IRA Investing: How Do I Find Alternative Assets?

Patricia McCrystal

August 17th, 2015

If you’ve decided to take the reigns of your retirement account by self-directing your IRA, you more than likely already have an alternative asset market in mind for your investments. However, if you’re ready to try your hand at a new market in which you have little knowledge or experience, it can be daunting to figure out how to shop for assets.

Below are some starting points to help you in your search for alternative assets for your IRA. You can always utilize your existing financial team, such as a CPA or financial planner, to receive advice about potential asset markets to pursue. Feel free to call New Direction IRA with any questions or for more information about your IRA’s investment options.

Precious Metals: Many investors who use their IRA funds to invest in precious metals are already seasoned coin/precious metals collectors. As such, prior experience in gold or silver can make investing your IRA account in precious metals a fairly familiar  process. You are free to use your IRA savings to purchase metals from any dealer that you may have a pre-existing relationship with. If you’re new to precious metals investing, you can shop online for dealers with the best prices. Because your IRA can only purchase bullion products, you may find it relatively easy to compare the over spot price for each dealer.

Real Estate: IRA account holders who already have experience investing in real estate can utilize their IRA funds to continue their investment ventures. You are free to use existing real estate professionals that you have used in the past to scope out new investment opportunities for your IRA. Like precious metals, you can shop online to buy real estate with your IRA.

Most real estate investors understand that you have to know people in the local market to find investing opportunities. There are typically real estate investor clubs in every big town; at which real estate professionals can provide you with information about local property for sale and can mentor you in the ways of savvy real estate investing. These real estate investor clubs are a low-cost or no-cost way to receive information for your IRA real estate investments. These clubs allow you to choose your role and level of involvement in your local real estate investing market.

Private Lending: Finding a private lending opportunity for your IRA is principally reliant on your personal knowledge of borrowers in the market for a loan. You can originate a loan for your IRA funds, or you can purchase an existing loan, usually at a discount. There are online markets for peer-to-peer lending, peer-to-business lending, and more. Some investors utilize a loan broker to partner their IRA money with a borrower.

You may find real estate borrowers through a real estate professional, or via online venues. You can also attend local real estate networking groups to scope out private real estate lending opportunities.

Private Equity: Private equity is the most individualized asset in which you can invest IRA funds. Finding private equity opportunities is largely dependent on your personal knowledge of promising new startup companies, or companies looking for capital to fund new products. You can take advantage of your connections and experience to identify auspicious private equity investments.

Although the asset types above are some of the most popular choices of our clients, they are far from exhaustive. Call New Direction toll-free today at 877-742-1270 to find out about the nearly endless list of investment choices you have with your self-directed IRA. Visit our website to access industry-best educational resources and learn more about the freedom and control granted with a self-directed IRA. Happy investing!

Freedom and Control in a Gold IRA

Patricia McCrystal

July 28, 2015

One of the championing benefits of a self-directed IRA is the freedom and power granted to clients to take the reigns of their retirement savings. A self-directed IRA allows clients to make investment choices that best serve their individual retirement goals and market expertise. A principal facet of this freedom is the ability to invest in alternative assets outside of the publicly traded securities market; including investing in a gold IRA or silver IRA.

When you invest in precious metals with a retirement account at New Direction, we take the freedom of a self-directed IRA a step further by allowing our clients to choose their own preferred qualified precious metals dealers. Many self-directed IRA administrators allow their clients to work with less than a handful of metals dealers and depositories. At New Direction, we’ve worked with more than 65 different dealers this year alone, all at the client’s direction. Additionally, clients who have preexisting relationships with dealers or depositories can request that New Direction work with those specific businesses to carry out transactions with their gold IRA.

New Direction clients can select between 15 depositories to store their precious metals investments; a number that keeps growing every year. The ability to shop a large selection of metals dealers and depositories allows our clients to choose a business that best suits their price range and service preferences for their gold IRA.

When metals dealers work with New Direction, they can access a specially designed portal that shows a list of their clients, a client’s progress within the transaction process, and a client’s transaction history. We can also tailor this portal to meet any dealer’s specific needs. This degree of specification benefits both dealers and New Direction clients alike, as it ensures thorough communication between the client, the IRA administrator, and the metals dealer.

