRS actually allows a much wider array of investments through IRAs. Alternative assets for IRAs include real estate, precious metals, and business partnerships, but you need to find a broker that accepts these investments through an account called a self-directed IRA. These accounts work nearly exactly the same as a regular IRA except they allow a wider range of investments. That said, make sure you are working with someone that understands the rules of self-directed IRAs to avoid any IRS penalties.

5. “My money will be locked up in an IRA until I retire”

It’s true that IRAs are designed to de-incentivize account withdrawals until you are at least 59 ½ years, and early withdrawals do incur a 10% tax penalty. However, there are a number of loopholes to this rule. Penalty-free early withdrawals are allowed if you become disabled, if you need to pay higher education expenses for yourself or a family member, or if you have medical bills that exceed 10% of your income. Other scenarios where early withdrawals are accepted include if you are unemployed and need to buy health insurance, if you are buying your first home, and if you need the money to pay back taxes.

In addition, Roth IRAs allow you to take out some or all of your contributions for any reason without a penalty. The penalty only applies when you withdraw investment gains from the Roth IRA.

6. “I can’t move my IRA to a different broker”

If you find yourself unhappy with your investment options or simply find a better option, you are by no means locked in with broker that set up your IRA. At any point, you can transfer your savings to another company and broker through what’s called a “rollover.” You do not have to pay taxes on a rollover because it is not a withdrawal, but simply a transfer between accounts.

Your retirement plan is too important to base on myths. For more information on IRAs, you may also like to know about these 6 investments that are not allowed in a self-directed IRA.

Have You Made This Year’s Required Minimum Distribution?

December 1, 2015 by IRA Services

If you are retired and have i IRA-Services-RMD nvested in a retirement plan, December 31^stis one date that should be marked clearly on your calendar. That’s the last day that you are allowed to make any Required Minimum Distributions, or RMDs, to avoid a steep IRS penalty. In fact, penalties for mishandling these withdrawals are among the most costly penalties in the entire tax code.

Here’s what you need to know about handling this year’s RMD.

What are RMDs?

Retirement accounts like 401(k)s and Traditional IRAs delay taxation on your investment gains, which incentivizes you to save more while you are working. But once you retire, the IRS wants to begin collecting on those unpaid taxes, which they can do when you make a withdrawal from your retirement accounts. So, the IRS requires a minimum withdrawal each year – the RMD. (Roth IRAs, which includes tax-free withdrawals, are exempt from the RMD rule.)

If you have a Traditional IRA, you should start taking an RMD – which you will need to calculate – when you turn 70 ½. If you have a work-sponsored plan, such as a 401(k), you should start taking RMDs either when you turn 70 ½ or when you retire, whichever is later. If you do not withdraw your RMD, the IRS will charge you a tax penalty equal to 50% of your RMD amount. For example, if your RMD is $20,000 and you withdrew zero dollars before the January 31 deadline, the IRS will charge you a $10,000 penalty.

How to calculate your RMD

RMDs are calculated using a few different factors. Your particular RMD is based on your current age, the amount of money in your retirement plan, and your expected life expectancy, as calculated by the IRS. The IRS publishes calculation tables every year, known as the IRS Uniform Lifetime Table

To find your RMD for this year, find the “life expectancy factor” next to your current age on the table. Then divide your retirement account balance (as of December 31of last year) by your life expectancy factor.

For example, if you are 80 or will turn 80 sometime in 2015, your life expectancy factor is 18.7. And if you had $100,000 in your Traditional IRA on December 31^st 2014, your RMD calculation for 2015 would be: $100,000/18.7 = $5,348. It’s always a good idea to double check your calculation with your financial advisor.

Special situations for RMDs

1^st year of RMDs

In the first year that you take an RMD, you have the option of delaying your withdrawal until April 1 of the following year. So, if you turned 70 ½ in 2015, you can delay your first RMD until April 1^st of 2016. But remember that if you do this, you will need to make two withdrawals in one calendar year, the first by April 1 and the second by December 31, in order to stay compliant for next year. Depending on your situation, the extra withdrawal could move you into a higher tax bracket.

Younger spouse

If your spouse is more than 10 years younger than you and would inherit your retirement plan, then the RMD calculation is based on a different table, called the “Joint and Survivor Life Expectancy Table.” This calculation table reduces your RMD amount to help ensure there are sufficient funds to support your younger spouse’s retirement.

Multiple retirement plans

If you have more than one retirement plan through your employer, you are required to calculate and withdraw RMDs for each individual plan. However, if you have more than one IRA, you can combine the withdrawal. For example, if you calculate that you must withdraw $1,000 out of one IRA and $2,000 out of another, you can divide those withdrawals across both accounts- however you prefer, as long as you take out a total of $3,000 from all your IRAs.

Inherited retirement plan

The person inheriting your retirement plan will also need to do an annual RMD, should you pass away. If your spouse inherits the plan, they have the option of rolling the money over into their own IRA and following the normal retirement RMD schedule.

If someone besides your spouse inherits your retirement plan, they will need to calculate RMDs based on the single life expectancy table. The inheritor must make RMDs immediately, and are not allowed to wait until their retirement. For example if your 50-year old son inherits your plan, he is not allowed to wait until he turns 70 ½ to begin RMD withdrawals.

You worked hard to save up money in your retirement plans so make sure that money doesn’t slip away to costly penalties.