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. 

Roth IRA vs. Traditional IRA

Using either a Traditional or Roth IRA can provide tremendous tax advantages for accumulating wealth and assets for retirement. But what are the differences between a Traditional and Roth IRA?

Think of an IRA as a tax advantaged investment container.  When you make a contribution, you are putting funds inside the IRA container.  Those funds can then be invested.  Any earnings, gains or interest are generally allowed to grow and be reinvested without paying taxes as long as they are inside the IRA container.  Visit our UBIT page to see when taxes on IRA earnings may be applicable.

When are taxes paid and am I required to withdraw funds at a certain point?

Again, think of an IRA as a tax advantaged investment container.  Depending on the type of account either the contributions (money put into the IRA) or distributions (money removed from the IRA) may be taxable.

Traditional IRA contributions are generally tax deductible.   The money put inside a Traditional IRA container can reduce your Taxable Income.  This is referred to as a ‘Pre-Tax’ contribution.    If your taxable income is $50,000, but you make a $3,000 Traditional IRA contribution, your taxable income is now lowered to $47,000.  This saves you from paying taxes on the contribution amount.

Withdrawals from Traditional IRAs are taxed at ordinary income rates.  Withdrawals made before the IRA holder turns 59 ½ may be subject to a 10% early withdrawal penalty in addition to income tax.  Once the IRA holder turns 70 ½, the IRS mandates withdrawals from the account.  These are called Required Minimum Distributions (RMD).  The actual amount of the Required Minimum Distribution can be found using the IRS RMD Worksheet.

Why use a Traditional IRA?  Traditional IRAs can help you reduce your taxable income in current years which will lower tax owed.  This is especially helpful if you are in a higher tax bracket.  You also benefit from not paying taxes on earnings or interest on the investments while inside the Traditional IRA.  You also have more control over when taxes are paid because you determine the timing and amount of distributions (up to age 70 ½).

Roth IRA contributions are not tax deductible. The money put into a Roth IRA container will not further reduce your taxable income.   This is referred to as an ‘After-Tax’ contribution.   If your taxable income is $50,000 and you make a $3,000 Roth IRA contribution, your taxable income is still $50,000.

Once funds are distributed (withdrawn) from the Roth IRA container they are tax FREE. Withdrawals made before the IRA holder turns 59 ½ may still be subject to a 10% early withdrawal penalty.  However, Roth IRAs are not subject to Required Minimum Distributions.

Why use a Roth IRA?  While Roth IRAs do not give you an immediate tax benefit, they are highly beneficial as the earnings and distributions are, generally speaking, free of any additional taxes. 

 

Additional Withdrawal Rules

Certain withdrawals from Traditional or Roth IRA accounts before age 59 ½ are exempt from the 10% early withdrawal penalty.  These include exceptions for first time homebuyers up to $10,000, disability, qualified education expenses, etc.  You can find the complete list HERE.  

Additionally, Roth IRA accounts must be open for 5 years before any earnings can be distributed.  Earnings taken before the 5 year rule is satisfied will be taxed at ordinary income rates.  The cost basis (your total contributions) is always eligible to be withdrawn without penalty.

Contribution Limits, Eligibility & Deductibility

For 2014 and 2015 a person can contribute up to 100% of their earned income up to $5,500.  You can contribute an extra $1,000 if you are over age 50 as a catch-up provision.   Make note that the contribution limit applies to both Traditional and Roth IRA contributions combined.  You may contribute to both accounts as long as the aggregate amount doesn’t exceed the limit.  Earned income is generally defined as income from wages, salaries, tips or other taxable employee pay.  It does not include interest or dividend income, retirement income, social security, unemployment, child support or alimony.

The deadline to open or contribute to an IRA is April 15th of the following tax year.

If you or a spouse are eligible for an employer sponsored retirement plan such as a 401(k), 457, SIMPLE IRA, etc.,  your ability to take a tax deduction on your Traditional IRA could be phased out depending on your income.  You may still be able to make your contribution; it would just be considered an after-tax contribution to your Traditional IRA.  The lower limits on phase outs represent the point where a deduction or contribution begins to decline; once the higher limit is reached, the deduction or contribution eligibility is eliminated completely.

A similar rule is in place regarding Roth IRA contributions.  If your income exceeds a certain amount, you could be phased out from even making a Roth IRA contribution.  This is not dependent on eligibility in an employer plan but is strictly based on income and tax filing status. It’s important to note that you may be able to convert pre-tax funds to Roth status regardless of contribution eligibility.

