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Should You Open Multiple IRAs?

November 23, 2015 by IRA Services

Individual retirement accounts have great features. One of the most important features of your IRA is the fact that you can hold and contribute to more than one IRA at a time.

There is no limit to the number of IRAs that a person can own. You can divide your retirement savings over a number of different accounts. While this might seem unnecessary, there are situations when it can be helpful to own multiple IRAs.

Owning multiple IRAs

Your investment broker should give you the option of opening extra IRAs. Most brokers typically charge a small fee for setting up each additional account and that’s it. Once your new account is set up, you should not have to pay anything extra compared to what you are paying now on your investments. Your broker would likely require that you keep a minimum IRA balance so you will need to have at least that much in each account.

Owning multiple IRAs will not increase the amount you can contribute to your retirement plans every year. The annual contribution limit, currently $5,500 if you are younger than 50 and $6,500 if you are 50 or older, stays the same. Your combined contributions into the multiple accounts can not exceed the annual limit. Even though multiple IRAs do not increase what you can invest per year, there are still some benefits.

Benefits of multiple accounts

One reason to own multiple IRAs is to help keep track of your different investments and their performance. For example, you could keep your stocks in one IRA, your bonds in another, and your real estate in a third. This would easily let you see what is going on with each investment. If you have everything lumped into one account, you may overlook important performance information.

You may also be forced to open a separate account if you would like to invest in alternative assets. Regular brokerage firms do not allow investments in alternative assets like precious metals, real estate, or business partnerships for their IRAs. If you would like to invest some money in these assets, you will need to open a self-directed IRA. If you are happy with your broker for your traditional investments, then opening up an extra self-directed IRA would allow you to do both.

Separate IRAs can also be very helpful if you are investing in real estate or other alternative assets where it is necessary to pay for expenses. You are required to pay for these expenses out of the funds in the IRA that holds the asset. By keeping your properties in a separate self-directed IRA, you know where to take out money to pay these bills.

Finally, you may want multiple accounts so you can split the tax benefits of a Traditional IRA and Roth IRA. The Traditional IRA gives you a tax deduction now while you are working, whereas the Roth is better for taxes when you take money out in retirement. If you are eligible to contribute to both accounts, you could open one of each and divide you annual contributions between the two. That way you would get a partial deduction now while still earning some tax-free income in retirement.

Drawbacks

Every new IRA will charge an initial set up fee. It is a small expense but still one more cost. In addition, every IRA will have a minimum balance requirement. If you have just started investing and do not have a large amount of savings, you may not have enough money to open multiple accounts.

Finally, every new IRA is one more account that needs managing. It is important to pay attention to all of your IRAs to assure they are being properly invested. It may be easier for tracking purposes for you to keep everything in one IRA. At any point, extra accounts can be combined through rollover, giving flexibility for any change of mind.

While opening multiple IRAs takes some extra work, in the right situations it can be helpful. By keeping this information in mind, you can decide whether it is worth the effort to set up an additional IRA.

How To Invest Your Retirement Plan In Precious Metals

November 16, 2015 by IRA Services

iStock_000019443856_Small The term “gold standard” exists for a reason.

Precious metals investments have seen a comeback over the last decade or so since the financial crisis, when the stock market crashed but gold and silver continued to show strong returns and balance against future market losses. Precious metals have also shown to provide solid protection against inflation, a common concern for many investors.

For those looking to expand their retirement investments to gold, silver and other precious metals, there are several options. But these investments are not as straightforward as other, more traditional, investment assets like stocks and bonds.

Read on for a few important rules to keep in mind when investing your retirement plan in precious metals.

Types of Retirement Plans

Your ability to invest in precious metals depends on the type of retirement plan that you have. Self-directed IRAs work best in this case. These accounts allow for the widest range of investment options, including investments in physical gold, silver, platinum, and other precious metals.

Traditional IRAs, on the other hand, do not allow for precious metal investments. However, you can still try to simulate the security and returns of precious metal investments with a Traditional IRA. Stock in a silver mining company or a gold ETF (a fund that tracks the price of gold) can be good surrogates for precious metal investments.

