Archive for June, 2017

Your IRA and Unintended UBTI

Monday, June 26th, 2017

UBTI stands for unrelated business taxable income. It’s the tax placed on the income earned from an unrelated business, regardless of the tax filing status.

How it works

For our example, say an investor were to use their IRA to fund and start up a small business like a yoga studio. A yoga studio is a business not necessarily related to the primary principal of a traditional IRA. UBTI comes in at this point because the income earned from that yoga studio is considered unrelated business taxable income. Regardless of the fact that funds piping in are going into a tax-deferred, or tax-free account.

If an investor is qualified for a business loan through their IRA, any income or earnings that come as a result of the debt financing is also taxable. There are also certain tax deductions that can apply to UBTI, accordingly reducing tax liability. Eligibility for deductions have limits. The purpose of UBTI is to prevent tax-exempt accounts engaging with a business that is unrelated to their purpose. It includes most business operations’ income and excludes interest, dividends and capital gains from the sale or exchange of capital assets.

It’s important to note that UBTI isn’t illegal. You’re not breaking any laws if your IRA incurs UBTI, your IRA will just have to pay extra taxes. Investors everywhere miss out on opportunities because they don’t take their time to fully understand what UBTI is.

UBTI is reported on IRS Schedule K-1 and sent to investors once a  year. Say an investor were to receive more than $1,000 of UBTI in one year. They generally must file additional paperwork with the IRS. On top of proving or disproving the intent of the retirement account investor, and whether or not the person was intending to engage in an active trade or business.

A Guide to Non-Recourse Loans in an IRA

Monday, June 19th, 2017

What is a non-recourse loan?

When real estate is purchased through a self-directed IRA using leverage, the IRS requires a non-recourse loan. The main difference between a non-recourse loan and a recourse loan is which assets a lender can go after if a borrower fails to repay the loan. Non-recourse debt is usually limited to a 50-60% loan-to-value ratio.

The IRA holder is not personally liable for repaying the loan when through an IRA. How it works is that when you lock down an individual lender or a bank, they then lend your IRA the funds. Never to you personally. In the event of a default, neither you or your IRA are liable for repayment. The lender can only recover the asset that was purchased, and the equity therein.

What’s the difference?

How do you choose between a non-recourse and a recourse loan? The difference in both types of loans is best defined by the terms. So if money is still owed after the collateral is seized and sold in a recourse mortgage, the lender can then attempt to have borrower’s valuable assets seized or sue to have their wages garnished. If you have your IRA paired with a non-recourse mortgage, however, the lender is usually the loser. If the asset doesn’t sell for what the borrower owes, the lender absorbs the difference and cuts ties.

While IRA holders might find it tempting to seek out non-recourse loans for future purchases, it is important to remember that these loans are not without some fault. Non-recourse loans typically come with higher interest rates and are given to individuals and businesses with high credit scores. It can be tricky to be approved. Additionally, failure to pay off a non-recourse debt may leave other assets unharmed, but the borrower’s previously mentioned high credit score will definitely be negatively impacted. Just as the borrower’s credit score would be impacted by the failure to repay a regular loan.

Will the New Fiduciary Rule Impact your Retirement?

Monday, June 12th, 2017

If you haven’t heard of the new conflict of interest rule, or fiduciary rule that the Department of Labor has now enacted this week, buckle up. This new rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). With the passing of this legislation, it will automatically elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary. Meaning, essentially, that your advisor will have to work for you with your best interest at heart, not their own.

Why was there a need for this rule?

Reports have come out in recent years that retirement advisors have lined their pockets with an estimated $17 billion a year with cash. Cash they earn off of steering their customers into particular investments. So making sure their customers made a great return on these investments wasn’t their objective. Advisors accepted commission style bonuses, cars, and other incentives. Obviously, this was only a detriment to the American people.

That’s where this new rule comes into play. The former head of the DOL, Tom Perez, Senator Elizabeth Warren, and others from the Obama administration conceptualized this rule. Senator Warren posted the following video on June 9th, going over the rule.

As a result of the new fiduciary rule in place, $17 billion dollars is staying in the hands of the American people. So what’s next?

Will this impact you?

The short answer is, probably. And in a positive way. Saving for retirement is difficult enough without having to worry whether or not your advisor is doing what’s best for you. A fiduciary is a higher level of accountability. And that, in turn, raises the standard that was asked of the financial world, like planners, brokers, and insurance agents, who specifically work with retirement plans and accounts. As long as an investment recommendation met a customers need and objective, it would be deemed “appropriate”. So the passing of this law, financial professionals are legally obligated to put customers best interests first. Consequently, The new rule could eliminate many commission structures that govern the industry.