Blog – Page 5

7 Advantages Of Real Estate Investing For Savvy Entrepreneurs

October 15, 2015 by IRA Services

investing, ira advantages

Real estate investing isn’t for everyone. It takes a lot of self-motivation, a willingness to keep up with local market trends and an appetite for some calculated risk. But for those that have a touch of the entrepreneurial spirit, the right real estate investments can yield big rewards for your portfolio.

Here are seven of the biggest benefits of investing in real estate. Are you taking advantage of these?

1. Immediate positive cash flow

When you start a conventional business, it can take years to turn a profit and start earning positive cash flow. But investment real estate properties can be cash-flow positive almost immediately. In most markets, monthly rents are higher than the payments on a long-term mortgage so, even after expenses, you start earning money once you find a rental tenant. The profit margin can also grow over time as you gradually increase monthly rent, while your mortgage payments stay the same.

2. Tax deductions and lower rates

The federal government has a number of tax benefits that encourage real estate investment and can add up to big deductions on your annual tax bill and enhance your overall earnings. You are allowed to deduct all the expenses you incur for renting the property from your rental income, including a large depreciation deduction for the amount you paid to buy the property. Rental income is also taxed at a lower rate than regular business income because you don’t need to pay self-employment tax. In addition, when you sell an investment real estate property, your gains are taxed at the lower capital gains tax rate, instead of regular income tax rates.

3. Tax savings through an IRA

Investing in real estate as part of your retirement plan can offer even more ways to save on your tax bill. The IRS allows investments in real estate through a self-directed IRA, but be mindful of some caveats and exclusions. One of the main benefits of doing this is that you defer paying taxes on your real estate gains as long as you keep those gains – which includes both rental income and profitable property sales – in your IRA. If you use a Roth self-directed IRA, you also won’t owe any taxes on your investment gains when you make withdrawals during retirement.

4. Long-term appreciation

The hallmark benefit of a real estate investment is the steady, long-term returns it creates. While there are market fluctuations – sometimes severe, as we saw in the 2007 crash –real estate values have still consistently increased faster than inflation over the long run. As the United States population continues to grow, so does the need for housing, pushing up market prices. Over the long term, real estate returns are comparable to the stock market, but that’s before factoring in additional tax savings on real estate.

5. Control over your investment

While stock market and real estate investments may yield similar returns, you have much more control over the latter. When you buy a company’s stock, you have minimal to zero ability to influence company decisions that could affect your investment. But with real estate investments, you have a far greater ability to influence your returns. You can research and choose the most profitable investments, add value to the property through reparis and renovations and set rental rates. While rental properties certainly demand a lot of work, the payoff can be considerably more rewarding than stock market investments.

6. Debt leverage

The ability to leverage debt effectively is a crucial investment growth strategy, because it allows you to earn a profit off someone else’s money. In the case of real estate, that “someone else” is the mortgage lender financing the property. If you rent out the property over the life of the mortgage, you are able to pay off the debt incurred for purchasing the home using rental income. Eventually, the house property will be paid off, but you have only paid for a fraction of the investment out of your own pocket.

7. Positive community impact

Finally, real estate investments have the potential to positively impact your community, by improving properties in your area and providing good homes for local residents. All too often, people end up renting from dishonest owners who don’t take care of their properties. By being a reputable landlord, you can feel good about your contribution to society while earning a solid profit at the same time. There aren’t many other growth strategies out there that offer this same intangible benefit.

When you consider these advantages, it’s clear why real estate is a popular investment. Read more about the advantages of investing in real estate using your self-directed IRA.

How To Handle Complicated Asset Valuations In Your Self-Directed IRA

October 7, 2015 by IRA Services

ira services valuations The IRS requires anyone investing through an IRA to maintain an up-to-date portfolio valuation every year. For conventional IRAs that focus on market assets like stocks and bonds, the valuation process is simple enough. But doing these calculations for self-directed IRAs can be more complicated.