Work-retirement plans, like 401(k)s, typically offer the fewest ways to invest in precious metals. These type of accounts only allow investments in a list of assets pre-chosen by employers, who rarely include precious metal assets. If your plan does not allow precious metal investments, speak with the benefits department of your office about the possibility of adding these options.

If that doesn’t work, you will have to wait until after you are employed to buy silver and gold assets with your 401(k). Once you leave the company, you can roll over your old work plan into a self-directed IRA, at which point you would be free to invest in physical precious metals.

Permitted Investments

The IRS has certain rules around which type of precious metals are eligible for self-directed IRA investment. For example, the metals must be over a certain level of physical purity, a regulation that is meant to prevent investors from buying collectible items that usually lack long-term investment value. The acceptable level of purity varies depending on the type of precious metal. Gold bars, for instance, must have at least a 99.5% level of purity.

There are also regulations around precious metal coins. Only certain coins are acceptable, such as the American Eagle gold and silver coins, Canadian Gold Maples, and American Buffalo gold coins. Other coins, like the South African Krugerrand, are not allowed.

If you fall afoul of these IRS regulations, the agency could force you to take the ineligible asset out of your account, leading to extra withdrawal costs and taxes.

Managing Your Investments

There are certain procedures to keep in mind when making precious metal investments. First, you must make any purchases for your self-directed IRA through your designated IRA custodian, usually the company managing your account. Futhermore, you are not allowed to add precious metals that you already own into an IRA. Instead, you must use cash in your IRA to buy precious metals through the custodian. This IRS rule is meant to prevent any unfair dealings that take advantage of tax deduction benefits.

In addition, any physical precious metal assets you purchase for your IRA must be stored outside your home, with your IRA custodian. Custodians that sell IRA precious metal investments usually provide storage services for a fee.

Finally, when you sell your precious metals, you will not owe taxes on the proceeds, as long as you keep that money in your IRA. By reinvesting those earnings in other investments, you can delay taxes further.

Alternative investments can offer a valuable balance against more traditional investments in uncertain times. To read more about how to maximize retirement benefits through precious metals and other alternative assets, read our article about opening multiple IRAs.

6 Investments That Aren’t Allowed In Your Self-Directed IRA

November 3, 2015 by IRA Services

iStock_000017072506_Small Part of the appeal of a self-directed IRA is that you can invest in a wider range of assets than a regular retirement plan. However, while these accounts give you more options, there are still limitations. Certain types of investments are not allowed under IRS rules and it’s important to understand where the lines are drawn in order to keep your account compliant.

Here are six types of assets that do not make the cut for self-directed IRA investments.

1. Collectibles

The collectibles category covers a wide range of objects, including stamps, furniture, wine, jewelry, silverware, paintings, comic books, and antiques. The IRA is meant to help Americans. Even though some collectibles do appreciate in value, they generally are not reliable enough to be considered appropriate assets for a retirement plan. And since IRAs are really meant to help Americans save for retirement effectively, the IRS excludes collectibles in order to prevent investors from making this mistake.

2. Certain types of precious metals

While you can invest in precious metals with your IRA, there are restrictions. Precious metal bars must have a purity level of at least 99% in order to be acceptable for IRA investment. The purity requirement means that most coins are considered collectibles, rather than precious metals. The IRS lists exactly which coins are acceptable and these include American Eagle Gold and Silver Coins, Canadian Gold Maples, and American Buffalo Gold Coins.

3. Term life insurance

Term life insurance doesn’t earn any income so it’s not actually an investment. Since these policies can’t provide any real financial benefit to your self-directed IRA, the IRS does not allow them. While permanent life insurance can earn income, these policies already have their own set of tax benefits (which are very similar to what you would get from an IRA).

4. Your current home

Though you can invest in other real estate properties using your IRA, you are not allowed to do so for your personal residence. The IRS considers this a conflict of interest because you would essentially be renting the property to yourself.

