The main idea behind setting up an IRA or a 401K account is to safeguard your life after your retirement. So, automatically borrowing from this account ahead of time isn’t the most ideal way to go. However, sometimes you can be faced with situations where you need urgent cash on a short-term basis and borrowing from your IRA funds may be the best option at hand. In such cases, while you do have the option to borrow money from your retirement account, you must ensure you are fully aware of all the terms and conditions as well as the associated risks and penalties. Here are a few dos and don’ts you need to make note of before making the decision to borrow against your retirement funds:
Borrowing from Your IRA within the 60-day Rollover Period
If you are faced with an emergency and absolutely have to borrow money from your IRA funds, you can do so within the 60-day rollover period to avoid any additional penalties, while keeping the following pointers in mind.
Once you withdraw a sum of money from your IRA account, you must place the same amount back within the 60-day window as required by federal law.
Don’t miss the deadline because if you do, the transaction will be viewed as a distribution of cash and you will have to pay income tax on it. In addition, you might also have to pay an early withdrawal penalty if you are below the permissible age limit, i.e., 59½ years old.
Don’t pay back any amount lesser than what you withdrew either. This can also call for a penalty.
If you have previously rolled over money from your IRA, you will have to wait for at least 12 months before you can rollover money from the same IRA.
Exceptions to the 60-day Payback Period
While it is imperative that you pay back any amount that was withdrawn within 60 days, the IRS can waive the 60-day rule in case of medical or personal emergencies like unforeseen health expenses, medical insurance, educational expenses or due to physical disability. Pro Tip – Always consider looking into whether the reason you need to withdraw money from your IRA account can be accommodated under the penalty-free rule.
The IRS also allows you to withdraw up to $10,000 as a penalty-free withdrawal if it is being used to purchase your first home.
Borrowing from Your Roth IRA within the 60-day Rollover Period
Just like a regular IRA or a 401K, you cannot withdraw money from your Roth IRA penalty-free either, unless it is for a short amount of time and you have a valid reason to do so. While the IRS allows withdrawals from your Roth IRA for certain situations, do bear in mind that the IRS treats a Roth IRA withdrawal made more than five years after the first tax year in which you made a contribution as a qualified distribution. It is s not penalized if you meet one of the following conditions:
Withdrawing up to $10,000 to purchase your first home
Withdrawing money to pay for qualified education expenses.
Withdrawal to pay for unforeseen medical expenses or if you become disabled
Withdrawal to pay for non-reimbursed medical expenses or health insurance if you are unemployed
Withdrawal upon reaching the specified age limit, i.e., 59½ years old.
Figure out how much you can borrow
In case of your workplace retirement plans, the government usually sets a limit on how much you can borrow. However, generally you are only allowed to borrow an amount that is either less than or equal to 50% of the total amount deposited in your 401K with an upper limit of $50,000.
Determine how much interest you have to pay
The interest payable on your 401K loan will be determined by your employer and must also meet the IRS requirements. It is important to note that in this case since you will be loaning the money to yourself, you will also be paying the interest to yourself.
Find out the repayment period and method
Your 401K allows you to repay the loan within five years, but you can repay it in advance if you have the necessary funds. If you dip into your 401K funds to buy your first-home, your repayment period can get extended, based on your employers decision.As for the repayment methods, employers usually make regular deductions from your paycheck (after taxes unlike original contributions.)
If you are looking for more information on gaining checkbook control of your IRA, call us at (866) 639-0066 to learn how you can leverage your self-directed IRA to gain financial freedom!
Investing in the stock market can be a risky proposition because of the market’s potential to fluctuate taking the investors on a roller coaster ride. However, if you can pull off the risk, you can earn more than you had bargained for. If you are not much of a risk taker, investing in bonds or buying annuities would be a consideration.
During our investing lives, most of us try to achieve the highest returns possible with the level of risk we can tolerate. Most of our investing decisions are made in an attempt to accumulate a nest egg big enough to support us in retirement.
Once we reach retirement, we are apprehensive about investing in stocks. Our goal then is not to worry about growing savings but ensuring whether the accumulated fund is good to last for the next 30 years or so. So, the question arises: Should we invest in retirement stocks? If yes, then how much risk is too much?
Whether you should own stocks or not depends on these 3 criteria:
Can you take the risk?