An outstanding feature that sets New Direction apart is our in-house Precious Metals Asset Team (PMAT). This team is made up of gold IRA specialists who can guide our clients through the entire investment process and expertly answer questions regarding establishing, funding, and investing in precious metals IRAs. Available Monday through Friday, 8 am – 5 pm MST, this team ensures that clients, metals dealers, and depositories have a dedicated representative to contact about any questions or transaction requests. The PMAT team will also assist with gold IRA or silver IRA transfers between IRA accounts. To reach New Direction’s PMAT team, dial (877) 742-1270, ext.185.

Self-directed IRA account holders want flexibility and diversity in their retirement portfolios. New direction IRA offers both. Contact New Direction IRA today at 877-742-1270 (toll free), and take advantage of the freedom and control granted through a precious metals IRA with New Direction.

Prohibited Transactions Make Your IRA Vulnerable - Even to Creditors

Patricia McCrystal

July 27th, 2015

In a bankruptcy court ruling in Arkansas on May 25^th, 2015, a debtor was forced to forfeit his IRA’s tax-deferred status and give bankruptcy trustees access to the IRA account assets. This ruling marked an historic turn in legal proceedings for  IRA owners, as this was the first time a creditor successfully investigated the propriety of a debtor’s IRA transactions, and used evidence of a prohibited transaction to pierce the bankruptcy protection that IRA account assets typically enjoy.

Debtor Barry Kellerman and his wife Dana Kellerman created a partnership with Barry’s IRA account to purchase and develop land. The Kellermans owned 50% of the partnership, while Barry Kellerman’s IRA owned the other 50%. Instead of funding the purchase of the land with a proportionate split in cash between the Kellermans and the IRA account, Barry Kellerman directed his IRA to cover the entire purchase. The agreement required the Kellermans to match the amount funded by the IRA account after the land was sold at some future date.

An article on Wealth Management.com details the court ruling as follows:

“The Bankruptcy Court held that debtor Barry Kellerman and his wife Dana Kellerman used the income and assets of an IRA for their benefit, violating Internal Revenue Code Section 4975(c)(1)(D).  The court found that Barry alternatively dealt with the IRA income or assets as a fiduciary for his own interest, violating IRC Section 4975(c)(1)(E).  As a result, the IRA lost its tax-exempt status because of prohibited transactions engaged in by disqualified persons, and the Kellermans were unable to claim any tax-exempt interest” (June 1 2015).

What does this mean for my IRA?

The Kellerman court ruling is a tangible example of the consequences that can befall IRA account holders should  they fail to exercise due diligence with their self-directed IRA investment ventures. An IRA account administrator’s primary duty is to provide bookkeeping and custodial services for your investment decisions as the account holder. Some providers attempt to help clients identify potential prohibited transactions. However, an IRA provider cannot alert an account holder about a prohibited transaction if the IRA holder does not transparently communicate their investment intentions to their administrator.

Every self-directed IRA account provider works from the same set of IRS rules and codes; though these codes are not always clear. As such, IRA account holders may wish to call their provider or attorney and provide a detailed description of their investment ideas to make sure their proposed transactions are not prohibited. Before moving forward with investment decisions, it’s wise for self-directed IRA account holders to assess their own risk tolerance on possible prohibited transactions and risky investment choices.

Education about the rules and regulations of IRA account investments is a key aspect of making wise investment choices. New Direction IRA emphasizes an educational business model that empowers clients to confidently make knowledgeable assessments about potential investment opportunities. Call New Direction IRA today for more information about self-directed IRA investment parameters and proceedings.

Entrepreneurs and Self-Directed IRA Investors: A Dream Duo

Patricia McCrystal

July 14th, 2015

Every year, a higher number of investors decide to take the reigns of their IRA investments and rollover or convert their retirement funds into a self-directed IRA. The process is as simple as finding a self-directed IRA administrator that allows account holders to invest in alternative assets outside of the securities market. With a self-directed IRA, investors are granted nearly complete freedom and control over their IRA investments, as long as the assets fall within IRS guidelines (no life insurance or collectibles).

