Archive for October, 2017

Will The President’s New Tax Plan Impact your Retirement?

Monday, October 30th, 2017


It was reported last week that Congress was considering the option of reducing the amount of income that Americans could save in their tax-deferred retirement accounts in order to partially pay for the President’s tax reform plan. For now, that idea is unconfirmed by the Trump Administration, but remains a concern for every-day Americans, and what it means for their retirement.

The tax plan

The White House proposed a tax reform bill that would cut corporate and individual tax rates. The Trump administration says the cuts would spur economic growth and help boost people’s incomes. The emerging plan would also get rid of several tax deductions in order to help pay for the plan, leading some to worry that some of the most popular would fall away. The President indicated on Monday the 23rd of October that he has no plan to limit people from using pre-tax savings for their retirement, as they can now in their 401K and IRA plans.

Roth IRAs

One version of the new tax plan would have lowered annual contribution limits for 401Ks. This could force savers to rely more heavily on other retirement plans like Roth IRAs. The way a Roth IRA works is that money can be withdrawn in retirement free of taxes since taxes were paid up front, while withdrawals from 401K plans are taxed. Leaning more on Roth IRAs would create more tax revenue up front for the government, and is seen by some as an accounting gimmick that creates revenue earlier and helps pay for the broader tax reform bill.

What the President has said

While Trump said the traditional 401K plan will stay put under the GOP tax plan, it’s not clear if that also means no limits will be placed on future 401K contributions.

Those on the outside of the Administration have speculated that changing the tax treatment of 401Ks may have been an attractive way for Republicans to raise revenues because of the total involved. The Treasury department stated that they expect such plans will lower revenues by almost $600 billion over the next five years

A Real Estate Investment Resource you Haven’t Yet Tapped

Tuesday, October 24th, 2017

Real estate is one of the most popular alternative assets when an investor wants to shy away from the traditional avenues like bonds and stocks. Regardless of its popularity, it’s not necessarily accessible to everyone, namely because the amount needed up front is steep. What more and more retirement savers are discovering is that with the right help and resources, they’re able to use their retirement funds to invest in real estate.

Not all retirement accounts are created equal, a majority of IRAs (individual retirement accounts) are managed by an advisor, and the advisor chooses what your funds are invested in. With a self-directed IRA, you’re the one making the decisions, you’re the one directing your investments, so here’s what you should know about investing with a self-directed IRA.

Tax Benefits

When you open, contribute and use a Traditional self-directed IRA, the income earned off of your investments grow pre-tax. This means that when it comes time to retire, and you take monthly distributions, your retirement income will be taxed as income.
The other option you have is what’s called a Roth IRA, and when you open, contribute and use a Roth self-directed IRA, your earned income is contributed after-tax. When you reach retirement age, your Roth IRA distributions are not taxed.

Which type of account you open is up to you, but the differences are stark. Talking to your tax accountant is the best route for deciding which account is best for you.

Non-Recourse Loans

As a real estate investor, you can easily leverage your IRA by using a percentage of the funds in your IRA to purchase your chosen property and use a non-recourse loan to fund the remaining balance. The reason that you may choose a non-recourse loan over a personal loan is that the non-recourse loan is tied to the real estate it pays for, and not your credit personally. In the case of a default, the lender would seize the real estate property without touching any of your other property or assets. Two things to keep in mind though, one is that the non-recourse loan may have a higher interest as compared to a regular loan, and two, it may be difficult to get approved, since banks are looking at a non-recourse loan as more of a risk for them.

Rental Income

The main reason investors choose real estate is the income that’s earned by either buying and flipping for resale or to rent out to businesses or to families. However you choose to utilize the property, it’s important to note that since you’re buying the property with your self-directed IRA, it’s your IRA that owns the property. This means that any gains made on your investment go straight back into your IRA, and vice versa, any money spent on repairs or taxes come from your IRA as well.

Potential Risks

As with any investment, there are risks and some rules that could be deal breakers for some investors. Familiarizing yourself with the self-directed IRA rules and following them is just simply a part of the process. Violating rules that are set by the IRS could cause your IRA to get disqualified, and get you fined a percentage of the amount in your IRA.

The property in question cannot be used as a vacation house, or a secondary residence, or be rented out to immediate family. You’re also not allowed to do repairs or fixes yourself, you will always have to be at an arm’s length when it comes to your property.

One other possibility is that you could run into UBIT, which stands for Unrelated Business Income Tax. UBIT isn’t scary, nor does it mean you’ve done something illegal, it’s just a tax that your IRA will pay when using debt leverage to buy property, or does a deal with an organization that doesn’t pay corporate taxes.

