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.

Healthcare Subsidies: Do You Qualify?

As the Affordable Care Act takes hold and the deadline to sign up for government healthcare this year has passed, many Americans still have questions about how they should manage their health insurance. One particular area of mystery is government subsidies. Who qualifies? How do I apply? How much will I get?

Here, I’ve compiled some handy tools and information to get you started. If you have questions, feel free to call us at New Direction IRA or visit www.ndira.com.

The first thing to consider when figuring out government subsidies and tax credits is your family size. According to healthcare.gov:

If your income falls within the following ranges you'll generally qualify for a premium tax credit. The lower your income is within these ranges, the bigger your credit.

        $11,490 to $45,960 for individuals
        $15,510 to $62,040 for a family of 2
        $19,530 to $78,120 for a family of 3
        $23,550 to $94,200 for a family of 4
        $27,570 to $110,280 for a family of 5
        $31,590 to $126,360 for a family of 6
        $35,610 to $142,440 for a family of 7
        $39,630 to $158,520 for a family of 8

Keep in mind that if your income falls below that level, you may qualify for state Medicaid.

The second thing to consider is what your employer offers. Employers with more than 50 employees must offer reasonable health insurance to their employees—and if that plan meets minimum requirements, you will not be eligible for subsidies.

Lastly, it’s helpful to calculate any subsidies you may be eligible for. To find out if you are eligible for subsidies, use this subsidy calculator at http://kff.org/interactive/subsidy-calculator/. You’ll be able to input your income, family size and employer offerings to determine what you qualify for.

Subscribe to this blog to get more updates on healthcare, insurance and how you can use an Health Savings Account (HSA) to save for the future and lower your medical bills.

What is a Non-Recourse IRA loan?

Leveraging is a valuable tool to increase the buying power of an IRA. Leveraging means borrowing funds to increase purchase power and acquire a property that would otherwise be unaffordable. Surprisingly, many people aren't aware that their IRA or 401k funds can be leveraged and utilized as a down payment for a real estate IRA investment.

In order to use leverage, a non-recourse loan is required. The IRS restricts an IRA holder from personally guaranteeing the account or its assets. Consequently, lenders usually offer borrowers non-recourse loans with slightly different terms and loan-to-value requirements.

Key concepts for non-recourse loans

-    An IRA is its own legal entity, separate from the IRA holder’s personal finances.
-    Loan documents must be titled in the name of the IRA (i.e. NDIRA, Inc. FBO Client Name, IRA).
-    The personal finances of the IRA holder or other disqualified person can’t guarantee the loan.
-    The lender must be a non-disqualified person or entity.
-    Unrelated Business Income Tax (UBIT) on profits derived from the debt-leveraged percentage may be incurred by the IRA.
-    Terms of the loan are determined by the IRA holder and the lender.

The lender and non-recourse loans

The non-recourse lender determines the criteria that they wish to use to qualify an IRA (borrower) and the terms that they are willing to offer that IRA. It is common for the terms of a non-recourse loan to an IRA to be different from the terms that a lender would offer to an individual whose personal assets are available in the case of default. For example, non-recourse lenders may require 30 to 40 percent down or more.

The non-recourse lender may offer a percentage rate that is higher than they might offer for a personally secured loan. The IRS does not dictate to the lender which IRAs qualify for a loan, nor do they prescribe any terms of the loan except the concept noted above that disqualified persons cannot guarantee the loan.

The IRA provider and non-recourse loans

The IRA provider does not negotiate the loan for the IRA. It is also not the role of the provider to evaluate or approve the loan. Even though the loan is negotiated between the lender and the IRA holder, all legal documents associated with the loan are signed by the IRA provider, not the IRA holder.