A self-directed IRA requires active oversight by the account holder, and therefore isn’t ideal for the passive or unengaged investor. But for the innovative entrepreneur, a self-directed IRA is an exciting opportunity to capitalize on individual market expertise and sniff out promising investment opportunities way ahead of the crowd. In this way, “entrepreneur” and “self-directed IRA investor” are nearly synonymous.

A self-directed IRA investor can use his or her own personal knowledge and market expertise to scope out investment opportunities, or team up with another entrepreneur who has insight about a promising investing venture in another field. The self-directed IRA account holder can use their IRA funds to either partner with another individual’s IRA account or another individual’s personal funds (as long as the partnering party is not a disqualified persons); or the IRA can bankroll an investment that the initial entrepreneur doesn’t have the funds to personally finance.

Successful entrepreneurs understand the importance of cultivating connections with market insiders who can provide tips about promising investment opportunities. If a business savvy friend knows about a restaurant in a great location that’s being sold by the owner, or if a mutual acquaintance’s solar energy enterprise is seeking private investors, a self-directed IRA investor can act as a critical connection to help other driven entrepreneurs realize their investment goals.

If you’re looking to open a business of your own, you can’t use your self-directed IRA funds to finance the venture, since you are disqualified from directly benefiting from the money in your IRA (until you’ve reached legal age of distribution for your account type). However, you can partner your personal funds with other another qualified person’s IRA account (or their personal funds) in order to financially support your personal entrepreneurial goals. Feel free to visit New Direction IRA.com to learn more about self-directed IRA investing, and as always, happy investing!

Which Individual Retirement Plan is Best for Me?

Patricia McCrystal
June 22, 2015

Here at New Direction IRA, one of the most frequently asked questions by prospective clients is which Individual Retirement Plan will suit them best. The fact of the matter is, there is no easy answer to this question. Our role at New Direction IRA is to be a trusted provider of administrative services for individual retirement plans and HSAs; we specialize in the bookkeeping and reporting for unique and alternative assets. As such, we do not provide investment advice or endorse any products. However, one of our primary functions is to provide educational services for our clients so they may be empowered to make educated decisions about which IRA they would like to self-direct.

Each retirement plan yields different benefits and involves different restrictions, and the equation for which arrangement is the most advantageous depends on many present and future factors in a client’s life. Below are highlights of the various features of each IRA to illustrate which arrangement could be the most beneficial to your individual investment goals.

Traditional IRA

A Traditional IRA may be opened by any individual who has earned income. With a Traditional IRA, cash is contributed "pre-tax", meaning the contribution is taken as a tax deduction from earned income for that tax year. This cash can then buys assets (stocks, real estate, gold, etc.) on a tax deferred basis. In general, assets can be bought, sold, or traded within the IRA without incurring capital gains tax, and without affecting the IRA holder's personal taxes. There are a few exceptions to this advantage, such as the occurrence of UBIT (Unrelated Business Income Tax), which can result when your self-directed IRA makes a debt-financed purchase, or when you operate a business with your IRA. 

The main incentive behind opening a Traditional IRA is the projection that you will be in a lower tax bracket when you retire, and that your initial contribution will have grown on a tax deferred basis. Most 401(k)s, 403(b)s, Thrift Savings plans, and 457s are within the same tax status as a Traditional IRA. The rollover from any of these accounts into a Traditional self-directed IRA incurs no penalty fees or taxes. When you reach 59.5 years of age, you can begin to withdraw from the account (take a distribution) without penalty. You then pay taxes on the amount withdrawn.

What Are The Benefits Of A Traditional IRA?

A Traditional IRA enables you to invest for retirement in an account that lets your investments compound each year without being hindered by taxes. By contributing to your Traditional IRA, you may lower your tax bracket.

By investing with a Traditional IRA, as opposed to outside of an IRA, you are able to invest more money because taxes have not been deducted. If you anticipate your tax rate at retirement to be lower than your current tax rate , your total tax burden may be less.
You can make contributions even if you are not eligible to make a Roth IRA contribution because your income is too high.

A Traditional IRA can be used to invest in a wide variety of assets including real estate, precious metals, public and private stock, notes, and more. Additionally, early distributions may be taken without penalties for unusual circumstances like a first home purchase, or certain medical expenses.