First, you will need to calculate the minimum return your investments need to earn for you to ensure that you sustain your lifestyle goals in retirement. If you are fine with no cash in your account when you die, and your saved amount is enough to meet your expenses for the next 30 years you should not take the risk. On the other hand, if you are left with extra funds after securing your lifestyle goals for the next 30 years, you can afford to take the risk by investing in stocks.
Can you use risk as your holistic plan?
Another approach you can employ is investing in laddered CDs or bonds that matures each year for the amount you need to meet your lifestyle goals for the next 20 years. The remaining fund can be invested in stocks. During the 20-year period, if your stocks do well, you would have reasonable profit that could ensure additional years of cash flow.
Do you have an action plan if the risk materializes?
If your stocks don’t do well, you need to understand the consequences and have an action plan ready. There are 2 things to keep in mind here:
Do not own stocks if you do not have the flexibility to keep them when the market is down.
If your stocks aren’t doing well for a prolonged time, you may have to think of cutting down on your expenses.
The good and the bad of having stocks as part of your retirement portfolio
All that is Good
Stocks are good retirement investments that help your investment portfolio and retirement income withstand inflation.
Stocks give you higher returns and thus higher income and the chance to live a better and secured retired life.
All that is Bad
The stock market is volatile. If your stock delivers lower returns, you may have to spend less than what you had in mind.
It causes emotional stress because of constant anxiety about fluctuating stock prices. If you are not careful enough, you may end up selling at the wrong time and thus lose out on the money which could be used to live well during your retirement.
Bitcoin and other digital currencies seem to have become all the rage as an investment option these days. In addition to growing at an incredible rate over the last few years, the cryptocurrency has also become widely accepted in many areas, which only helps to make it more popular.
However, there are a few reasons why Bitcoin shouldn’t play a significant role in your retirement planning:
Potential Growth Isn’t Actual Growth – Many financial experts believe that the past and current growth of cryptocurrency is not sustainable over the long term. Treat these as you would any speculative investment, instead of looking at potential value alone. Like other speculative investments, it’s equally possible for the value to rise tremendously or drop to a fraction of the price at which you bought it.
High Volatility Makes for High Risk – Bitcoin did extremely well in 2016 and 2017, but the sudden drop in prices at the end of 2017 left many regretting their decision to invest in it. At a time when the digital currency would double in value within a week, a number of small investors decided to jump on the bandwagon and put their savings at risk. Buying Bitcoin at a high price meant heavy losses when prices fell.
Constant Fluctuations Are a Gamble – Most Bitcoin success stories came from investors who bought the cryptocurrency when it cost a few hundred dollars, or sold it when the process was its peak. There’s no way to predict when prices will rise or fall, so investing in digital currency is a lot like buying a lottery ticket. There’s little harm in spending ‘spare change’ on it, but avoid putting large sums at risk.
You Need Steady Gains for Retirement – Cryptocurrency has no guaranteed rate of return. Yes, it might make you a millionaire, but it might also leave you broke, especially if you put all your money in it. It’s a good option for short-term speculation, but only as a small percentage of a diversified portfolio. For retirement income, you need smart long-term investments that offer steady, if slow, growth.
Buy When You’re Financially Ready – If you’re considering Bitcoin or other speculative investments, you need to offset the risk by making sure your finances are in control. Ideally, you should invest in cryptocurrency when you’re free of debt, have good cash flow and a decent emergency fund, and have already set up a source of income for college, retirement and other financial goals.
Self directed IRAs offer many benefits, such as access to a wider range of investing options and greater control over asset allocation. By moving your existing account to one of these plans, you can maximize the growth of your retirement funds by selecting investments that offer the highest tax efficiency and returns.
You can transfer or rollover funds to a self directed IRA from another retirement account in specific situations:
401k or 403b Account with a Former Employer
Employer-sponsored 401k or 403b plans offer significant tax benefits, and have higher contribution limits than IRAs. Max out these plans to take advantage of matching contributions while working, and rollover to a self directed IRA with checkbook control after you leave the job.To avoid taxes and early withdrawal penalties, make sure the withdrawal is designated as a rollover and choose the right IRA type. Rollover your 403b or traditional 401k plan to a self-directed traditional IRA, and pick a self directed Roth IRA for an existing Roth 401k plan.
