Posts Tagged ‘IRA’

Funding an IRA Account with Alternative Investments

Monday, April 23rd, 2018

funding investments 2

Whether you’ve been diligent about funding your retirement account for years, putting away the recommended 10% of your paychecks into an IRA or 401K, or if you’re just starting to save at 25 or 26, the last thing that you want is to watch your hard-earned funds dissipate into fees, or completely tank into nothing during a stock market crash.

So what do you do to protect yourself? Diversify, and invest in alternative investments that are outside of the stock market. You have options when it comes to investing, but as with any investing, there are pros and cons when it comes to risk and reward.

The IRA Investments

For decades, IRAs and other tax-deferred retirement plans, like a 401K, have been used to fund retirement accounts for millions of Americans. In most cases, these accounts are funded with investments like stocks, bonds, mutual funds, unit investment trusts, CDs, treasury securities, and fixed, indexed, and variable annuity contracts.

Other less common investments such as mortgage-backed securities, precious metals IRAs, and real estate investment trusts (REITs) have at times been used by the more savvy investor.

There are certain types of investments have always been prohibited inside IRAs and qualified plans, such as life insurance, collectibles and antiques, and real estate that is being used by the IRA owner. These restrictions are found in the IRS Code and cannot be breached under any circumstances.

New Trends in Your IRA

Although this category of investments is hardly appropriate for everyone, it has become appealing for more and more investors in the wake of the market meltdowns over the past few years.

Those who have seen their retirement account balances shrink to a fraction of what they were in the ’90s have become more inclined to seek alternative avenues that have little or no real correlation to the stock and bond markets. These investments offer the potential of substantial gains for those who are able to absorb their risks.

Rules and Limitations for Owning Real Estate Through an IRA

Monday, April 9th, 2018

real estate and IRA long

Buying real estate through your IRA is a lucrative and competitive business. It can substantially increase the return on your IRA’s investment, and make for a big, cushiony retirement nest egg. One of the biggest reasons that more people don’t take advantage of owning a real estate IRA is all the rules and confusion that comes along with it. It can be a meticulous task, but well worth it.

Self-Directed Real Estate IRA

Although IRS rules permit IRA funds to be invested in real estate, IRS rules do not require an IRA trustee to offer real estate as an investment option. Most trustees who offer traditional IRA investments, such as depository banks, do not allow an IRA owner to invest in real estate because of the extra administrative burden of real estate management. As a result, if you want to invest your IRA funds in real estate, you will most likely have to convert your traditional IRA to a self-directed IRA, which is an IRA that requires you to decide what investments to make, such as real estate.

Prohibited Transactions

IRS rules require the IRA-owned real estate to be for investment purposes only. This requirement places several prohibitions on how the real estate can be purchased and used, the key to understanding the prohibitions is the term “disqualified persons”. This term is used in the IRS rules regarding IRA-owned real estate to refer to the IRA owner and related persons–that is, the IRA owner and spouse, ancestors (mother, father, grandparents) and descendants (children, grandchildren, and their spouses). The term disqualified person also includes the IRAs investment advisers, including a trustee of the IRA funds, and any business in which a disqualified person has a 50 percent or greater interest. IRS rules prohibit the use of IRA funds to purchase real estate from a disqualified person, the rules also prohibit a disqualified person from using any real estate IRA purchased with IRA funds, either as a home or business. These rules even preclude you from purchasing a vacation home that is only partly for personal use and otherwise rented to others.

Tax Consequences

If you violate the IRS rules regarding prohibited transactions, the IRS will consider the IRA funds used in the transaction as a distribution of your IRA. You will be taxed on the funds from the first year in which the transaction occurred, with penalties and interest included. Depending on your age, you may also incur an additional penalty for taking an early distribution.

What to do if your Retirement Savings Falls Short

Monday, February 26th, 2018

With so many older workers approaching their retirement years with meager savings, the big question is: What can they do to improve their financial security in retirement?

If you’re in your 50s or older, working longer — even by a few months — has a much greater impact on your ultimate retirement income than saving more or achieving a higher net rate of return on your savings. Of course, ideally, older workers would take all these steps — the paper just helps you focus on the most important one.

The report offers several examples that illustrate the power of working longer, using hypothetical workers of various ages. For example:

  • Workers age 66 who earn at the national average wage could increase their ultimate retirement income by 7.75 percent by working one more year and retiring at age 67.
  • For these workers, the total value of the additional lifetime retirement income generated by working for one more year is equal to getting a bonus of over 40 percent (43.27 percent) of this average wage earner’s annual salary.
  • Workers age 62 who earn average wages could increase their ultimate retirement income by almost one-third (32.7 percent) by working four more years until age 66 and by almost three-fourths (74.6 percent) by working eight more years until age 70.

(The report estimates that average annual wages for workers age 55 to 64 are about $52,350.)

Here are three reasons working longer increases your retirement income:

  • Your Social Security income will increase significantly — by 8 percent for each year beyond the full retirement age that you start benefits.
  • Your savings have more years to grow with investment returns.
  • Your savings need to last for a shorter number of years in retirement.

