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Time to Ramp up Retirement Saving with these 6 Tips

Time to Ramp up Retirement Saving with these 6 Tips

If you are in your 50s, retirement is not in the distant future. It’s upon you. And if you haven’t actually focused on the looming reality, and have been procrastinating saving up for your retirement, the time to start is NOW!
It’s never too late, but the countdown has begun…

Let’s assume the retirement age for you is 65 and you are 50 now. The road to retirement security hereon seems challenging but it’s still possible if you follow these retirement planning tips:

1.  Ramp up your retirement savings with catch-up contributions

You are eligible to make catch-up contributions on top of your regular contribution limit, depending on the type of retirement account you have.

  • For 401K plans, 403b, SARSEP, and governmental 457b plans, you can make a catch-up contribution of $6,000 on top of the $18,000 limit.
  • For SIMPLE IRA or SIMPLE 401K plans, you can put in an extra $3,000.
  • For traditional or Roth IRAs, you can make a catch-up contribution of $1,000 on top of the $5,500 limit.

2. Invest in account with low investment fees

When you are 15 years away from retirement, you have to choose your retirement plans with caution. If you have started investing so late in life, it makes absolute sense to invest in a low annual expense ratio fund. Morningstar agrees to it as well. Their study has found that low-cost funds have consistently outperformed high-cost funds.

3. Consider settling in cities that allow you to retire with your social security

If you haven’t been able to build up your savings enough to retire comfortably, all hope is not lost. Social security can be your major source of income during your retirement. You can consider settling in any of the cities where you can retire with your social security.

4. Don’t invest in high risk financial plans

Age is not on your side. So, you cannot take risks playing with your retirement fund by investing it in high-risk stocks that promise high returns. Focus on picking up investment products that do not fluctuate much and provide a steady source of income.

5. Gather information on all your retirement pensions

Get an estimate of your Social Security benefits and also the benefits attached to your traditional pension plans. Also, go through your old files to check if you have any pensions due from your previous employers. Don’t claim them just as yet. Let them stay in for a longer time. The longer you wait to claim, the more benefit you will get.

6. Delay retirement

If you have traditional and Roth 401K plans, you are expected to take the required minimum distributions (RMD) once you reach 70 1/2. Taking a part-time job that offers a retirement plan can delay RMDs. Rollover your old 401K plan into a new 401(k) plan. By doing this, you will be able to continue contributing to the new plan and delay your first RMDs.

7. Consider retiring abroad

If you have to live on a smaller budget, then you can think of living a good quality life abroad where you have access to beautiful weather and generous tax savings. Consider settling in countries like Costa Rica, Nicaragua, and Panama, where there are special retirement programs for U.S. retirees.

Are you ready to start on your retirement savings strategy? Let’s talk! Contact Self Directed Retirement Plans LLC today!

IRA vs. 401(k)? Which Plan Wins When it Comes to Estate Planning for HNIs

IRA vs. 401(k)? Which Plan Wins When it Comes to Estate Planning for HNIs

                                                                      image source: www.freepik.com

With most employers now offering attractive 401(k) plans with multiple investment options and a matching contribution, retirement planning funds have become easily accessible. On the other hand, anyone willing to invest a few thousand dollars can easily set up an IRA in an instant without much effort. These plans are easy to set up, the contribution deductions can be automated and you don’t need to put in any extra thought as the interest returns are bank declared on fixed investments. However, all of this can change if your IRA is based on mutual funds because then, your choice of funds can make a big difference down the line.

If you are a recent college grad or you’ve just started your career, both 401(K) and IRA can give you good returns. But as your career progresses and time passes things get complicated and financial priorities often change from saving for retirement to building wealth. Traditional retirement plans were the best option some 20 years ago but given the existing financial landscape, it is important to know how these retirement plans earn down the line. If you are a high net worth individual who wants to create a bountiful retirement reserve and pass on the assets, the 401(k) Vs. IRA comparison proves to be very useful in exploring the implications of each, for planning an estate.

Why Estate Planning is Important for HNIs
Unlike retirement planning, where you are creating a nest egg to cover the expenses of retirement, estate planning is about passing on the assets and wealth that took you a lifetime to build. However, even years of excellent financial planning and consistent contributions can be severely undermined due to poor estate planning.

Another key aspect of estate planning in curtailing the estate taxes that your heirs are required to pay on the legacy they’ve inherited. 401(k) and IRAs are tax-advantaged plans and so they are considered effective wealth-creation vehicles for both estate planning and retirement planning.

There are some excellent strategies that allow retirees to create millions in assets from their IRA and 401(k) plans and strengthen their savings portfolio.

Maximum Contribution IRA 401(k)
Below Age 50 $5,500 $18,500
Age 50 and Above $6,500 $24,500

Consistent contributions from top salaried professionals over a course of 30 years can create a reserve of more than a million in assets if investments yield good returns.

