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Self Directed Retirement Plans Blog

Borrowing against Your IRA: 6 Common Questions about IRA Loan

IRA loans for property and investments may seem like a good idea, but there are some risks to consider. These 6 FAQs will help you understand more about them: IRA loans for property and investments may seem like a good idea, but there are some risks to consider. These 6 FAQs will help you understand more about them:

Can an IRA Loan Be Taken and is it a Good Idea?

Technically, you can’t borrow against your IRA or take a loan directly from it. What you can do, however, is use the “60-day rollover rule” as a method of financing expenses, loans or investments. Essentially, money taken out of an IRA can be put back into it or another qualified tax-advantaged account within 60 days, without taxes and penalties.

When Should You Borrow against Your IRA?

Honestly, never. The risk is too great. That being said, the 60-day rollover period can help with a financial emergency or time-sensitive investment opportunity.

For instance, it can be helpful when you’re negotiating a real estate deal that you intend to finance with a mortgage, when you have no other source of funds for medical expenses, or are expecting a tax refund or money from other sources.

Explore all other avenues first, such as:

• Making a tax-free withdrawal from the initial investment in a Roth IRA
• Taking a loan on margin against stocks in your investment portfolio
• Loans from friends or family, who won’t charge you interest if you’re late by a day

Also, make sure that mortgages, other financing options or incoming funds with which you plan to pay back IRA loans will definitely be completed within 60 days. Leave room for potential setbacks such as public holidays and delays in paperwork.

What Happens if You Fail to Pay Back the Loan?

If you fail to pay back your IRA loan within 60 days, the money will be treated as a taxable distribution from the account. If you’re under 59½ years of age, you will also be liable for a 10% early withdrawal penalty in addition to income tax.

There are a few exceptions to the 60-day rollover requirement, like receiving incorrect advice from a financial advisor or falling sick. However, there’s no guarantee that you will qualify for an extension or waiver.

There’s one more risk to consider. In case you use IRA loans to tide you over during a bad financial time but go bankrupt during the 60-day rollover period, you will still owe the IRS any tax and penalty applied to the amount withdrawn.

Is There Any Penalty for Taking IRA Loans?

As long as you pay back the loan within 60 days, tax and penalties don’t apply, but you may be liable for a 6% excess contribution fine if you make more than one rollover within a 12 month period for each IRA.

What are the Qualification Criteria for IRA Loans?

Certain lenders offer non-recourse IRA loans for the purchase of rental property, where property itself acts as security, instead of the account holder or IRA.

To qualify for an IRA non-recourse loan:

  • The property must be marketable and in rentable condition
  • The property must have a strong cash flow
  • You must have 30%-40% of the property’s purchase price in a self directed IRA, to cover down payment and fees

What is the Process for IRA Loans?

  • Check if the property is eligible for financing, complete the loan application, and provide recent IRA statements to the bank. If you’re married, include your spouse’s name.
  • Review the procedures and documents required by your IRA custodian. Complete and sign these, and get the real estate contract signed by the custodian.
  • Coordinate with the custodian to get funds directly transferred from your IRA to the financing bank for fees and appraisals.
  • Ensure that the IRA is listed as insured, with a minimum policy term of one year. Provide the bank with invoice and policy copies at least two weeks before closing.
  • After the bank reviews your application, verifies your documents, orders an appraisal and confirms the closing date, you will be notified if your loan is approved.
  • After approval, your IRA custodian should execute your real estate documents as “read and approved” before closing, and then transfer the down payment and closing fees directly from your IRA to the title company.

5 Ways to Make your Money Last During Retirement

You have worked and saved your whole life to retire and sometimes the thought of running out of money can cause a degree of anxiety. There are, however, strategies you can implement to make sure your money will last you for your entire retirement. This may seem overwhelming and difficult but the simple steps below can help you lead a comfortable and stress free retirement.

  1. Meet Periodically with a Financial Advisor

    Similar to going for your physical, a retirement “check-up” is critical to making sure you stay on track. When you were younger, getting away with an annual review might have been okay but it’s advisable when you are getting close to or in retirement that you meet with your financial advisor quarterly, and at the very least semi-annually, as a lot can happen in a year.

    This is important so that you and your advisor can make adjustments for any new money coming in or any unexpected expenses you had that will impact your long-term objectives. A simple forecast based on your current savings and expenses can be re-evaluated taking into account any changes.