Self Directed IRA Contribution Tips

When navigating the world of retirement investing, one of the most important things to understand are the rules governing how you may fund your account. Overfunding your account can get you in trouble with the IRS and incur tax penalties. Underfunding your IRA can result in missed opportunities and overlooked tax advantages.

Individual Retirement Accounts may be funded via a transfer, rollover, conversion, or contribution. A contribution differs from a transfer or rollover in that it does not involve moving funds from one account into another. Instead, a contribution is a deposit made directly from an individual or their employer into a retirement account. Contributions are also not to be confused with conversions which involve converting funds from a Traditional, SEP, or SIMPLE IRA into a Roth IRA.

The IRS has set careful limits on the amount of funds that may be contributed to an IRA. These limits are based on the type of retirement account and your age. For individual accounts, Traditional and Roth IRAs, the contribution limits are generally smaller than employer accounts, SEP and SIMPLE IRAs. The 2014 contribution limits for Traditional and Roth IRAs is $5,500 with a possible $1,000 catch-up contribution for those age 50 and over. 2014 contribution limits for SEP IRAs is $53,000 and Simple IRAs is $12,000 with a possible $2,500 catch-up contribution for individuals over age 50. While the contribution limits for 2015 have not been published yet, the IRS does change these limits periodically. You can visit IRS.gov for the most accurate and up-to-date information on contribution limits.

These contribution limits apply to all IRAs, including those accounts which hold alternative assets or are self-directed. Remember that “Self-Directed IRA” is simply a moniker and not an IRS or legal designation. All IRS rules which apply to non-SDIRAs also apply to SDIRAs. It is also important to note that while it is possible for an individual to hold multiple IRAs, these contribution limits are per person, not per account.

Knowing and understanding how to fund your SDIRA can help you make the most of your tax-advantaged retirement accounts and help you avoid tax penalties. While contributions represent just one of the ways you can fund your account, they are an key part of your overall retirement plan.

How much control do American Pension Services account holders have?

IRA holders may have become aware of the events at American Pension Services, an IRA provider in Utah.  For the last several months, while legal proceedings have been underway, the accounts there have been “frozen”.   This has meant that American Pension Services account holders have not had the ability to move their IRAs to another provider.  Traditional and Roth IRAs, as well as HSAs, are typically completely portable and account holders can move all or part of their account at will.

Unfortunately, for American Pension Services account holders, this control has been temporarily suspended by the court.  The timetable is uncertain but the expectation is that they will eventually regain the ability to move their account.  Given the alleged malfeasance at American Pension Services, account holders may well be looking for a new IRA provider.

Here is a list of the top 5 due diligence questions to help choose a self directed IRA provider:

1.  How often do my account assets and cash get balanced?  A daily balancing of cash and assets makes the discovery of any anomalies more likely.  It can protect your account from fraud and mistakes.

2.  Who is the custodian and what is their expertise?  Not all custodians have the manpower and experience to properly service an IRA that contains alternative assets.  Due diligence on the custodian can be a key to keeping your retirement savings safe.   Keep in mind that with some IRA providers, like New Direction, administration and custody are handled by separate companies. Your account may get more oversight and attention than with multiple levels of oversight and experience than with single entity providers acting as both administrator and custodian.

3.  What kind of account access do I have?  Reporting transparency is a characteristic that is part of many types of due diligence investigations.  Fast and accurate account access such as an online client access system that is updated daily gives you a tool to help you monitor your IRA. 

4.  Can I get a complete disclosure of fees?  Not all IRA providers have the same business model, particularly when it comes to how they make money.  Comparisons are not often “apples to apples”; so it is critical to get a full disclosure and to check for small fees that can add up.  Try these follow-up questions:  Do I have to pay for statements?  Do I get charged for each check my IRA sends out to pay a bill for one of my assets?  How much do you charge when I take a distribution?

5.  My self directed IRA strategy is _________________, how would that work with your business model?  Check to make sure the provider you are considering handles the asset types that you already have or may want to get into.  A single provider for all asset types, publicly traded and “alternative”, may save you a lot of time and energy over the years.

Alternative Asset Annuity Strategy

An attractive feature of an annuity is the predictable, periodic return.  For some, a less attractive feature over the past several years has been that their annuity has been tied to the stock market.  By using a self directed IRA, investors can enjoy tax-deferred investment growth and achieve periodic returns similar to an annuity without having to worry about the stock market.