FAQ on UBIT–Unrelated Business Income Tax and IRAs

Monday, October 23rd, 2017

There’s a lot of misconception when it comes to UBIT, and that’s because it can sound daunting and scary when taxes are involved. Understandably. But there’s no reason to fret, it’s really not as scary as it sounds.
One reason that it might be confusing is that when we think of self-directed IRAs, we think of them being tax-deferred or tax-free. When you make an investment, and that investment makes money, it goes back into your IRA without having to pay taxes on it. So when we’re told that some unexpected tax event has occurred, it can feel like you’ve done something wrong but don’t worry, we got you covered.

Q: Do I have to file for Unrelated Business Income Tax?

A: Probably. Anybody who has made investments that are considered unrelated business activity—like an LLC—and contains debt financing within the tax-advantaged qualifies for UBIT.

Q: Is UBIT considered a prohibited transaction by the IRS?

A: In short, no. It is not illegal nor is it considered a prohibited transaction within retirement accounts. But keep in mind that some transactions that make a UBIT event occur may also have prohibited transaction issues.

Q: When do I have to pay it?

A: Just as with all taxes, April 15th of the following year. So any taxes your IRA qualified for in 2017 is paid next April 15th 2018, paid via IRS Form 990-T.

Q: Does it still apply if I have a Roth IRA?

A: It does, yes. Regardless of the fact that Roth IRAs grows tax-free, and aren’t taxed at retirement, UBIT rules still apply to some investments that are held within the Roth account.

Q: Is it possible to keep any retirement account from paying UBIT?

A: Yes actually, a solo 401K account is not subject to this tax when invested in real estate, but is subject to UBIT when invested in an LLC.


Investing in Trust Deeds with your IRA

Tuesday, October 17th, 2017


What is trust deed investing?

Trust deed investing is simply investing in loans that are secured by real estate. Most trust deed investments are relatively short-term loans given to professional real estate investors. Banks can be reluctant to lend to investors who seek these loans not because the loans are particularly risky, but because some banks have a great deal of bad real estate loans on their balance sheets. This is obviously a result of the loose lending practices that lead to the housing market crash in 2008.

The value in their scarcity

In today’s day and age, banks are unwilling to make real estate loans unless they fit a very strict set of criteria. Which may seem harsh to people who are denied, but means that ill-suited individuals aren’t taken advantage of. They often don’t lend to opportunistic real estate investors because the property which is “security” for the loan usually needs some work, i.e. is a fixer-upper. For this reason, real estate investors have limited financing options available to them, and lenders to this market are able to charge higher than average interest rates.

Why is trust deed investing favorable?

If outlined properly, trust deed investments offer a high-return with moderately low risk. In some cases, returns above 10% are possible. Needless to say, the high returns that can be made from trust deed investing are preferred over other investment options with similar risk profiles. The risk of losing money in these investments is reduced by a built-in safety button.

Paired with an IRA

One of the biggest reasons investors use their IRAs to invest in trust deed is because income from trust deed investments are treated as regular income. This means that that income is taxed at a higher rate than other types of income. This is where an IRA comes in. Through investing in trust deeds from an IRA, that disadvantage is neutralized since all income earned on an asset invested with an IRA goes directly back into your IRA.

Control your Investments With a Checkbook IRA

Monday, October 9th, 2017


Do you have an IRA or a 401K? According to the Federal Reserve’s Survey of Consumer Finances, in 2013, about 45 percent of households aged 25 to 64 had balances in retirement accounts. Do those 45 percent of Americans know what their retirement accounts are invested in? Most likely not, and that doesn’t bother most people, but if you need more out of your retirement account, then a checkbook IRA might be for you. The freedom that comes with a checkbook IRA allows you to invest in real estate, precious metals, and other hard assets. So how does it all work?

What is a Checkbook IRA?

A checkbook IRA is the same thing as a regular IRA except that the custodian allows you to take control of the checkbook for the IRA. What does that exactly mean? With a regular IRA you have to go through your custodian when making any investments for your IRA. If you wanted to purchase gold with your IRA, you would have to contact your custodian and let them know what you are wanting to do. You would then have to work with them to finalize the investment. If you have a checkbook IRA, instead of going to the custodian to make the investment happen, you do it yourself.

Setting up

Another name for a checkbook IRA is a self-directed IRA LLC with checkbook control. It’s called this because to establish a checkbook IRA, you must establish a limited liability company (LLC) that is owned by the IRA, and managed by you, the account owner. Then the IRA owner’s funds can be transferred by the custodian to the new IRA LLC bank account. Because you are the manager of the IRA LLC, you will have the authority to make investment decisions on behalf of the IRA. With this authority, you then have the ability to write checks from the IRA LLC bank account for your investments. Thus, cutting out the middleman.

With a checkbook IRA, you’re able to invest in the things you want without hassle or waiting for someone else to do as you’re asking. You’re in control, so you have the power over what you’re investing in, and the owner of a truly self-directed IRA.