The paper shows that delaying Social Security accounts for most of the total increase in your retirement income — roughly three-fourths of it.

For low-wage earners, delaying Social Security benefits is particularly powerful. For example, consider such an earner at age 56: Delaying retirement by seven months has roughly the same impact as saving an additional 10 percent of pay for 10 years.

Many older workers aren’t willing or able to keep working at their current rate of pay or for the same number of hours. But you may not need to do either. For instance, you could pursue a “downshifting” strategy during which you reduce your hours and responsibilities, and earn just enough to cover your current living expenses while you let your Social Security and savings grow until you ultimately retire.

This strategy might free some time to enjoy life more and take care of yourself, and you’ll still reap most of the benefits of working longer described above.

It’s important to acknowledge that working longer may be “easier said than done” for many older workers. They’ll need to be resilient and creative to find work opportunities, and working longer will most likely take some planning. While working longer may not be the ideal solution, it may be the best option that many older workers have.

The Rules of Buying Property with your Real Estate IRA

Monday, February 12th, 2018

Real estate is one of the most sought-after and lucrative hard asset types that investors love. It’s popular because it’s not just single-family homes, but commercial real estate, farmland, business parks, apartment complexes, and more.
What most Americans don’t know is that you’re allowed to invest in these types of real estate with your self-directed IRA, and any gains made off of your investments go back into your retirement account.
As with any investment, there are rules that you have to follow to make sure that your IRA is compliant with IRS laws, so let’s go over a few rules.

Your personal use

When real estate is purchased as an investment property, it almost seems like second nature to want to inhabit that property. But when your IRA has purchased the home, your IRA is the technical owner, not you, unfortunately. Neither you or your family are allowed to use the property for personal use, either as rental tenants, overnight guests, or anything in between.

Self-dealing

This rule seems like it should be fairly self-explanatory, and seems easy to avoid, but if you’re found violating these rules, your IRA could be disqualified. Self-dealing is when the IRA owner uses their IRA for personal gain or promotes their own self-interest. Say if you’re looking for a single-family home to buy with your real estate IRA, and your own home is for sale, so you think about buying your home with your IRA. That’s self-dealing. Because you directly benefit from your IRA buying your home, it’s not allowed.

Limited Liability Company

A Limited Liability Company is better known as an LLC, and an LLC paired with your real estate IRA isn’t a rule, but a perk. By opening an LLC, you will then have checkbook control, a physical checkbook that allows you to pay fees, services, any costs affiliated with the property your IRA owns.

Unique Types of Properties to Invest in With an IRA

Thursday, December 31st, 2015

unique properties - wide

Flexibility is one of the main reasons savers and investors use self-directed IRAs for real estate transactions. A property can be acquired quickly, with the required fees and costs being directly paid for from the IRA, and in turn, any profits will funnel straight back into the self-directed IRA account.

Commercial Property

The inconsistent performance of the stock market in recent years, and the ever-growing threat of a Federal rate hike has made commercial real estate a prime target for investors. This shift in investment focus has helped fuel the commercial real estate market. That’s because investors who use their IRAs to purchase commercial properties that generate excellent cash flow and appreciation can gain a number of awesome tax benefits. For instance, in the case of a Roth IRA, which is funded with after-tax money, investments are not taxed while growing, and are tax-free upon distribution. Roth IRAs also have no minimum distribution, so savers can decide when and how much to take as distributions. Traditional IRAs are funded with pre-tax money and are taxed at the time of distribution, which is the main difference between the two plans.

Real Estate Overseas

The most common investments made with a self-directed IRA are in real estate, but only a small percentage is invested in real estate overseas. Throughout most of the world, it’s not really possible for a foreign buyer to just borrow money from a local bank and use that money to buy real estate. This is where your self-directed IRA comes into play.
Using the property as a rental property, think how Airbnb does it, where a property is rented out, maybe by someone new almost every week (if not every night), makes it easy to remotely operate from anywhere.
You can purchase real estate, but just as it is with property you own in the US, once you move in, or make use of the property yourself, the total value becomes taxable as a distribution under the terms of your retirement account, and your entire IRA account could get hit with repercussions from the IRS.

Farms

Who knew that you could invest in a farm without owning farmland? Well you can with a self-directed IRA! There are a few more options like REITs, or mutual funds, or ETFs, but today, we’re just going to talk about self-directed IRAs.
Farmland can help your IRA grow in a few ways as an agricultural investment. A farm that produces crops ranging from fruits and vegetables to cotton and other raw materials for manufacturing tend to be the most profitable because these crops, of course, produce income when they are sold (and most regrow annually). In addition, the value of the land may increase, resulting in a capital gain. Before your IRA can buy anything with an IRA, you have to fund it. As of 2015, you can contribute up to $5,500 a year to an IRA, or a $6,500 catch-up limit if you are 50 and older. Keep in mind that you can also rollover money from another retirement plan to buy a farm, and another funding option is to buy partial ownership of the property, and have other investors.