Both Traditional and Roth IRAs can purchase “alternative” or hard assets while maintaining the tax benefits associated with that account type.  Some alternative assets provide consistent, periodic returns that mimic an annuity but are not driven by publicly traded securities.  Consider the three most common IRA alternative investments that can produce returns with the consistency of an annuity: rental real estate, private lending, and private equity.

An IRA (Traditional or Roth) is its own legal and financial entity, and it can own physical real estate. distribution schedule as needed.*
  The IRA-owned property can be residential, commercial, or agricultural, and all of these types of real estate can produce rental income.  The rent goes into the IRA and can then be distributed to the account holder at their convenience.  Not only can this rental income produce income like an annuity but there are two additional benefits.  First, the IRA not only gets the rental returns but it still owns the asset itself, which may be appreciating even as it generates rent.  Second, because the account is controlled by the account holder, he or she can make adjustments to the

An IRA can also be a lender.  These loans can be secured by collateral or unsecured.  The account holder finds the borrower, vets them, and negotiates the terms.  If the terms of repayment are such that the borrower periodically makes principal and/or interest payments to the IRA, the IRA holder could set up a distribution schedule that mirrors the payments.  In this way, the loan payments would act very much like annuity payments.

An IRA can also invest in a private company.  Usually called Private Equity, Private Placement, or Private Stock, the returns produced by the privately owned company or fund that you choose may be deposited in the IRA periodically.  And again, the IRA holder could set up consistent distributions.

In fact, the flexibility offered by self directed IRAs allows for almost any asset type to make periodic distributions.  And with an IRA, you, the account holder, are, largely, in control of when and how much income you choose to take.   If you like the idea of having your retirement savings pay you with regularity like an annuity but do not want to be tied to the stock market, use your New Direction IRA to achieve your goal.

* Traditional IRA holders must take required minimum distributions (RMDs) after age 70.5.

Top 7 Benefits of a Truly Self-Directed Solo(k) Plan

What is an Solo(k) anyways?

The Solo(k) also known as Individual(k), Individual 401(k), Uni(k), and One-Participant(k) operates in essentially the same way that a 401(k) retirement plan offered by a large employer does. In fact, the official IRS designation for this type of account is a One-Participant 401(k) plan. The Solo(k) is different than a major employer plan only in that it’s strictly for companies without employees other than the owner (although spouses may be eligible).

The Solo(k) has many features not offered under IRA structure and this blog will give you a better idea of the advantages and how they can dramatically benefit you and your real estate investing goals.

Please take the time to share, comment, and ask questions after reading this condensed overview.

There are many experienced professionals on BiggerPockets that have Solo(k) plans themselves, and I hope that this blog becomes a great starting place for beginners through your addition of comments and dialog. Thanks for reading!

#1: Large Contribution Limits

A Solo(k) provides you the opportunity to defer substantially more income when compared to an ordinary Traditional or Roth IRA. In 2014, the contribution limits for a Traditional and Roth IRA are only $5,500 (if you are under 50 years old). The contribution limits for a Solo(k) in 2014 however are as much as $52,000 ($57,000 if you’re over 50). You can clearly see the difference that these annual contributions limits can have when attempting to grow a nest over your lifetime.

Solo(k) contributions work differently than IRA contributions. They are broken into two categories: elective employee deferrals and employer contributions. Here is the breakdown as it’s described on the IRS website:

• Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
• 2013 and 2014: $17,500, or $23,000* if age 50 or over; and
• Employer non-elective contributions up to
• 25% of compensation as defined by the plan, or
• for self-employed individuals, see discussion below

*Note that for those of age 50 or older, there is a $5,000 catch-up provision in addition to the elective deferrals.

Math Example: Nancy, age 48, earned $50,000 in W-2 wages from her C Corporation in 2014. She defers $17,500 in regular elective deferrals to the 401(k) plan. Her business contributes 25% of her compensation to the plan, $12,500. Total contributions to the plan for 2014 were $35,500. This is the maximum that can be contributed to the plan for Nancy for 2014.

Roth 401(k) Component

If making your employee deferrals to a post-tax (Roth) structure appeals to you, the Roth 401(k) component may be an attractive option for you. When adopting an Solo(k), you have the option to allow all or part of your elective employee deferrals to be made as a Roth, post-tax component. When compared to a Roth IRA, you can more than triple your annual contributions through an Individual(k).