The IRS requires these valuations because it is in their interest to track future tax estimates and to prevent tax avoidance through asset undervaluation. For example, say Taxpayer A owns a piece of real estate in a Traditional IRA and the property value increases from $100,000 to $300,000. Without an appraisal, he or she would continue to report an asset value of $100,000. If Taxpayer A were to roll over a Traditional IRA account to a Roth IRA, where gains are tax-free, he or she would effectively receive an extra $200,000 of untaxed income upon sale of the property. Clearly, this is something the IRS wants to avoid.

No matter which kind of IRA you invest in, annual valuations are an important part of IRA investing and should be handled properly to avoid potentially costly tax issues with the IRS.

Here are a few things to keep in mind when you are doing your valuation this year:

There are special valuation rules for alternative assets

Traditional IRA investors usually focus on publicly traded assets like stocks and bonds, which have a market price that is updated daily. As a result, investors can easily figure out the value of their investments – for example, if you have 300 shares of Apple stock and Apple closes the day at $100 a share, than you know your stock portfolio is worth $30,000. Brokers usually make this calculation automatically for regular IRA customers so they always know the value of their account.

But valuation calculations are considerably more complicated for alternative asset investors. Unlike stocks and bonds, these assets, like real estate or business partnerships, are not bought and sold every day. For example, if you own part of a privately-held business, you will only know exactly how much that business is worth when you sell it. In order to report a valuation on these hard-to-value assets to the IRS every year, you have to hire an appraiser.

There is a specific appraisal process to follow

There are a few important things to note on the appraisal process for alternative investments. First, it is crucial that you pay for this appraisal out of the funds in your IRA, not out of your own pocket since IRS rules prevent payment of IRA expenses using personal funds. If you do pay out of pocket, the IRS could force you to take the asset in question out of your IRA, leading to taxes and, potentially, an early withdrawal penalty.

Timing is also important. Once the appraiser finishes the valuation, you must send the report to your IRA broker for submission to the IRS. Brokers typically require that you do this by the end of the year, but you should check with your individual broker. If you miss their deadline, the broker could force you to take the asset out of your IRA, or you could also run into tax problems with the IRS.

An improper valuation carries heavy consequences

The IRS could charge you a costly accuracy penalty if you don’t report your valuations regularly. In addition to the regular income taxes that will be owed, the accuracy penalty entails an extra 20% of the pricing shortfall. In the example above, where Taxpayer A underreported a piece of property’s value by $200,000, he or she would owe $40,000 for the penalty plus the income taxes that should have originally been paid on the IRA rollover.

While asset appreciation can lead to a steep tax bill if you do not report regularly, significant depreciation of your assets could also get you in trouble. For example, there was an investor who owned shares of a real estate partnership in his self-directed IRA. The partnership went bankrupt and the shares dropped from a value of $77,000 to zero. The investor told his broker to adjust for the lost value but never performed an official appraisal. When he closed the IRA, the partnership shares were still listed at a $77,000 valuation. The IRS maintained that he had $77,000 of taxable income from the IRA, despite the fact that the shares he took out were worthless. He had to pay thousands of dollars worth of unnecessary taxes that could have been avoided with an appraisal.

Don’t let incorrect asset valuations set back your retirement plan. Ask your advisor to help you plan ahead.

News & Ideas – October 2015

October 3, 2015 by IRA Services

Paperless Notifications for Property Tax and Expense Payments

For those of you who have opted to go paperless, we applaud your actions.

As part of our continuing efforts to better serve you, Property Tax Payment Request forms along with any property tax bills we receive will now be sent to you via e-mail. After completing the forms, you may fax or e-mail them back to us with instructions to either send the property tax payment check to you for filing or directly to the tax authority. We ask that requests be submitted promptly to allow for timely processing of your payment request.

In addition, we occasionally receive asset summaries, insurance policies, utility bills, and similar documents, pertaining to assets held in your account. We will forward these promptly to the e-mail address indicated on your account. If a payment is required, we will attach the proper Expense Payment Request form for convenience. When we receive your instructions, we will forward the payment to the authorized provider.

For faster processing, we suggest you consider instructing your providers to send the various bills directly to you (at your residence or primary address), which will allow more time for receipt and processing of payment requests. Please note: If you require the original document be sent to you, a $5.00 forwarding fee will be charged to your account.