  2. Make a budget and stick to it
    This one may seem obvious however until you track what you spend, most people have no idea what is going out. This is especially true when you are retired and you have more free time to go out to eat, shop and go on vacation. Having a budget and reviewing it at least monthly, and ideally weekly, can ensure the plan you made with your financial advisor is on track.
    Having a budget also does not mean you can’t enjoy your retirement so definitely plan trips, have date night and buy stuff for the grandkids, just make sure it fits within your allotted annual spend.
  3. Spending Money on Family
    One of the best parts of being retired is that you can spoiler your grandkids. While this is every grandparents’ right and makes them feel good they also need to make sure they don’t go overboard. Buying gifts for birthdays and the holidays is great however buying gifts all the time may not be the best idea.

    Another area where this gets a little tricky is paying off your child’s college. While this may be something you feel you are obligated to do, it’s not something that should be done to the detriment of your own retirement. If you have extra money and can afford it, then it’s your right however if you have to take from money you need to live on, that may not be the best solution. There is also the thinking that if your children have some skin in the game, they may work harder and be more appreciative.

  4. Take social security as late as possible
    It is natural to want to take social security as soon as you are eligible, after all you did put a good chunk of money into it throughout your career. This, however, may not be the best strategy to maximizing your income. According to the Social Security Administration those born between 1943 and 1954 can increase their monthly payments by 32% if they delay taking social security to age 70 instead of age 66. This would mean that by age 73 you would have broken even and every year after that you will continue to get 32% more benefit. The only time you may want to consider taking social security earlier is if you are not in the best health.

  5. Get a part-time Job
    Some of you may be thinking that this one does not belong but the truth is while the thought of doing nothing during retirement sounds great in theory, most people find that in practice it is actually very boring. The first 3 months, 6 months maybe even a year you will enjoy getting up when you want to, relaxing all day, going to see your grandkids, going to the park, whatever you feel like doing. However once that initial excitement of having all this freedom goes away, the thought of doing that for the next 30 years, can be difficult.

    This is the opportunity to think about what you want to do that would be fun and exciting. This does not have to be a full-time, 40-50 hour work week with all the travel that you dreaded during your working years, this could be a part-time job at a hardware store or maybe a tour guide, something that you have a genuine interest in. If you have a particular skill and some good connections, you could also do some consulting work. This will allow you to make your own schedule and make some extra money. One thing to note, be sure to review with your financial advisor and accountant the impact your job may have on your social security benefits.

In conclusion, being prepared and having an understanding of your situation will make living in retirement far less stressful than it has to be. The key to it all is being honest with yourself with what you can and can’t afford and to continue to review and update your plan with you financial advisor.

About the author: Joseph Scalice is a freelance writer and runs the website www.retireeworkforce.com.

The 5 Costliest Mistakes IRA Owners Make

You might be scrambling right now to put together the money you need to make your IRA contribution for the year. There’s nothing wrong with that. In fact, there is a lot right with investing in your IRA. You get a sweet tax deduction, tax-deferred growth and a bigger nest egg to draw from when you retire.

But just because you contribute to your IRA doesn’t mean you can check that box and move on to your next task for the day. A lot of people do that and fail to take the extra steps that can amplify the true value of their IRA investments. Here are the top 5 mistakes investors make with their IRA accounts and how to avoid making them yourself:


1. Spreading It Out Too Much

Many investors have IRA accounts all over town. They do this in order to reduce risk and perhaps save on fees. There is some value in those arguments of course but the cost of doing this far outweighs the benefits.

First, by having IRA accounts all over the place, it’s very hard to keep track of your money. That means investments often go unchecked. The danger of not watching your money is that you can easily hold on to under performing investments for years and years and not even realize how poorly those accounts are doing.

The solution is to consolidate your investments. This is easy to do and very worthwhile as it makes it a snap to audit and upgrade your investments on a periodic basis. And if you are worried about having too many eggs in one basket, you can relax.

As long as your money is held at a bonafide custodian who offers SIPC coverage, your investments are insured up to $500,000 including $250,000 in cash. Many custodians offer much more coverage – some up to several million dollars’ worth – so ask about the coverage you have with the company you do business with.

(If you keep your IRA money in bank products rather than investments, SIPC won’t help you. To solve that problem, keep reading.)