Traditional IRA with a Brokerage Firm/Bank
If you are interested in using self directed IRA accounts, you can perform a direct or indirect rollover with a traditional IRA. For a direct rollover, funds are directly transferred or a check is made out from your existing plan to the new IRA.In case of an indirect or 60-day rollover, funds from your existing plan are distributed to you, and you need to deposit them into your self directed IRA within 60 days. A percentage of the amount may be withheld as tax, which you can recover while filing tax returns. However, you need to add this amount while making the deposit.
Roth IRA with a Brokerage Firm/Bank
Existing Roth IRA plans can be moved to self directed Roth IRAs the same way as a traditional IRA, and will not incur taxes and penalties if they’re handled correctly.To ensure that these transactions remain tax-free and penalty-free, opt for a direct rollover or transfer from one account to the other. This way, you are not directly receiving the assets from your existing retirement account, so it will not count as an early withdrawal.
If you have an inherited an IRA from a spouse, you can treat the account as your own or roll funds over to your self directed retirement account.With non-spouse IRAs, you have two options. You could take full distribution of the account, paying income tax on the funds, or have the plan retitled as an ‘inherited IRA’. For retirement accounts inherited from anyone other than a spouse, you can rollover to a self directed IRA only if the inherited IRA has been characterized correctly.
The immediate priority for new parents is their bundle of joy and the arrival of this new family member often shifts the focus to hospital paperwork, birth certificate and SSN applications followed by making provisions for college funds and a comfortable future. While making provisions for your child’s needs is important, planning for your own future should also be a priority. With compounding money stresses, most new parents struggle to strike a balance between financial planning for children and retirement planning.
This is because most new parents are unaware of the dire consequences of failing to create a retirement reserve. If you want to maintain your standard of living even after retirement, retirement planning is important. It will not only ensure a steady flow of income post retirement but also keep your medical expenses from exhausting your lifetime of savings. You won’t ever have to liquidate your assets even if you happen to live longer and the inflation rates rise beyond expectations. The earlier you start the bigger corpus you can build and enjoy greater returns during the golden years of your life.
Where to Invest Your Money for Maximum Returns
Make the Most of Your 401(k) for Tax Advantages
If your employer is offering a 401(k) savings plan, use it to your advantage. These accounts allow your retirement reserve to grow tax-free and you get numerous advantages ranging from low-cost index fund options and tax credits to matching contributions and a Roth without limits!
So contribute to match your employer and enjoy the free money. Designate at least 5% of your paycheck if your employer is matching contributions up to 5% and keep adjusting your contributions as the limits are updated every year.
Open an IRA to Save More
If you don’t have access to a 401(k) plan or you want to boost your retirement savings in addition to your employer-sponsored 401(k) plan, setting up an IRA makes perfect sense. You have two options here: traditional IRA and Roth IRA. While a traditional IRA uses pretax contributions, a Roth IRA allows your retirement nest egg to grow tax-free.
Retirement may seem a long way off for new parents but your baby’s first few years will pass away in a flash and you will be throwing a retirement bash before you even know it. So do your best now to keep growing your nest egg even as you continue to invest in your child’s future.
Watch Out – Most young parents struggle to pay off student loans and credit card debts and this makes it very difficult to save for retirement. Pay off your credit card bills and repay all the debts with high-interest rates so you can save for your future.
Use Your Retirement Savings to Pay for Education Expenses
New parents prioritize the needs of their children above retirement planning and this can be a very expensive mistake forcing them to modify their lifestyle during retirement or even postponing their retirement in dire circumstances. It is important to balance financial priorities so you don’t lose track of your own future while investing in the future of your child. The best way to strike a balance between the two is tapping your retirement reserve to cover your child’s college expenses.
With a self-directed IRA you don’t even need to pay a 10% penalty as long as the educational expenses meet specific requirements. With a self-directed IRA new parents have many investment options that can be used for funding their child’s education, investing in real estate, or making loans. Just knowing the right alternatives when it comes to retirement planning can not only secure your future but also the future of your family and loved ones.