#2: Tax-Deferred or Tax-Free Growth

One advantage to utilizing retirement account funds for real estate deals is receiving the benefit of tax-deferred growth. As plan funds are invested, they generally grow without taxes. When paying the full purchase price for real estate using IRA or 401(k) cash, there is no need to worry about depreciation or investment expenses because no taxes exist. Furthermore, when the plan sells the property at a later date, there are no concerns over capital gains or need for a 1031 exchange. The tax advantage that the plan enjoys can create a dramatic snowball effect of growth.

#3: Special Tax Treatment on UDFI (Unrelated Debt Financed Income)

An IRA or Solo(k) can seek out a non-recourse mortgage and increase the purchase power of the plan assets. For those of you that don’t know, a non-recourse mortgage does not have a personal guarantee, and only the property itself is held as collateral. Lenders will usually look for down payments between 30-40% depending on who your lender is.

Normally with an IRA, profits generated from debt-leveraged financing are subject to something called unrelated business income tax (UBIT). This special tax is the IRS’s way of leveling the playing field for tax-advantaged entities utilizing leverage and investing in ongoing business activities. Let’s look at a quick math example:

Assume I purchase a property with my IRA for $100,000 and finance 50% or $50,000. For simple math purposes, also assume that I generate net income of $10,000 after depreciation in year one. If my outstanding debt ratio is 50% then half ($5,000) of my net income is derived from non-IRA dollars. Therefore, I would have to file tax form 990-T for my IRA and calculate UBIT on the net profit of that 50% that is attributed to the debt leverage. This is a simplified explanation and other details go beyond this explanation but it serves as a good example. UDFI taxes follow the IRS tax rate schedule for Trusts and Estates.

So... How does this UBIT apply to 401k real estate investing?

UBIT associated with UDFI does not apply to 401(k)s. Self-employed real estate investors that have an Solo(k) can therefore benefit from some additional tax savings under the 401k structure when leveraging retirement dollars.

It’s important to note that the 401k structure is NOT exempt from UBIT when it comes to unrelated business taxable income (UBTI) derived from an operating business. Continuous fix-and-flips may constitute an operating business and may therefore be subject to UBIT as a result.

At this time, there are no IRS rulings that clarify whether a second, third or twentieth flip constitutes an operating business. It’s best that you consult an experienced ERISA attorney for advice.

#4: Fewer Investment Restrictions

Many brokerage houses offer Individual 401(k) plans for little to no cost. The pitfall of course is that your investment options are usually restricted to the offerings of the brokerage house; limiting you to traditional publicly traded securities. This means you’re unable to invest in real estate, private loans, private equity, and other allowable investments. Make sure to adopt plan documents that are written to give you the flexibility to invest in alternative assets.

If you already have an Solo(k) plan, check with your provider to learn about any investment limitations. You can always perform a ‘restatement’ of plan documents, which means you’ve decided to replace your existing 401k plan documents with new documents that allow you to invest in anything allowable by law.

#5: Ability to Borrow from Plan

Unlike an IRA, the 401k structure has language that allows plan participants to borrow against plan funds. The funds must be paid back to the plan and certain timelines are associated with each loan, based on the situation. There are also limitations to the amount you can borrow from the plan. In general, participants are able to borrow up to 50% of the plan balance or $50,000, whichever is less.

This option can offer you access to fast cash if you need it for your personal finances. Be aware, these funds will be deemed taxable if they aren’t repaid within the given time frame for your loan.

#6: Be your own Trustee with Checkbook Control

Possibly the most sought after feature of the Solo(k) is the power to self-trustee your own plan. Unlike the IRA, a 401K is a do-it-yourself dream come true for those that prefer to do all their own bookkeeping and plan administration. This option is a way to gain retirement plan flexibility.

Keep in mind that with power comes responsibility, and becoming the trustee for your own Solo(k) plan is not something to take lightly. There are many rules that must be followed and special reporting requirements also exist. It can be valuable to have professional tax and legal advisors available to answer questions as they come up.

#7: No-testing Advantage for Self-Employed

A self-employed business owner with no common-law employees can avoid having to perform regular nondiscrimination testing for the plan. Since the plan is only for an individual, the administrative burden and added cost is reduced.