2. Investing Too Conservatively

The next big error that people make with their IRA is that they put the money in lousy investments. Ultra-conservative people tend to keep retirement assets in bank products like CDs and this costs them a fortune. That’s because the rate of return on CDs barely keeps up with inflation if at all and this can be devastating over long periods of time. And since the greatest benefit of having an IRA is the ability to tap into years and years of tax-deferred growth, it costs you big if you park your money in low-return investments.

To give you a sense of this, let’s look at some numbers. Let’s say you invest your $5500 IRA contribution into a CD every year for 25 years and earn 3% on average compared to a conservative balanced fund that theoretically earns 6% on average. The person who invested in the balanced fund ends up with $100,000 more retirement money at the end of the period compared to the bank depositor.

Of course, the fund investor took on more risk and there are no guarantees of results. But because the nature of retirement accounts is long-term, the value fluctuations over the short run aren’t important. What counts is the value over the long-term. I urge you to learn about investing for growth and learn about dollar cost averaging.


3. Investing Too Aggressively

Of course there is a flip side to this issue and that is, investing too wildly. Some people feel that they can take all kinds of risk with their IRAs because they are such long-term arrangements. Well, you can certainly take some short-term risk, but it rarely pays to take on unwarranted risk.

Remember, your retirement money is very long-term. You don’t need to take tremendous risk in order to grow your money quickly. You need to get a good return over the long-run. Sadly, investors who buy super risky investments often end up underestimating just how much risk they really take on. This happens with DIY investors as well as those using advisors. In my experience, this leads to investors suffering huge losses in many cases.


4. Not checking beneficiaries periodically

Besides making investment mistakes with their IRA money, investors often make administrative errors which can be even more costly. And the biggest mistake in this category is failure to check your beneficiaries.

By law, your retirement money goes to the beneficiary you name in your retirement account documents. It doesn’t matter if you have a trust or a will. The people you name on the beneficiary document are the people who are going to inherit that money.

Picking your beneficiaries can be a tricky subject and you should only name them after careful deliberation – preferably with a qualified attorney who is expert in estate planning.

And don’t become complacent. Review your beneficiary selection every couple of years. I suggest this because things change; people get married, have kids, pass away, etc. It’s absolutely critical to review who your beneficiary designations are periodically. If you don’t your money could fall into the wrong hands and you won’t be able to do anything about it.

The trick here is knowing the best way to check on this. In my experience, there is only one way to do this and that is to get a copy of the beneficiary form your custodian has on record. You can’t just call the custodian or email. You need the actual form your custodian has on record. Here’s why this is so important.

First, when you pass away, that form is the document your custodian will follow. Second, this proves that the custodian hasn’t lost the document to begin with. Believe it or not, this happens all the time and if you die and there is no beneficiary document, your IRA money might go into probate which is a costly and time consuming exercise only popular among lawyers.


5. Putting Your IRA at Risk by Other Financial Behavior

The last mistake is I want to mention is having to deplete your retirement money as a result of spending. I know that sometimes you have no choice but to tap that IRA in order to keep the financial wolves at bay. But please understand that this is something you should avoid at almost all costs .If you tap into your IRA to pay off debts, you’ll have to pay a 10% penalty if you are under 59 ½ (unless you meet stringent requirements). And worse, you risk never being able to retire at all. That’s because once people start putting their fingers in their retirement cookie jar, they tend to keep doing so until all they have left is crumbs.

As you can see, these 5 mistakes are relatively easy to make – unless you are aware of them and take proper steps to avoid them. My suggestion is to take the time to ask yourself if you are at risk in any of these areas and if so, take corrective action immediately.

Neal Frankle, Certified Financial Planner ®, WealthPilgrim.com, CreditPilgrim.com

Investing Your IRA in Real Estate and Alternative Assets

The options for investing your hard-earned retirement savings are numerous, each with its pros and cons. Among those options would be investing your IRA in real estate and other alternative assets by operating a self- directed IRA. One important thing to remember is that age is not a limiting factor to retirement savings; you can start as soon as you get your first job.

Investing Your IRA in Real Estate and Alternative Assets

If you are looking for a retirement vehicle to invest in, it is important to ask a trusted financial adviser on how best to invest your savings. For instance, if you desire to invest in stock market trading, you need to understand how volatile the stock market can get. By choosing to buy stocks, you might get yourself into a situation where you have your finances tied and hence cannot use it at a time when you need to.

As a wise response to market volatility, investors are diversifying their investments by looking and buying alternative investments, such as real estates. So, if you are looking for an investment option, look no further than real estate investment.

What accounts do you need to get started saving for your retirement?

