Rules and Regulation

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.

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.

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.

Are You Making These Mistakes With Your Self-Directed IRA?

September 15, 2015 by IRA Services

The flexibility of a self-directed IRA can be a great thing. It gives you the opportunity to make investments that you might not be able to make through other retirement plans. But the ability to go after a broader set of investments could also land you in trouble with the IRS if you aren’t careful and stay up to date on the rules. And the ramifications could be serious – if the IRS voids your account because of non-compliance, you would be forced to withdraw all funds and pay income tax on the entire balance (plus a potential 10 percent penalty if you are younger than 59 ½).

Here are some common mistakes self-directed IRA investors make. Are you headed toward any of these pitfalls?

1. Personally guaranteeing debts in the IRA

This rule can be tricky and you might not even know you are breaking it. For example, if you buy investment real estate for your account and take out a mortgage on the property, you are not allowed to guarantee the mortgage with your personal assets.

Another rule-breaking scenario would be if you invest through your IRA with a broker that requires investors to make up shortfalls in their investment accounts with their personal assets. (Some brokers require this). Signing this type of agreement would be a violation under self-directed IRA rules and the IRS could void your account.

2. Making deals with “disqualified persons”

The IRS has strict rules around who you can and cannot make business dealings with under your IRA. “Disqualified persons” in this case includes family members, friends and other people with whom you have a prior personal relationship.

This rule is in place to stop people from making the kind of sweetheart deals that could abuse the tax advantages under your IRA. For example, someone could use an IRA to buy a piece of real estate at a steep discount from their parents and later sell it for a huge gain while avoiding taxes.

It’s best to avoid personal deals altogether – even if you make a deal with a friend or family member that is completely fair and true to market conditions, the IRS could still void your account.

3. Investing in non-approved assets

While the self-directed IRA allows a large list of alternative investments, there are still some investments that are excluded. This includes most collectibles like antiques, stamps, gems, artwork, and rugs.

Other categories carry specific exemptions. Only certain types of precious metals are allowed on the self-directed IRA investment list. Most, but not all gold coins are acceptable. For example, if you want to buy gold coins, you can buy American Eagle and Canadian Maple Leaf gold coins, but not the South African Krugerrand.

If the IRS catches you investing in a non-approved asset, you will be forced take out the asset as a distribution and you will owe taxes on the amount of the withdrawal.

4. Mishandling improvement and repairs to real estate

There are specific rules about how you pay for repairs or improvements to a piece of real estate in your self-directed IRA. Paying for these repairs out-of-pocket or out of your personal assets is not allowed, and the IRS could force you to withdraw the real estate from the IRA. Instead, you must hire someone else to handle this work for you using funds from your self-directed IRA.

Too many investors run into trouble simply because they don’t understand the rules for self-directed IRAs. Remember to do your research before making investments with your IRA.