All Distribution Requests for withdrawal of funds or Transfer Authorizations to bring funds from elsewhere should be sent directly to IRA Services Trust Company (rather than the Investment entities or previous custodians). In the case of deposits such as Contributions or Rollovers, they should also be sent directly to us, using the Deposit Info form available on our website www.iraservices.com under the Forms & Fees tab.

Property Tax Payments

If you hold real estate in your account, the first installment of property tax payments is usually due by December 10th. If you have not yet received your tax bill, please contact your county tax collector’s office. In order for property tax to be paid from your IRA, you must submit an Expense Payment Request form with a copy of your tax bill. You may obtain an Expense Payment Request form on our website, www.IRAServicesTrust.com, under “Forms & Fees”.

Please allow 3-5 business days to process your payment. The check will be mailed to you, and it is your responsibility to forward the payment to your county tax collector. Payments received after December 10th will be considered delinquent by your county tax collector’s office. If we receive your request after December 1, we may charge your account any applicable expedited processing and handling fees in order to get your payment issued on time!

Go Paperless today

At the beginning of the year, we have begun charging a $5 per quarterly paper statement fee. To avoid this cost, you may elect to download your statements from our website. To select the paperless option, visit our website www.iraservicestrust.com, log into your account, and change your delivery method under the Statement Section in the lower left corner of the display.

If you are not sure you currently have internet access to your account or if you require any assistance, send an email to info@iraservices.com or call Customer Service at (800) 248-8447. To establish online access to your account, submit an Internet Access Request form which is available on our website www.IRAServicesTrust.com under the Forms & Fees tab.

Consider the benefits of a Roth IRA

Roth IRAs are designed to leave more money in your hands down the road. Establishing a Roth IRA now or converting some of your Traditional IRA may save you money in taxes over time. Be sure to check with your tax advisor to determine the best course for you.

Qualified Distributions are tax-free
Once you reach the age of 59½, having held a Roth IRA for at least 5 years’ time, those funds can be distributed tax-free. They can also remain in the Roth IRA indefinitely to grow even further until you need them.

Funds held in a Roth IRA, unlike the Traditional IRA, are not subject to mandatory withdrawals starting at age 70½, so you are free to maintain the balance of funds in your Roth IRA even after the age 70½ milestone.

Converting moneys from Traditional IRA to Roth IRA will reduce the amount remaining in Traditional IRAs that is subject to the Required Minimum Distribution.

You can take physical possession of your ‘hard assets’ like real estate or precious metals, tax-free. This is possible when you make Qualified Distributions (over the age of 59½, with 5 years in the Roth IRA). Now they are yours to hold and to use as you wish.

No eligibility age limit for contributions
New contributions to your Roth IRA are still permitted after 70½, provided you have earned income. If your income (MAGI) exceeds $6,500 but is less than $116,000 (or $183,000 if filing jointly), you may be entitled up to the maximum contribution including the catch-up provision of $6,500.

No RMDs for sole spousal beneficiaries
A spouse, who is the sole beneficiary of a Roth IRA who meets the criteria for qualified distributions, may make the Roth IRA their own, tax-free. They can also make new Contributions to it going forward, as long as they have earned income. A non-spouse beneficiary (or a spouse who is not the sole beneficiary) may elect to take distributions according to his or her own life expectancy. These too will be tax-free to the beneficiary (again, assuming the original Roth IRA owner had met the criteria for qualified distributions at the time of death).

No income limits for converting to Roth IRA
Even if your earnings are too great to allow you to make new Contributions to a Roth IRA, you are allowed to make Conversions to a Roth IRA without limitations from your existing Traditional IRA. Yes, it will be taxable in the year you convert, but this could still pay off handsomely in the long run, as you may be able to keep the money working for you indefinitely, before ultimately withdrawing it tax-free. However, you should consult with your tax advisor to determine what is best for you and your tax situation.

Holiday Office Closures

Our office will be closed on the following bank holidays this quarter:

October 12: Columbus Day
November 11: Veteran’s Day
November 27-28: Thanksgiving
December 25: Christmas Day
January 1: New Year’s Day

Although our office will be closed on these dates, you still have 24/7 access to your account by logging in online at www.IRAServicesTrust.com. Don’t have online access? Sign up by completing our Internet Access Request form.