An IRA, Individual Retirement Account or plan is an account that you open with a custodian, such as a bank or a brokerage firm where you direct a monthly amount of money to use after retirement. One disadvantage of the IRA is that they limit your investments to bonds and other exchange-traded stocks. If you have such an account and are interested in real estate and other alternative investments, you will be required to convert it to a self-directed IRA with a custodian offering that service. Another retirement account you can open is a 401 (k) plan, which has a higher contribution limit thus enabling you to save more.

A self-directed IRA (SD IRA) gives you investment freedom and complete control over your money and much more options than what a traditional IRA does. One good reason why you should consider a SD IRA is if you can’t trust someone with managing your funds and are confident with the investment decisions you make. The alternative investments include:
Real estate

  • Private Placements
  • Precious metals such as gold and silver
  • Private equity
  • Tax Liens
  • Hard money lending
  • Many many more

So, a SD IRA gives you absolute control and investment freedom, but is it a must have for everyone saving for retirement? No, SD IRA is not for everyone and this is why:

  • You need to be an expert in the field you have chosen to invest in. For instance, if you chose to invest IRA in real estate, you need to be well conversant with land or properties. Another alternative asset is investing precious metals – in this case you need the help of a respectable and experienced precious metals dealer.
  • As compared with other retirement plans, the assets in a SD IRA may not be liquid (having a ready market to sell to) but you will still be required to take Required Minimum Distribution (RMD) when you reach the age of 70 ½. If you are illiquid at the time of RMD’s are required, you don’t have to liquidate, you just have to pay the taxes due.
  • SD IRA’s do have two very important rules to follow. One is the disqualified person rule. A disqualified person can neither extend credit to the SD IRA nor receive any immediate benefit from the SD IRA. Normally disqualified persons are the IRA owner, his/her spouse, children, grandchildren, parents and grandparents and their respective spouses. The other rule is the PT (Prohibited Transaction) rule. There are three assets classes not allowed by the IRS. These are Life Insurance Contracts, Collectibles and shares of an S Corp. As with any investment good record keeping is a must.
  • SD IRAs are exactly that – self-directed so proper due diligence should be the rule. Don’t become a victim of fraud. You have all the investment control so just because investment looks too good to be true and it is not a regulated investment, be careful. It is your retirement dollars you are in charge of.
  • Opening a SD IRA is also easy, but beware a lot of custodians have investments they wish to sell and although they can call it a SD IRA, it really isn’t.

So, before deciding on which IRA investment fits you, decide first on what you want to achieve with your funds first. Any action you take with your money will determine how your retirement will be.

7 Practices to Help your Clients with Retirement Planning


Image Source : investopedia.com

Every financial planner wants their loyal clients to have a successful retirement. There are various methods to approach the aspect of retirement planning to ensure that your clients lead a comfortable life once they decide to wrap up their careers.

Here are 7 practices that will help you prepare your client well for their golden years.

  1. Review The Funding ‘Sources’
    It is crucial to figure out which financial sources your client can tap into to fund their retirement. The retirement income can come from numerous sources that may include Qualified retirement plans like 401k, IRAs, annuities, pensions, social security, taxable investments, stock options, insurance policies, etc. It would be better not to consider anticipated inheritance into account as family ties/relationships and circumstances may change which can directly affect the number of assets that would eventually be passed on.
  2. Monitor the Account Regularly
    As financial advisors, you should constantly keep a check on your clients’ accounts and financial portfolio. Monitoring the accounts will help you understand how and where the money is flowing, discover transactions that weren’t ‘authorized’ and see if there are any unexpected activities or activities that are difficult to understand. Keep your clients in the loop at all times so that issues can be discussed immediately. Regular monitoring will also help you keep a check on new contributions that your clients or their assistants forgot to mention — contributions which can pile up without being invested properly.
  3. Review Retirement Budget
    Everyone has an estimate of their retirement budget. Review that budget with your clients and make adjustments or changes if possible. Check if any items can be eliminated without impacting their lifestyle, if they can move to an affordable area, the kind of lifestyle changes they can make such as cutting on travel or eating out, etc.  Make only those changes that will allow them to maintain the retirement lifestyle they wish for.
  4. Listen More
    It is true that you need to talk at length with your clients and make them understand different investment options. But more importantly, you should spend time in listening to them. Recognize their needs, listen to their concerns and clarify the things you don’t understand. You should not enforce your favorite investment strategies upon your clients but rather make sure that the proposed strategies align with the client’s needs. When you listen carefully, you will minimize the risk of suggesting those investments that are not appropriate for your clients.
  5. Act Against Impulses
    The relationship between you and your client should be transparent and honest. If your client is being impulsive or leaning towards a decision that looks like an investment mistake, act against it. Do not be a ‘yes man’ and agree to each and every suggestion. The role of the consultants and advisors is to push against impulses of the clients, so that they don’t harm the retirement portfolios. You are hired to make good decisions for them, offer the right financial advice and warn against mistakes.
  6. Help in Downsizing
    Help your clients in downsizing as it becomes a natural thins as one comes closer to retirement. Once the kids graduate and move out, your clients might not need to stay in a huge house and rather move to a smaller one. They no longer have to stay in a place that’s closer to work and they can enjoy the option of moving to a different area that’s more affordable while offering the same comfort. Probably they can further cut down by giving up the extra cars or other household expenses that they won’t need post retirement.
  7. Start Planning Early
    The earlier you start the planning process, the better. That gives you a longer time to prepare, plan and invest to get better returns. As soon as your client contacts you regarding retirement planning, study how much time they have until retirement and assess their current financial situation. This will allow you to create a good retirement strategy for them. Encourage them to start early without procrastinating it any further. Give them an honest assessment of how ready they are for the retirement and even when the results do not look bright, give them options that will work for them.