Besides, it makes more financial sense to keep your personal residence out of your IRA. There are a number of extra tax benefits for owning your personal residence – like deductions for mortgage interest – that you would lose by moving the property to your IRA.

However, you can buy a future residence, such as a home for retirement, with your IRA. You just have to rent the property out while you’re still working to pay off the mortgage. Only when you retire are you allowed to withdraw the property from your IRA and move in.

5. Aggressive derivative contracts

With a self-directed IRA, you can invest in some derivative contracts, like call and put options, that give you another way to manage risk and earn a higher return in the stock market. However, not all derivative contracts are allowed under self-directed IRA investment rules. You are not allowed to invest in contracts that set up a potentially unlimited downside – these are considered too risky for a retirement plan. For example, if you sell a naked call option, you agree to sell a stock at a set price, no matter how high it is actually selling for in the market. Since there is no limit to how high a stock price can go, there is no limit to how much you could lose on this trade if it goes badly.

6. Personal loans

IRS rules do allow you to make loans to certain individuals using your self-directed IRA account. These loans function just like a bank loan and include interest and a repayment schedule. However, the IRS draws the line at lending to yourself or people with whom you have a personal connection, like family members. In fact, any IRA business transactions with personal connections are prohibited.

Don’t let a prohibited investment get you in trouble with the IRS. By staying clear of the 6 investments mentioned above, you’ll be able to keep your account compliant and make the most out of IRA tax advantages.

Looking Ahead To 2016 – What’s New For Your IRA?

October 29, 2015 by IRA Services

Every year, the federal government reviews the rules for Individual Retirement Accounts and makes adjustments. They’ve made a few changes for IRAs that will go into effect in 2016. While the changes haven’t been major, they could still impact your savings strategy for the next year.

Here’s what to expect for 2016.

No increase in IRA contribution limits

The amount you can contribute to your IRA will stay the same in 2016. You will be able to contribute up to $5,500 if you are younger than 50 and up to $6,500 a year if you are 50 or older. The fact that there is no increase will be frustrating to people who are currently maxing out their accounts. This is roughly 43% of IRA investors, according to research from the Employee Benefit Research Institute

If you’re worried about hitting the limit next year, make sure to get your full contribution in for 2015. Remember, you can make IRA contributions for 2015 up until April 15^th, 2016 so this is a chance to get more money in your tax-advantaged account. Keep this in mind if you get a tax refund.

Higher income limit for Roth IRAs

The government did increase the income limit for allowing people to contribute to a Roth IRA. If your annual income is past a certain amount, the amount you can contribute to a Roth IRA decreases until you reach a point where you can’t add any money to the Roth IRA. The government has increased the entire threshold by $1,000 which should make a few more people eligible to contribute to Roth IRAs.

If you are single, Roth IRA contributions start phasing out when your adjusted gross income is $117,000 a year and you can no longer contribute if you make over $132,000 a year. For married couples, contributions begin phasing out when your combined adjusted gross income is $184,000 and you can no longer contribute to a Roth IRA when you make over $194,000.

No income limit increase for Traditional IRAs

While the income limit was increased for Roth IRAs, it will remain the same for Traditional IRAs in 2016. This income limit applies only if you have a retirement plan at work. If you have no other retirement plan, you can contribute to a Traditional IRA and receive the full tax deduction for your contributions no matter how much you earn.

If you are single and have a work retirement plan, your Traditional IRA deduction starts phasing out when your adjusted gross income is $61,000 and you can no longer receive a tax deduction for your contributions if you make over $71,000. If you are married, your contribution deduction starts phasing out when your combined adjusted gross income is $98,000 and phases out completely when you earn over $118,000. These are the same limits as 2015. If you have a work retirement plan and earn more than the income limit, you can still contribute to a Traditional IRA. You just won’t receive a tax deduction for your contributions.

Higher income limit for spousal Traditional IRAs

One other change is the income limit for spousal contributions into a Traditional IRA. This is when one person isn’t working but their spouse is and has a retirement plan at work. The non-working spouse receives a deduction for their Traditional IRA contributions only if their combined adjusted gross income is below a certain limit.

