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.

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.

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.