How To Minimize Taxes On Your IRA Withdrawals

September 29, 2015 by IRA Services

Protecting his assets One of the main advantages of investing through an IRA is that, as long as your money stays in the account, taxes on investment gains are delayed. But when it comes time to start making withdrawals, taxes can start accruing fast.

Depending on what type of account you have and when you make the withdrawals, your tax bill can vary significantly. Here are some things to keep in mind so you can minimize taxes on your IRA withdrawals.

Account Type Matters: Traditional vs. Roth IRA

There are two main types of IRAs – Traditional and Roth – both have very different tax rules, and Roth accounts are best for minimizing taxes upon withdrawal. The Traditional IRA gives you a tax deduction on the front end of your IRA, when you make a contribution. But the Roth IRA, instead of giving you an immediate tax benefit for contributions, will yield tax savings at the time of withdrawal.

Timing Matters Too: Early Withdrawals and Exemptions

Since IRAs are intended to be a retirement account, taking money out before you stop working or hit a certain age will usually lead to taxes. But again it depends on what type of account you have.
With a self-directed IRA, money taken out before you turn 59 ½ is considered an early withdrawal by the IRS, and thus subject to taxes.

However, if you have a Roth IRA you are allowed to take out contributions – but not investment gains – without owing any taxes. For example, if you added $10,000 to your Roth, you can take out $10,000 tax-free. If you withdraw any money that you have earned on investments from that same Roth IRA, you will owe income taxes on amount withdrawn. Depending on how old you are when you take the money out, you might also owe an additional 10 percent early withdrawal penalty.

Similarly, withdrawals made at any time on a Traditional IRA are subject to income tax (and the early withdrawal penalty if you are younger than 59 ½).

But there are ways to avoid the early withdrawal penalty and taxes, depending on your circumstances. If you qualify for any of the categories below, you may be able to minimize taxes on your IRA withdrawals.

1. Disability – If you become disabled and can’t work, you can take money out of your IRA without penalty.
2. First home purchase – You can take out up to $10,000 from you IRA penalty-free to buy or build your first home.
3. Medical expenses – If you have medical bills that add up to more than 10 percent of your adjusted gross income for the year, you can take money out of your IRA to pay bills that are over this limit.
4. Health insurance – If you are unemployed, you can make withdrawals to buy health insurance.
5. Tax lien – If you are behind on your income taxes, the IRS could place a lien against your IRA for payment. You could then take money out penalty-free to pay your back taxes.
6. Higher education – If you or a family member goes to a qualified college or university, you can take money out of your IRA to pay for school expenses like tuition, books, and room and board.
7. Called up to active duty for the military reserves– If you are a member of the military reserves and called up for a period of active duty that lasts at least 180 days, you can make withdrawals while on active duty.
8. Equal periodic payments – You can divide up your IRA into equal periodic payments based on your life expectancy, as calculated by the IRS. You’d need to receive these periodic payments for at least 5 years or until you turn 59 ½, whichever comes first, to avoid the penalty.
9. Death – If you die before retiring, the person who inherits your IRA can make withdrawals without owing the penalty.

Minimizing Taxes After Retirement

Once you turn 59 ½, you can start making retirement withdrawals from your IRA without fear of the 10 percent penalty, regardless of whether you are still working or not. Withdrawals on Roth IRAs are completely tax-free. But any withdrawals on a Traditional IRA will be taxed as income, not the lower capital gains rate.

In order to avoid getting pushed into a higher tax bracket due to income gains from Traditional IRA withdrawals, you may want to balance out those withdrawals with other IRA accounts during retirement. For example, if you split your savings between a Roth and Traditional IRA, you may want to take money out of both accounts every year to avoid a hefty tax hit.

Another common strategy involves spending the money in your Roth IRA and regular brokerage account while keeping your savings in the Traditional IRA, since that money will continue to grow while deferring taxes. But there is a catch. When you turn 70 ½, you must start making the Required Minimum Distributions – IRS-mandated withdrawals calculated by your account balance and life expectancy – from your Traditional IRA. If you don’t make these required withdrawals annually, the IRS will charge you a penalty of 50 percent of your calculated RMD.