Roth IRA

The Roth IRA is a powerful way to save for retirement because earnings on your investments are free from federal income tax, providing certain conditions are met. With a Roth IRA, cash is contributed "post-tax", meaning the contribution is made with taxable earnings for that year. This cash then buys assets (stocks, real estate, gold, etc.) on a tax advantaged basis. In other words, assets can be bought, sold, or traded within the IRA without incurring capital gains tax, and without affecting the IRA holder's personal taxes.

Keep in mind, a Roth IRA holder may withdraw the principal amounts (i.e. your contributions) at any time without penalty or tax liability. Once you reach 59.5 years of age, you can begin to take a distribution of the earnings from the account without penalty and without taxes, as long as the account has been open for 5 years.

Unlike a Traditional IRA, contributions may be made into a Roth IRA even after you are 70½, and you are not required to take distributions at any age. The Roth IRA is popular with clients who anticipate a large return on their assets, or for clients who invest in real estate and may have taken a loss for that specific year.

What Are The Benefits Of A Roth IRA?

The qualified withdrawals (distributions) from a Roth IRA are tax free since you already paid taxes on the contributions. All earnings derived from your contributions can be distributed without incurring any tax. 

A Roth IRA enables you to invest for retirement in an account that allows your investments to compound each year without being chipped away by taxes. If you anticipate your tax rate at retirement to be the same or higher than your current tax rate , your total tax burden on distributions may be less.

A Roth IRA can be used to invest in a wide variety of assets including real estate, precious metals, public and private stock, notes, and more. Distributions up to the amount of your total contributions may be taken at any time without tax or penalties. With a Roth IRA, there are no Required Minimum Distributions (RMD).  

SEP IRA

Self employed? The Simplified Employee Pension (SEP) IRA is a popular employer plan for self-employed individuals. SEPs offer significantly higher contribution limits than individual plans such as Traditional and Roth IRAs. Any SEP IRA can acquire alternative assets, as long as the account is with a provider like New Direction IRA that services those assets. SEP IRAs accrue the same tax advantages as a Traditional IRA.
A SEP IRA account holder has the ability to fund a SEP IRA with annual contributions, transfers from other IRAs, and Employer Plan Rollovers. With a SEP IRA, you can choose the percentage of contribution for any given year (0-25% of earned income) for yourself and your staff. The only requirement is that the contribution percentage, in any year, must be the same for each employee.

NOTE: New Direction IRA provides SEP IRAs for any account holder that already has a SEP IRA, or self-employed persons who would like to establish a new SEP IRA.

Individual 401(K)

An Individual 401(k) plan is simply a 401(k) plan for companies with no employees. Individual 401(k) plans have the same options available to them as larger 401(k) plans. However, with an Individual 401(k), the employer, trustee, and participant are usually the same person.

For self-employed persons or companies with no qualifying employees, an Individual 401(k) plan allows the employer/participant high annual contribution limits as well as a high degree of flexibility and convenience when it comes to acquiring assets.

What Are The Benefits Of An Individual 401(K)?

A 401(k) plan provides employers flexibility and customization depending on the needs of the company and its employees.  It also provides higher contribution limits than individual accounts such as a Traditional IRA. 

There are tax benefits for the 401(k) participant and the employer. If you leave your employer, you are allowed to rollover a 401(k) into an IRA, tax and penalty free. Similarly, you are allowed an IRA to 401(k) rollover.

401(k)s can be used to invest in real estate, precious metals, private equity, publicly traded securities and more. You can make contributions to your 401(k) even if you are over 70.5, as long as you are still employed. 

Individual 401(K) Eligibility And Other Rules

To be eligible for an Individual 401(k), you must be the age required by the employer (or older), even if you are a full-time employee and receive other benefits. Eligibility rules change from company to company, as each employer is able to customize the 401(k) plan.
The Individual 401(k) is available for any sole proprietorship, partnership, limited liability corporation (LLC), or incorporated business, including sub-chapter "S" Corporation. The Individual 401(k) is used by owner-only and small businesses with no employees, or if the employees fall outside of certain guidelines. 

No savers are restricted to any just one of these individual retirement plans. You can manage any combination of these accounts to reap the full benefits of both pre-tax contributions and tax-free gains.

