Self-directed IRA

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.

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.