Explain your role to your clients if they are unclear about that. It’s your job to ensure that your clients are well-prepared for retirement. Be completely honest and offer alternatives if and when required to augment their investment and financial portfolio.

Retirement Planning for Veterans – Investment Options You Must Make the Most Of

Are you sure that your pension plan is sufficient to lead a comfortable life throughout your retirement? Can you guarantee that your lifestyle won’t change if the cost of living continues to rise? Can you count on your social security benefits for the rest of your life? It is important that you have a secure and steady stream of income that has you covered beyond your basic expenses. Military members surely have a great pension plan that assures a 50% pension after 20 years of service but unfortunately even a 50% pay is not enough to live a comfortable life throughout retirement. While it is a good amount, it is still not adequate and this is exactly why veterans and military members need to take retirement planning seriously. Not to forget the fact that most military members never even serve 20 years due therefore they are not entitled to receive the retirement benefits.

For all these reasons, it is necessary that veterans and military members plan their retirement regardless of whether they serve the military or separate from it to join a different sector. Contributing to an IRA allows you to take your income with you wherever you go and it also offers great tax benefits.

What Makes Military Veterans Different from Other Employees

Most military veterans are on PDRL wherein they receive a predetermined payment every month. However, despite generating a steady stream of income, the payment overrides the possibility of demotion, disability and job loss.

A veteran only receives a certain percentage of his base pay and retiring on the basis of this pay alone is not a prudent decision as it would not even cover the basic expenses during retirement. VA payments are not considered to be a source of income and hence they are tax-free. So veterans who are entitled to receive benefits do not qualify to contribute to an IRA. They can, however, take advantage of other retirement savings options.

Best Investment Strategies for Long-term Retirement Savings

Veterans are eligible to receive home loans which can be leveraged for purchasing large properties or a multiunit that can be rented out for substantial profits, provided you reside in one area of the multiunit.

The thrift savings plan is another lucrative investment option that allows account holders to make tax-free retirement contributions. Veterans working in a combat zone can get tax-free deductions if they have dependent children. The money that is saved during a deployment is not taxed even when it is time to withdraw. A TSP allows veterans to invest in bonds and stock. It also offers target date funds that comprise a mix of five different index funds. Expenses are kept to a minimum in the TSP program by forfeiting automated contributions and the loan charges are also low. The only caveat with a TSP is that veterans do not receive a matching contribution that federal employees do which is where a Roth IRA gains preference.

Why a Roth IRA Makes a Rational Choice

The Roth IRA comes with tangible future tax benefits unlike a traditional IRA which is tax deductible. This means that there is no tax break when you make your contributions. All your retirement savings keep growing tax deferred and become tax free if the IRA owner has the IRA for 5 years and reaches the age of 59 ½.

A Roth IRA is extremely flexible as compared to other investment options, which is why opening a Roth IRA is beneficial for military members and veterans. If you are a single filer and your adjusted gross income does not exceed $110,000 or $160,000 if you are a joint filer, you can establish a Roth IRA and enjoy tax-free withdrawals at age 59 without inviting any penalty.