Some people view their IRA account as an inheritance for heirs. If that’s the case, keep in mind that an inherited IRA retains its tax status. Both a Traditional and Roth IRA can be inherited, and their withdrawals will be subject to the same tax rules as the original account owner.

You worked hard to build your retirement savings so make sure that money doesn’t just go to the IRS. Keep reading to learn more about IRA strategies and Required Minimum Distributions.

How To Directly Invest In Real Estate Using An IRA

September 21, 2015 by IRA Services

Investing in real estate or a retirement account are two common – and smart – money strategies that can become even more advantageous when combined. By using the right type of IRA, you can invest in property as part of your retirement plan, allowing you to combine the investment benefits of real estate with the tax benefits of an IRA.

But there are IRS rules to be aware of when using this strategy and, if you run afoul of these, the penalties can be costly. Here are a few important steps and guidelines to keep in mind if you are investing in real estate using an IRA.

Setting Up a Self-Directed IRA

In order to buy real estate for your IRA, you need to set up a self-directed IRA with an investment company that allows such purchases. Self-directed IRAs are managed by custodians and offer a wider range of investment options compared to large brokerage firms, which typically disallow real estate investment. These large firms limit your investment options in order to keep their own expenses down.

Once you find the right company, setting up a self-directed IRA is a simple process. If you already have your money in a regular IRA, you can rollover those funds to a new self-directed IRA.

Buying the Right Property, From the Right Seller

While there are no rules on the type of real estate you can buy with an IRA, there are some strict rules about who you can buy the properties from. You are not allowed to transfer real estate that you currently own into your IRA. You also are not allowed to buy property from a list of “disqualified persons” determined by the IRS. This list includes family members and anyone else with whom you have an existing, personal relationship.

The IRS created this rule to prevent people from buying real estate at an artificially low price and taking unfair advantage of tax benefits when they later sell the property at market prices. The penalties for violating this rule can be steep – the IRS will force you to withdraw real estate out of your IRA portfolio, which would incur taxes and, possibly, a 10% penalty on the value of that withdrawal.

It’s also important to note that you need to put the property title in the name of your IRA, not your own name. Officially, your IRA owns the property, not you. Consult with your IRA custodian on the title when you make the purchase so that you can avoid problems down the road.

Financing Your Purchase

An all-cash purchase – meaning, in lieu of a mortgage, you pay off the entire property all at once – is probably the best way to buy real estate through your IRA. This approach can help you save on taxes and extra financing costs.

If that is not an option for you, it’s still possible to qualify for financing for an IRA investment purchase. But it is more difficult than securing financing for a regular, non-IRA real estate purchase because the lender can only use the actual piece of investment real estate as collateral. You are not allowed to back up an IRA real estate purchase loan with your personal assets. As a result, you’ll likely need to make a larger down payment and owe a higher interest rate on the loan.

Borrowing money can also lead to extra taxes on any rental income you will accrue through this property. The IRS charges Unrelated Business Income Tax (UBIT) when you borrow money to buy an income-producing property for your IRA. This tax applies to the share of the income equal to the amount you borrowed. For example, if you borrowed 50% of the price of the property, you would owe UBIT on up to 50% of your rental income.

Managing Your Investment

After you have made the purchase, you need to make sure you do not run afoul of IRS regulations when you manage the property. The IRS has very strict rules around IRA investment property management. You must pay for any expense that is related to your investment real estate using IRA funds. This includes any repairs, renovations, utility bills, property taxes, and more, so make sure you keep some extra cash in your IRA account to cover these expenses.

In addition, according to IRS rules, you are not allowed to even make repairs yourself to the property. You must hire someone for all repair and maintenance jobs using IRA funds. If you are caught breaking this rule, the IRS can force you to take a distribution.

You are also barred from living in or using your IRA investment real estate for your own personal use. For example, if you buy a beachfront property, you cannot vacation there. Once again, making this mistake can lead to a forced distribution.

Investing in real estate through your IRA takes some extra work but the tax benefits can also make this effort worthwhile.