The Best Self Directed IRA Account Access Portal

At New Direction IRA, we have launched another cutting edge technology feature for our account holders!

Historically, self-directed IRA providers have been a little behind the times in terms of adopting technological conveniences for their account holders.  This could be due to any number of factors, but the result is that in a world of depositing checks via a picture on a phone and eSignatures, SDIRA account holders were sometimes still filling out paper forms and submitting them to make a payment from their account.

Over the last two years, New Direction IRA has led the self-directed IRA industry in improving account technology.  Not only have we created myDirection which is a proprietary account access portal, but we have also introduced an entirely online application, implemented online transactions for precious metals, and given account holders the ability to pay IRA real estate expenses online and for FREE.

Our newest features are also free.  At NDIRA, if your account (IRA, HSA, or Individual 401(k)) owns rental real estate, your tenants can now pay their rent via eCheck.  This same technology also allows borrowers to make note payments to an IRA electronically.  It’s convenient and safe for the tenants or borrowers and efficient for the account holder.   When a payment is submitted through this secure system, the account holder receives an email notification that the payment was made and their myDirection account information is updated.

And this is not the end of the line of electronic improvements coming to New Direction IRA account holders.  Check this blog or our website for updates on more new account technologies.

Self-Directed IRAs Featured in Forbes' "365 Ways to Get Rich"

Most people don’t know that their retirement funds can be used to purchase “alternative” assets and still receive the tax benefits associated with their account.  We’ve learned as much in our ten years as administrators of self-directed IRAs (SDIRAs).

SDIRAs are popular because of their investment opportunities.

So, it was gratifying to see that SDIRAs were part of Forbes’ “365 Ways to Get Rich” article published this month. “Number 33” on the list encourages investors to put alternative assets in their IRA and the article even goes on to cite IRS code relating to SDIRAs. In this economic environment, where investors are exploring how to achieve real diversification for their portfolios, adjust to market conditions, or both, self directed IRAs are moving into mainstream consciousness.

Our role is growing as an administrator and custodian of IRAs, HSAs, 401(k)s, and Coverdell ESAs. It once seemed to be that all our energy needed to be devoted to educating account holders on the possibilities available to them. Now the focus is on the technology and client service needs of a rapidly increasing number of investors who want to utilize SDIRAs. 

Financial technology has exploded in the last several years, making transactions faster and account information more accessible and more up-to-date.  To some extent, SDIRA providers have lagged behind this curve, but New Direction IRA has taken the lead in rolling out innovative technology-based services so that our clients have the widest array of account capability as well as the most current account information available.

In addition, New Direction IRA has kept its longtime dedication to personal client service by providing each account with a client representative and making sure that clients have the phone and email contact information they need to get their questions answered promptly. 

As our industry comes out from behind a veil of misinformation and lack of publicity into the mainstream, it is incumbent upon us to deliver the service level that American investors have come to expect from their financial service providers.  There is a wave of interest and participation in the services that we provide at New Direction IRA—and that’s exciting!  Our existing account holders have been pioneers in IRA investing, and their success has drawn the attention of the financial world.  We meet their entrepreneurial spirit with ever improving service and technology to enable them to make the most of their tax advantaged accounts.

Top 5 alternative investments for Self-Directed IRAs

1) Real Estate IRA
Investing retirement money in real estate can take many forms – a rental apartment which pays your IRA monthly, a house which is held in an IRA until you decide to sell, even your dream home, which you can live in after you retire. This real estate can even be in a foreign country, which opens your options greatly.

2) Land
Raw land can be purchased and held until the time is right to sell or build, purchased and leased for farm land or oil or cell towers – the possibilities are limited by your imagination. As someone famous said, they’re not making any more.

3) Gold and other precious metals
Your IRA can purchase gold coins, gold bars, electronic shares of gold. Buy now, sell when the time is right, and you’ll never have to worry about or pay for storage.

4) Loan
Your IRA can provide loans for friends, businesses, or non-profit associations. If someone you know is paying 20% interest on a credit card, your IRA can loan them the money for 15%! As long as a person is not a direct lineal descendent (or yourself), your IRA can loan them money.

5)Private Stock
Find the next Microsoft, Apple or fill in your own successful business, and your IRA can buy some shares in them before they go public. Nanotechnology, biotechnology, or your next door neighbor’s fledgling cookie business, your IRA gets in before the world knows the true value of a start-up company.