Posts Tagged ‘Retirement’

Your IRA and Unintended UBTI

Monday, August 13th, 2018

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 UBTI 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 principle 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 has 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 Breakdown of Retirement Terms and What They Mean

Monday, July 30th, 2018

Don’t let the retirement industry terms confuse you, or deter you from pursuing your own retirement account. Here are a handful of the must-know terms to help you get your toes into the pool.

Custodian

An IRA custodian is a financial institution like a bank, credit union or trust company that acts as a bank. IRA custodians are regulated by the IRS and rigorously aim to comply with laws and regulations to keep your IRA tax-deferred or tax-free. They hold your retirement account contributions, as they are the only entity that’s allowed to physically hold assets.

REITs

REITs stand for real estate investment trusts, they are an entity that owns income-producing real estate. Most REITs specialize in particular types of property, residential, industrial, commercial, and retail. Some REITs even own real estate-related debt, like mortgages.

Self-Directed IRA

This is an account type for retirement savers, they can be either Roth or Traditional. The difference between regular IRAs and a self-directed IRA is that with a self-directed IRA you’re allowed to invest in alternative assets like gold and silver, real estate, pretty much anything that is a tangible asset. Self-directed IRAs are definitely not for everyone since they require work on behalf of the account holder. 

Required Minimum Distributions

Just as they sound, an RMD is a retirement distribution that you’re required to take. The reason that you’d be required to take the money is that if you have a Traditional IRA, and you turned 70 ½, that’s when you’re required to start taking money. If you have a Roth IRA, there aren’t actually any required minimum distributions.

Annuities

An annuity is a type of insurance that you can buy alongside your 401K or IRA. The idea behind an annuity is that if you outlive the funds that you have in your retirement account, the since money in your annuity will then kick in as income. Annuities give retirement savers peace of mind and help those who outlive their retirement accounts.

Is Investing in Real Estate for your IRA?

Monday, May 14th, 2018

Real estate is definitely one of the more lucrative, and sought-after investment types. The reason it’s so sought-after is that the possibility of return on real estate investment is higher than other types. Plus it’s familiar, right? The question though is whether or not it’s right for you, and your IRA.

First thing’s first

You first need an IRA that’s held by the custodian and administrator of your choice. The custodian reports to the IRS on deposits, withdrawals, and year-end balances. Custodians hold your real estate IRA funds like a bank, so that your investments are IRS-compliant; because one of the easiest ways to get your IRA disqualified by the IRS is if it’s found to be in violation of IRS rules. So, to avoid that, choose a custodian wisely.

Speaking of rules, here are some more:

  • The IRA owner isn’t allowed to work on the investment themselves. Say you bought a fixer-upper through your IRA, it will need lots of work, right? You’re actually not allowed to do the work yourself, you will need to hire a contractor to take care of that for you.
  • All costs associated with the property must come from your IRA, and any income earned from that same property must also funnel back into your IRA.
  • You cannot live on the property that’s funded by your real estate IRA. It must be used as an investment property only.

Direct benefits and use

To expound upon what we mean by you’re only allowed to use your new property only as an investment property, and not for personal use, is simple. Since the property is legally owned by your IRA, it cannot be used as a vacation home for you or your family. Period. You also cannot use it as a rental home for your family. So no vacations, and no renting to your own family.

It may not be for you

There are a lot of technical and legal loopholes to jump through when you own real estate. It only gets more complicated when it’s an investment property. And even more so when it’s an investment property through your IRA. For those reasons, a seasoned real estate investor will catch on quickly, while a novice will have not only the real estate biz to study but also the real estate IRA world.

By no means is this suppose to discourage anyone from seeking real estate as an investment, you just have to know what you’re getting yourself into. It may be hard work at times, but the promise of rewards makes it worth it.

Warning Signs that Your Retirement Savings are off Track

Monday, April 16th, 2018

warning signs

You know that little voice in your head that’s been bothering you lately? It’s telling you that you may not have enough for retirement, right? Well, you’re not alone. Here in America, 75% of us that are over 40 actually are significantly behind on our retirement savings. So how can you tell that you’re off course? We’ve got you covered.

1. You’re only saving through a 401K

If you’re lucky enough to have an employer that offers a 401K, and even luckier to be able to make monthly contributions, then you’d think you’d be in the clear, right? Unfortunately, that’s not the case. A 401K is not meant to be your only means of retirement saving, it’s only meant to be one tool for savers. Opening an IRA may be the right option for you in order to be fully prepared for your retirement, it allows your money to grow tax-deferred if in a traditional IRA, and tax-free if in a Roth.

2. You aren’t matching contributions

Now, if you have a 401K, and your employer has a match program, but you’re not taking full advantage of it, you have to reevaluate your contributions. That’s free money that you’re missing out on. The average employer contribution is around 6%, up to a certain amount. Get in touch with your company’s HR team, and make sure that you’re contributing enough.

3. You’re unsure of how much to save

One reason this is such an issue is that the amount that one person will need at retirement is different from another person, and also depends on when you start saving. If you started saving in your 20’s, 10% of your gross income is standard, but if you’re 30+, 15%-25% is ideal. Calculate the end total of what you will need based on your income with the Social Security Quick Calculator.

The most important thing to remember when it comes to saving for retirement is just to save. Save. Save. And Save. And contact us today if you want to open an IRA.