This income limit has also been increased by $1,000 for 2016. Spouses will receive the full Traditional IRA deduction until their combined adjusted gross income equals $184,000. From there, their deduction starts phasing out until it ends at $194,000. Once again, this is just a small increase but should help a few more Americans receive a tax benefit for their retirement plans.

As you can see, it’s worth checking in on the new IRA rules every year. While there are rarely huge changes, there’s always the chance that one of these adjustments can impact your financial plan.

How To Avoid Taxes From Required Minimum Distributions

October 23, 2015 by IRA Services

IRA, Withdrawal, Taxes One of the hallmark benefits of investing in a retirement plan is the ability to defer taxes on your savings and investment gains. But the IRS won’t let you get away with this perk indefinitely, and you will eventually have to start paying taxes on your savings through IRS-mandated withdrawals known as Required Minimum Distributions (RMDs).

For those that don’t necessarily need to make withdrawals on their retirement fund on a regular basis, or those that would like to postpone taxes further, RMDs can be frustrating and lead to extra taxes. First, RMDs add to taxable income, driving up your tax liability. Also, withdrawing from your retirement account means your savings are no longer in a tax-deferred account and if you reinvest the money through a regular brokerage account after the RMD, you’ll be paying extra taxes on your future investment gains as well.

If it is more beneficial for you to continue deferring taxation on your savings, as there are a few strategies you can use to avoid RMDs.

How do RMDs Work?

First, let’s back up to explain the basics of RMDs. RMDs only apply to retirement plans, like Traditional IRAs and Traditional 401(k)s, that trigger a tax on withdrawals. There are no RMDS for accounts with tax-free withdrawals, such as Roth IRAs.

The rules around RMDs vary by type of account. Traditional IRAs, for example, require RMDs each year once you turn 70 ½ years old. If you have a work retirement plan, you don’t need to make RMDs until you either turn 70 ½ or retire, whichever is later.

RMD amounts also vary, and are calculated based on your life expectancy and your account balance. To find your RMD, divide your account balance by your expected life expectancy (using a chart prepared by the IRS).

Penalties for not paying your RMD every year are among the most onerous in the tax code, at 50% of the RMD amount. For example, if your RMD is $10,000 and you don’t make a withdrawal, you’ll owe $5,000 in extra taxes that year.

So, how do you avoid RMDs if you don’t actually require those annual withdrawals to meet your needs? Roth IRAs are your best bet, and there are a few different rollover strategies to consider.

1. Make a lump-sum Roth IRA rollover

Rolling over your entire Traditional IRA or 401(k) balance into a Roth IRA has pros and cons. The year that you make the rollover, you will need to pay taxes on the entire account balance, meaning you will take a fairly sizable, one-time tax hit.

But, on the upside, you will never have to make RMDs in the future, and your savings will grow tax-free from that point on. This approach can make sense if you are in a relatively low tax bracket and have the money to pay off all your retirement plan taxes right away.

2. Spread out small transfers to a Roth IRA

Once you turn 59 ½, you can also choose to make smaller withdrawals every year from your taxable retirement plans (Traditional IRAs and 401(k)s) to a Roth IRA. By making smaller withdrawals, you can avoid getting pushed into a higher tax bracket by that extra income, and taxes on withdrawals will be fairly minimal.

The downside of this approach is that it requires more effort on your end, and you will see less tax-free growth in the future since your Roth IRA balance will accumulate more slowly than a lump sum transfer.

This strategy works best if you finish your Roth rollover before you start taking Social Security because taxable retirement plan withdrawals add to your total income, which can lead to extra taxes on your Social Security payments. Keep in mind that it usually does not make sense to delay Social Security after age 70.

Both approaches have their merits and can help you minimize if not completely avoid RMDs. By planning ahead, you can take money out of retirement plans on your schedule to make sure you have the most tax-effective approach. In the meantime, read more about making this year’s Required Minimum Distribution in our next article.