Most people assume or believe that IRA investments are limited to stock and bonds but that’s not true. IRAs can be used to invest in a wide variety of investments including real estate, mortgages, private placements, limited partnerships, private lending and many other types of investments. So how can you use an IRA for private lending and enhance your returns? There’s not much you need to do – simply set up a self-directed IRA, vest the note for private lending, sign custodian agreements to gain checkbook-control, close the transaction and coordinate with the loan servicer to send payments.
Making Private Loans with an IRA
Private lending using an IRA can be done by purchasing a secured or unsecured promissory note, mortgages, or deeds of trusts. A small lender who makes a loan and needs to recover the money lets an investor use liquid assets or cash in a self-directed IRA to purchase the promissory notes along with payments. In such a situation the lender is lenient and often willing to sell the note for less so the IRA holder receives both the interest and a certain amount of principal as well.
One more lucrative option to lend money to an organization using a promissory note is with collateral where the collateral is the company’s stock. The risk with this secured note is that the value of the collateral is directly impacted by the success or the failure of the company that has issued the note.
Other investment options for private lending include:
Bridging loans to companies that seek debt finance
Residential and commercial mortgages
Equity participation loans
Microloans for small businesses
Your self-directed IRA also lets you set your own origination fees and rate of return while letting you turn your retirement nest egg into a bank. Marketplace lending is another great way to do private lending using a self-directed IRA.
The Upsides of Using a Self-Directed IRA as a Lending Institution
Improves the potential of your retirement reserve
All the gains are tax-free
The returns are excellent
The potential for future profits is maximum
When loaning your retirement funds for a mortgage, you get to secure the loan using the same property so even if the mortgage defaults, you get possession of the property which can then be sold or given on lease. Additionally, all your gains are completely tax-free if you are leveraging a self-directed IRA. However, before using a self-directed IRA for private lending be sure to consult a financial advisor and ensure the investment gives you excellent returns or simply call a self-directed retirement expert at (866)639-0066 and take checkbook control of your IRA.
IRAs or Individual Retirement Accounts are some of the most popular personal finance solutions for retirement planning, since they offer significant tax advantages as well as various investment options. An IRA is not an investment in itself, but an account where various investments are held.
However, it’s important to remember that certain types of investments cannot be held within these accounts and will be treated as withdrawals if you try to do so. This involves not only being taxed on the investment, but also a 10% early withdrawal penalty if you’re under 59.5 years of age!
Here are 8 basic dos and don’ts of IRA investments that you should keep in mind while planning for retirement:
1. DO: Common Investments – Mutual funds, including equity, bond and balanced funds, are the most common type of IRA investments and a good place to start. Other popular options include publicly traded stocks, fixed and variable annuities, money market funds, bonds, treasury instruments and cash.
2. DO: Real Estate Investments –IRA contributions can be used for making down payments while buying a home as a first-time buyer. You can withdraw up to $10,000 tax-free, if the funds have been in the IRA for at least 5 years. You cannot use IRA earnings, which would be treated as taxable distributions and subject to early withdrawal penalties.
3. DON’T: Prohibited Investments – Tangible personal property deemed as collectibles by the IRS, such as art, rugs, gems, stamps, fine wines or other alcoholic beverages, antiques and most precious metals are not permitted as IRA investments. The IRS allows some exceptions for coins made of precious metals.
4. DON’T: Life Insurance – You cannot buy life insurance policies as IRA investments, but you can set up your IRA account through a life insurance company to hold an annuity that offers life insurance benefits. As the IRA owner, this annuity must be in your name and proceeds from it can only be paid to you or your beneficiaries.
5. DON’T: Prohibited Transactions – You cannot use an IRA for personal financial gains beyond the tax benefits you already enjoy. The IRS prohibits self-dealing, i.e. Engaging in transactions that involve the IRA owner and parties in interest such as members of their family, corporations where they hold controlling interest, etc.
6. DON’T: Prohibited Financing – If you’re using any kind of debt to finance IRA investments, you will get in trouble. The accounts are designed to help with planning for retirement, not making quick profits, so you cannot use margin accounts, rental income from mortgaged real estate, or securities purchased with loans.
7. DON’T: Master Limited Partnerships – While there’s no prohibition, you should avoid buying MLPs or Master Limited Partnerships, such as pipeline or real estate partnerships with your IRA. Most people consider these the same as corporate stock, since they’re traded on the stock exchange. However, the taxation rules are different.
