Roth 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.

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.

News & Ideas – July 2015

July 6, 2015 by IRA Services

GO PAPERLESS TODAY

As announced at the beginning of this year, we have begun charging a $5.00 per paper statement fee each quarter. To avoid this cost, you may elect to download your statements from our website. To elect to go paperless, 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 whether you have internet access or should you require any assistance, send an email to info@iraservices.com or call Customer Service at (800) 248-8447. If you currently don’t have an online account and wish to establish one, submit an Internet Access Request form that is available on our website www.iraservicestrust.com under the Forms & Fees tab.

CONSIDER THE BENEFITS OF A ROTH IRA

A Roth IRA is a tax-free retirement savings account that can be funded with after-tax dollars. Funds deposited continue to grow tax-free and can be withdrawn with no penalty. Establishing a Roth IRA now or converting some of your Traditional IRA may save you money in taxes, especially over longer periods, growing yourself a bigger nest egg.

QUALIFIED DISTRIBUTIONS ARE TAX-FREE

Funds in a Roth IRA that have been held for at least 5 years can be distributed tax free if you are over the age of 59 1⁄2. 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 70 1⁄2, so you are free to maintain the balance of funds in your Roth IRA even after the age 70 1⁄2 milestone at which Traditional IRAs must begin.

Converting moneys from Traditional IRA to Roth IRA will reduce the amount remaining in Traditional IRAs that are subject to the Required Minimum Distributions (RMD).

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 59 1⁄2, 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 701⁄2, as long as 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 that meets the criteria for qualified distributions, may make the Roth IRA their own, tax-free. Not only that, they can even make new Contributions to it going forward, as long as they have earned income. A non-spouse beneficiary (or a spouse who is not 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 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.

THINKING OF YOUR LEGACY (CHILDREN AND GRAND-CHILDREN)?

For a parent of a child who has earned income, a Custodial Roth IRA can be a great way to teach the value of saving and investing. Besides getting a head start on saving and investing, the child can learn and see how a small investment made today, especially when repeated periodically, can grow into a large pile of funds over time. Down the road, the child could tap into it for qualified higher education expenses, and similarly, they could use up to $10,000 towards their first home purchase, without tax or penalty, in either case.

PAPERLESS NOTIFICATIONS FOR PROPERTY TAX AND EXPENSE PAYMENTS

As of May, 2015, if you are holding real estate in your account, we are now emailing our Property Tax Payment Request form, along with any property tax bills that we receive. This form can simply be completed, then faxed or e-mailed back to us. You may instruct us to send the check with the original tax document or to send it directly to the tax authority. We ask that requests be submitted as promptly as possible to allow us to make timely processing of your payments.

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 also attach the Expense Payment Request form for your convenience. Once we receive your instructions indicated on that form, we will forward the payment to the authorized provider.

Also, we suggest clients consider arranging with their providers to have bills sent directly to them (at their residence or primary address), which will provide more time for receipt and processing of payment requests. Please note: if you require the original document to be sent to you, a $5.00 forwarding fee will apply, charged to your account.

Always remember, however, that 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.iraservicestrust.com under the Forms & Fees tab.

A NEW PRECIOUS METALS STORAGE FACILITY – ON THE WEST COAST

We have approved the use of a second precious metals storage facility. Located in San Diego, California, BlueVault provides segregated storage for gold and silver bullion only. For more information, visit their website at www.bluevaultsecure.com or call 619-342-8090.

As always, our original precious metals storage facility, Delaware Depository Services Company, continues to provide storage for all precious metals (gold, silver, platinum and palladium).

A WORD ABOUT RESPONSIBILITIES

As a self-directed IRA account holder, you have a number of responsibilities, which include:

Performing due diligence on your investment(s)
Understanding the risks related to your investment(s)
Understanding Prohibited Transaction rules and avoiding them
Ensuring that valuations are provided to us for all assets on at least an annual basis
Understanding our fees and minimum balance requirement.

Please read our Fee Schedule and Financial Disclosure.

IRA Services Trust Company does not assume responsibility for any investment decision. Therefore, it is advisable to consult suitable professionals (accountants, tax or financial advisors, or attorneys) before making your investment decisions.