401(k) vs. IRA – Tax Implications
If you are investing in a traditional IRA or an employer-sponsored 401(k) plan, then your contributions are pre-tax and this can lower your existing tax liability. However, you are required to pay tax on withdrawals during retirement.

But, if you invest in a Roth IRA, you get the advantage of tax-free disbursements because all your contributions are taxed at the beginning.   This is why a Roth IRA is more beneficial as a component of estate planning as it allows you to pass on your wealth to your heirs tax-free.  Think of it like this:

You pay the taxes on the seed and you get the harvest tax free!

The Downsides of Both 401(k) and IRAs
When it comes to mitigating risk, both the plans are equally risky as the savings generally land in mutual funds, stocks and bonds that are subject to market volatility. Since the global stock markets are constantly fluctuating, one market slide can send the financial gains crashing, resulting in a loss of capital gains along with the principal amount invested. This is why financial advisors remind investors that both 401(k) plans and IRAs are intended for long-term growth.

Since none of these plans have a guaranteed return rate, it is best to consider your risk tolerance before you set up an IRA or a 401(k) plan. However, you do have the option of low-risk funds but again the rate of return is also relatively low. Young investors can be more aggressive at the start of their career with their choices and gradually move to conservative funds as they near retirement.

Leveraging 401(k) and IRAs for Estate Planning
The biggest benefit of both 401(k) and IRA lies in maximizing tax-advantaged savings and this can be realized by maxing out on the contribution limits. If you want to reap the full potential of your retirement planning funds, then make it a goal to hit the contribution threshold year-on-year.

The ultimate goal of planning an estate is accumulating a significant financial reserve that not only funds your retirement but also makes an impressive legacy that you can leave for your heirs. But the last thing you want to leave them is a big taxable balance that will reduce the assets to ashes.

If you want to tap the power of tax-deferred retirement planning funds with effective wealth maximization strategies, call Self Directed Retirement Plans at (866) 639-0066.

Know this Before Borrowing Against your IRA

Know this Before Borrowing Against your IRA

In your retirement days, your IRA is one of the most critical assets you have. At a time when you might need money, in case of an emergency, or otherwise, one of the first thought one gets is to take out a loan against your IRA funds. The most important thing you need to know about taking an IRA loan, is that you cannot. It is a common misconception among people that they can take up an IRA loan, especially since it is allowed to take loans against other retirement accounts.

Now that you know you can’t get an IRA loan, what else can you do to get the money you need? Here are a few options for you to consider

  • A 60 day rollover:
    A long term loan on the IRA is not permitted, instead, you can choose to utilize your IRA assets for a relatively much shorter period of time, like 60 days. To do this, you use an option called 60 day rollover. In order to be able to do this, you need to meticulously follow the rules laid down by the IRS. The rules have been tightened a lot lately, so understand what you are getting into completely before signing it out.
  • A 401(k) loan:
    Withdrawals from your 401(k) fund are discouraged before you turn 59.5 years, you need to pay a 10% penalty if you do so. The best thing about a 401(k) loan is that you are borrowing your own money, money which was deducted from your own paycheck. It is not the bank’s money, it is your own, so the interest you pay, would also eventually come to you. The tenure for a 401(k) loan is five years, with no early repayment charges. This borrowing has no impact on your credit and mostly the only cost involved is a small origination/administration fee. It is important to note that 401(k) funds should not be used for leisure spending such as holidays or home redecoration, or that new sports car. A useful tip would be to keep the 401(k) for unexpected expenditures. If you leave your job, voluntarily or involuntarily during the time you have an outstanding loan, you have a 60 day time limit to pay the loan back.
  • Roth IRAs:
    A Roth IRA is still an IRA. Taking funds from the Roth IRAs is not an option you can consider. For a rainy day, you can withdraw up to 100% of your original contributions to Roth IRA.

No matter what you do, when there is money involved, there is risk involved. IRA withdrawals require you to pay back the loan within 60 days in case you voluntarily or involuntarily quit your job. If you don’t pay back the funds of the rollover within 60 days, then IRS treats it as a distribution, inviting income tax on it, plus a 10% penalty if you are less than 59.5 years of age, save a few exceptions. So, make your decisions wisely. Make it a practice to save money outside your retirement funds and plan for the rainy days. For any unexpected occurrences, you always have options to help you.

What You Need to Know about Borrowing Money from Your IRA Account

What You Need to Know about Borrowing Money from Your IRA Account

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.

Borrowing from Your 401K

If met with a dire situation where you urgently need cash, you also have the option of borrowing funds from your workplace retirement plans such as your 401K, if your retirement plan permits you to do so!

  • 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!

Should You Take the Risk of Owning Stocks in Retirement?

Should You Take the Risk of Owning Stocks in Retirement?

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:

  1. 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.
  2. 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.
  3. 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.

To learn how you can make wise investment decisions about stocks, contact the team at Self Directed Retirement Plans today!

Is Bitcoin a Good Option to Consider While Investing for Retirement?