Whether you have a self directed IRA or your account is handled by a brokerage firm, you enjoy a certain amount of freedom over where and how you invest your IRA money. The right decisions will help you grow your retirement savings while reducing your tax bill.
As a couple, a smart retirement planning strategy can help you enjoy a comfortable and happy life when you’re older. However, you need to sit down and figure out the basics about each other’s financial or retirement goals, annual income and savings. Knowing where you stand financially can help you decide if or when you can afford to retire.
If you’re both working, the first step is to get the full employers match on a 401k. Based on your income and how much you can afford to max out your retirement accounts, the income tax deductions and matching employer contributions can help you boost your retirement savings tremendously.
If one spouse does not work, a spousal IRA can help the working spouse make contributions in the name of the non-working one. Remember, the ability to claim tax deductions is limited if you have a 401k as well as an IRA. If you both have IRAs, you can name each other as a beneficiary of the account.
Other basic tips to follow while planning for retirement:
1. Diversify Investments – When it comes to personal finance and investments, spouses often disagree. Retirement planning can be challenging in this case, but keep in view the family as a whole. Look for IRA investments that are low-risk and offer long-term gains, but diversify your portfolio to help you meet short-term goals as well.
2. Make Collective Savings – Both of you are individually accountable for your own retirement, but just as you decide on the financial aspects of your lives together right now, you should also save for retirement together. If your partner is not enrolled in a 401K, save more in your own plan to help you meet mutual retirement goals.
3. Avoid Retiring Together – Retiring together isn’t wise, since you put double the burden on your lifestyle and the change becomes too extreme. Try on partial retirement by working fewer hours at first. While ironing out the kinks, you will better understand how to utilize your free time before taking on retirement!
4. Review Beneficiaries – Even after choosing a beneficiary while opening a 401k, you need to update it after major life changes like marriage, the birth of your children, divorce or death. Contact your financial planner, IRA custodian or HR representative handling your company’s 401k plan to modify beneficiaries as needed.
5. Discuss Retirement Goals – Spouses usually have different ideas about their lifestyle after retirement. It’s healthy to have varying interests and hobbies, but discuss these so retirement planning becomes hassle-free and you both get what want. In case either of you has a business plan or wants to travel after retirement, plan for it now.
6. Budget Expenses – If you plan on moving or modifying your home, how this would affect your retirement lifestyle and budget? Will it make your life better in old age? Figure out your living situation, how much time you expect to spend with children or grandchildren, funding college expenses when you near retirement, and other questions now.
7. Educate Yourself – Learn everything you can about retirement plans, to understand which kind will best suit your needs. Consult experienced financial advisors to explore asset allocation options tailored to your specifications. Retirement planning is one of the most important decisions of your life, so take your time to get it right.
At Self Directed Retirement Plans, our expert advisors will be glad to help you understand your retirement planning options and choose the right one. If you want to explore self directed IRAs or get the right investment advice for planning retirement savings as a couple, contact us today!
Year end is a good time for tax and retirement planning, since the last day of the calendar year is also the contribution/distribution deadline for many retirement accounts. You may get extra time with other plans, but planning now could help you avoid higher taxes with last-minute deposits or withdrawals!
Here are 7 important moves for year-end financial planning:
1. Set a Retirement Savings Target – Before you can start successfully saving for retirement, you should know how much you will need. Without setting goals and calculating your retirement needs accordingly, you’re likely to end up with too little saved by the time you reach retirement. Use a retirement calculator to understand how much you should be saving every month, based on your annual income, age, current investments and goals.
2. Contribute to Your IRA and 401k – Even if you make IRA and 401(k) contributions every year, you may not be contributing enough to reach your retirement saving goals. Max out your annual contributions so you can enjoy the full tax savings and benefits. Remember that your biggest ally in terms of retirement planning is time; compound interest and tax-deferred gains can help your investments grow tremendously.
3. Make Catch-Up Contributions – After you turn 50, you can make additional tax-deferred contributions to your 401k by the end of the calendar year. Use these catch-up contributions to maximize your savings and tax breaks while planning for retirement. Workers who are 50 years of age or older can contribute an additional $6,000 to their 401k account, for a total of $24,000 annually.