Any of these Individual Retirement Arrangements can be part of a generational wealth plan. Although NDIRA cannot provide investment or legal advice concerning which retirement plan will be the best fit for our clients, we hope you use this information to your advantage to make well-informed decisions about which IRA will be the best option for you. 

Case study: How not to partner with your IRA to purchase assets

A recent Wall Street Journal article outlined the case of two Colorado men whose self-directed IRA investments were deemed unlawful by the IRS after they coupled a personal line of credit with an LLC they had created with their IRAs to buy a business. The men were assessed $45,000 in penalties and approximately $225,000 in taxes each.

According to a U.S. Tax Court decision on May 9^th cited in the WSJ piece:

“[The] two men each used $309,000 of assets from their respective IRAs in August 2001 to buy two 50% shares in a corporation. The corporation then paid $1.1 million to buy Abbot Fire & Safety, a provider of fire alarms, sprinkler systems and related equipment. The purchase price consisted of $400,000 of the taxpayers' IRA assets, a bank loan and other funds, including a $200,000 promissory note personally guaranteed by the two men. The note was secured by their homes.”

The tax court ruled that the personally guaranteed notes constituted a prohibited transaction. The notes guaranteed by the men were considered an “indirect extension of credit,” thus forcing a termination of the IRAs when the men bought the business. Therefore, the IRS sought to collect taxes on the distribution of those IRA funds.

Because a statute of limitations disallowed the IRS from collecting taxes when the business began in 2001, the court ruled it could only seek taxes from when the business dissolved in 2006. Those capital gains taxes amounted to $224,000 and $243,000 for the respective men.

Although this incident was unfortunate for the two men, many self-directed investors have made prohibited transactions similar to this whether they knew what they were doing or not. This case highlights the need for educating self-directed investors and finding an SDIRA provider that will be an ally throughout the investment process.

Self-directing retirement funds into alternative assets can be a powerful investment tool. When investors fail to abide by the laws, it is not an affirmation that SDIRAs are high risk or require endless amounts of paperwork to be legal. The investors in this case did not take the time to learn critical information about their IRA investment structure.

At New Direction, we have thousands of SDIRA investors that effortlessly abide by rules. As a leading provider of SDIRAs, we focus on educating investors and creating a comprehensive and complete paper trail of their transactions so that they won’t commit prohibited transactions or other illegal activities.

Think of it this way: the things in which you invest your retirement funds may be high risk; that’s your prerogative. But the self-directed IRA itself is not high risk if you’re with the right company.

Why did I get a 1099-R? I didn't make a distribution.

This discussion is relevant to those of you who receieved a 1099-R without making a distribution and/or anyone who rolled over funds from a 401k to an IRA. This post is designed to help you learn about how 1099-R and 5498 forms.

There are several reasons why people receive 1099-Rs. You will receive a 1099-R if you:

-          Take a distribution from a retirement account.

-          Make a conversion of a Traditional IRA to a Roth IRA.

-          Devalue an asset to zero.

-          Roll funds over from a 401k to an IRA or other retirement plan.

-          Roll funds over from an IRA to an HSA.

Depending on the reason you receive a 1099-R, you may or may not have tax consequences (see the discussion of the 5498 form below), but it is still good to understand the form and why you received it.

If you did one of the first two items on the above list, your reported income will increase by the amount on the 1099-R form. If your asset was devalued to zero, you essentially are paying tax on a distribution that has zero value. Tax on something worth nothing is also equal to nothing.

If you received the 1099-R form for one of the last 2 reasons listed above, another reporting form becomes relevant, form 5498 which is also filed with the IRS by New Direction IRA as part of our annual IRS reporting. The 5498 will reflect the results of any rollovers you made to accounts held by us.

For example, if you rolled funds from an IRA to an HSA, the 5498 will reflect that the amount reported on the 1099-R was rolled over into an HSA and not received by you personally (the IRS only allows that once in your lifetime). The same is true if you rolled funds over to an IRA from a 401k plan. The net result is that the 5498 will indicate that the amount reported on the 1099-R did not result in increased income for the current tax year.

Your first statement of the year serves as your substitute form 5498. You can reference this form for your records. As long as the amounts on the 1099-R match the amount listed as the rollover which funded your account on your statement from us, the net resulting tax is zero. Keep your statement (substitute 5498) and the 1099-R form with your tax files for documentation.