Is Bitcoin a Good Option to Consider While Investing for Retirement?

Are you tempted to invest your retirement savings in digital currency? Do you think Bitcoin could be your primary source of retirement income?

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

Investing in Bitcoin works best if you already have a healthy mix of short-term and long-term assets in your portfolio, and are investing for retirement in an IRA or other tax-advantaged plan. If you need help with making the most of your investments for the future, get in touch with our retirement planning experts now!

When Can You Move an Existing Retirement Account to a Self Directed IRA?

When Can You Move an Existing Retirement Account to a Self Directed IRA?

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:

  1. 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.
  2. 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.
  3. 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.
  4. Inherited IRAs
    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.

There’s no restriction to how many times you perform a direct transfer, but an IRA rollover can only be performed once in 12 months. To learn more about maximizing your retirement savings with self directed IRAs, call (866) 639-0066 today!

Why Retirement Planning Should Be Your Top Priority

Why Retirement Planning Should Be Your Top Priority

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.

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.

To learn how you can leverage your self-directed IRA to save for your retirement and also set your child on the path to financial freedom, call us at (866) 639-0066.

Private Lending Using Self-Directed IRA or a Self-Directed 401(k)

Your retirement account can be a small lending institution. Private lending through your IRA or any other qualified retirement plan typically involves creation of a new promissory note, the purchase of an existing promissory note, either performing or non-performing, secured or unsecured.

A secured note adds a layer of security as it is backed by collateral. It guarantees the lender some type of property in case a default happens. On the other hand, an unsecured note typically carries a higher rate of interest as it is not backed by collateral.

Investing in private lending can also involve debt secured by mortgages or deeds of trusts. Let’s say a small lender or an individual invests in a note. The lender can then sell the note at a discount. This means that the IRA will be repaid with both interest and some of the principal.

Another option is to loan money from your retirement fund to a company via a promissory note, backed with corporate stock as the collateral. In this case, the level of risk the secured note carries is different. This is because the value of the collateral can increase or decrease depending on the success of the issuing company. In this category, there is an unsecured note too. An example is a bridge loan given to a company looking for debt financing.

Your options for private lending investments are:

  • Secured or unsecured notes
  • Performing and non-performing (or discounted) notes
  • Residential and commercial mortgages and deeds of trusts
  • Business loans (including microloans) and personal loans
  • Automobile and equipment financing
  • Equity participation loans
  • Debt-financed notes

By investing your retirement fund into private lending, you are essentially turning your retirement account into a bank. You can make hard money loans, which are secured by real estate and also loans to purchase business equipment, automobiles, and anything else the borrower wants to purchase with the loan. The best part of loaning money from your retirement account is that you can set your own interest rate and origination fees.

Marketplace lending is another popular way of private lending. In this type of lending, the investments are often made indirectly in a pooled investment vehicle (PIV) or fund. This vehicle, then either invests in debt instruments or loans.

A quick rundown on private lending (secured and unsecured) through self-direction
Can you loan money to your children with your retirement account funds? Absolutely, not! The IRS defines this transaction as a prohibited transaction. Whether in private lending or any other investment with your retirement funds, you need to ensure that you are not transacting with a disqualified person.

Disqualified persons include the following:

  • Your fiduciaries
  • Your family members such as your spouse, lineal descendant, ancestor, any spouse of a lineal descendant

For more information, read this page on prohibited transactions.

In private lending through a self-directed retirement account, the investor chooses the borrower and is responsible for working out the loan terms with the borrower. In the case of a self directed IRA – once the details of the loan are documented and handed over to the custodian, the custodian executes the loan instructions on behalf of the IRA, and hold the assets. In the case of a self directed 401 k there isn’t a custodian, the investor is the trustee of their plan and executes the documents.

It is important to understand your state’s lending laws—conduct due diligence on market interest rates, reasonable loan terms, and maturity date. Most lenders include an amortization schedule in their notes.

A self-directed IRA or self-directed 401(k) can fund either secured (low risk) or unsecured loans (high risk). These decisions are taken by the investor whose retirement plan will lend the funds. While carrying out these transactions, you need to ensure that you are not transacting with a disqualified person. According to the IRS, this will be termed as a prohibited transaction, which can be penalized. An example of a prohibited transaction will be loaning money to yourself personally or your family members from your IRA.

A self-directed retirement plan allows you to invest in a wide array of alternative assets beyond mortgages and loans. Some of the non-traditional investment options, including private placements, real estate, and precious metals. All earnings and profits that your investment generates flow back into the retirement plan and grow tax-deferred until distribution or tax-free (if held in a Roth IRA). All expenses associated with the asset are paid by the plan.

The type of paperwork differs depending on the exact nature of your private lending investment.

The Top 7 Dos and Don’ts of IRA Investments

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 7 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.

To learn more about permitted and prohibited IRA investments, contact the team at Self Directed Retirement Plans today!