4. Track Required Minimum Distributions (RMDs) – You need to take RMDs from traditional IRAs and 401ks after the age of 70½. If you don’t take the entire amount by December 31 every year and pay income tax on the distribution, you incur a 50% penalty and tax on the amount that should have been withdrawn. You can delay your first RMD till the following April, but you pay tax twice, and could end up in a higher tax bracket.
5. Explore Conversion to Roth IRA – Investments in a traditional IRA account are not taxed until you make a withdrawal. However, income tax is due on contributions to Roth accounts at the time of the contribution. Roth IRA investments don’t have RMDs, which can be very helpful for tax and retirement planning. You can convert part or all of your IRA into a Roth account, but consult a tax professional or financial planner about whether and when to do this.
6. Review Your Retirement Goals – You may have a general goal in mind when it comes to retirement, but you need a specific plan for effective savings. Reassess your retirement planning goals annually, and prioritize spending needs based on what will make you happy and comfortable. Create a budget for early, middle and late retirement, taking into consideration different expenses for each stage.
7. Optimize Retirement Planning for Tax Breaks – Year end is a good time to review your taxes, both for the current year and the next. If you’ve been holding retirement money in a savings account, move it into tax-advantaged retirement accounts to start maximizing your tax breaks. Sign up for your employer’s 401(k) plan, contribute as much as they will match, and check whether you qualify for saver’s credit.
Retirement planning is not a one-time activity, but something you need to review and update regularly. Year-end reassessments can help you stay on track, especially if you haven’t looked over your investment portfolio and personal finances in a while.
A self directed IRA gives you complete control over your IRA investments. To understand how they work, contact Self Directed Retirement Plans today!
Do you as a small business owner find the process of choosing a retirement plan expensive and confusing? A Simplified Employee Pension IRA or SEP IRA might be the perfect option for you. Do you as a small business owner find the process of choosing a retirement plan expensive and confusing? A Simplified Employee Pension IRA or SEP IRA might be the perfect option for you.
A wide-array of small businesses, ranging from partnerships, LLCs, S-Corporations, C-Corporations to sole proprietorships can benefit from the powerful features of SEP IRA accounts. These accounts were created so as to provide a tax-advantaged retirement plan for small businesses.
A SEP IRA can simply be set up by executing a written agreement, or setting up the SEP plan with a qualified financial institution (such as a mutual fund company, a bank, a brokerage firm or through a financial advisor), or by opening a SEP IRA for each eligible employee.
Let’s take a look at 7 ways in which small businesses can benefit by choosing a SEP IRA:
A major advantage of an SEP IRA account is its high yearly maximum contribution limit. Hence, you may contribute more to a SEP IRA as compared to traditional IRA or Roth IRAs as long as you make more than $22,000 approximately.
As with a traditional IRA or 401(k), contributions to a SEP IRA account are not taxed in the year they are made. Instead, until the withdrawals are made, the taxes are deferred. This allows the money to compound tax-deferred for long periods of time.
Employers can reduce the tax bite on the contributions they make to the SEP IRA account of their employees as these contributions are tax-deductible for the employer.
With an SEP IRA, an employer is not required to make contributions each year. Also, the amount of contribution that you can make as a percentage of an income can vary from year to year.
In case of a 401(k) plan, it is mandatory to fill out an annual form 5500. But this is not the case with an SEP IRA. There is no requirement to fill out excess tax forms.
Every participant has immediate and complete ownership of the money contributed by you to his or her SEP IRA accounts. This means the employer is not responsible for the investments within the employees’ accounts. Also, the employer does not have to set up a schedule for vesting or to track service requirements. Each employee is responsible for choosing his or her investments inside this account.
With SEP IRA, employers can take advantage of the flexible funding feature. This means the employers can take the decision every year regarding the amount to be contributed to this account. The amount can vary and the employers can even skip contributing any amount altogether.
Apart from all the features listed above, small business owners can also benefit from the fact that along with contributing for an SEP IRA, they can also contribute to a Roth or a traditional IRA. Also, SEP IRAs are easy to set up, have no initial setup or annual maintenance fees, come with low administrative costs and are easily available through most online investment firms.
If you too are interested in learning more about how an SEP IRA can be beneficial for your business, get in touch with our expert IRA advisors at SD Retirement Plans LLC today.