Prohibited Transactions
As of early 2016, the average retirement savings of all American families was $95,776 —not enough to go very far during those retirement years. Of course, self-directed account holders understand that they have the potential to grow that figure more aggressively through investments in alternative assets, such as real estate. However, given this U.S. figure, it’s tempting for account holders to consider using personal funds along with the funds in a self-directed retirement plan to make those nontraditional investments.
It sounds tempting, yes … but it could be a prohibited transaction that benefits the IRA owner rather than benefiting the retirement account. According to Internal Revenue Code Sections 408 & 4975, a disqualified person is generally defined as the IRA holder, any of his or her ascendants or descendants, and any entity controlled by such persons. Disqualified persons are prohibited from engaging in certain types of transactions.
In 2015, an Arkansas court decided on a bankruptcy case, which concerned the legality of partnering with one’s retirement funds to make alternative asset investments. The court held that forming a partnership between a self-directed IRA and an entity owned by the IRA holder (and spouse) was a prohibited transaction. The case involved the Kellermans, spouses who each owned a 50 percent share in Panther Mountain Land Development, LLC. In order to acquire and develop a four-acre property, the company partnered with Mr. Kellerman’s self-directed IRA: the IRA contributed property and Panther Mountain contributed property and cash. Since the couple owned Panther Mountain personally, it became a case of self-dealing … and triggered a prohibited transaction under IRC 4975(c)(1)(D).
By entering into a transaction with IRA funds that in some way directly or indirectly involves a disqualified person, the IRA owner must prove the transaction does not violate any prohibited transaction rules under IRC Section 4975, which can be difficult to satisfy, as the Kellermans found out. As the court stated, using assets of a self-directed IRA for the benefit of disqualified persons (in this case, their personally owned land development company) was a direct conflict of interest.
Of course, this was a very complicated case and every detail has not been hashed out within this article. It is also important to note that there are instances where an IRA account owner may partner with their own IRA or other disqualified parties IRAs and personal funds; however; there are many tests in order to determine if it is allowable and these partnerings must be structured and maintained in very specific ways.
At Next Generation Trust Services, our rigorous transaction review process is in place to help our clients become aware of when a transaction may be considered prohibited. Although combining self-directed retirement funds and personal funds on a transaction is not necessarily prohibited, it can be very risky and trigger the IRC Section 4975 prohibited transaction rules. If you are considering such a transaction, we advise that you consult an attorney that specializes in ERISA issues; and, as always, our helpful professionals are available to answer your questions about self-directed investments at Info@NextGenerationTrust.com or 1-888-857-8058.
Retirement Savings with Your Future in Mind
Saving for a big ticket item like a car is relatively easy—you determine what kind of car you want, how much you want to spend and then you start saving. Saving for retirement is much more challenging. For instance, how long will you need the money? Since no one knows how long they will live, answering that question and undertaking the necessary savings needed to retire successfully can be tough.
According to the Society of Actuaries, people are living 10 percent longer than they did 20 years ago. Men who reach the age of 65 can be expected to live to an average age of 86.6 and women to 88.8. And, those are only averages. Online longevity calculators such as the Actuaries Longevity Illustrator may provide additional insight into your potential longevity.
With longer life spans on the horizon, individual investors need to get more aggressive about retirement savings to be able to fund their desired standard of living in retirement and avoid falling into longevity risk. Longevity risk occurs when the individual depletes his/her resources before the end of life. This problem can affect anyone but typically hits widows over 85 because income falls by about one-third after the death of a spouse. However, it can happen sooner than that. According to Social Security Administration data, 14.5 percent of widowed women over the age of 65 live in poverty; as well as divorced women (17.1 percent); and those who never married (23.2 percent).
Longer life, lower investment returns
Consider this: A 35-year-old couple with household income of $50,000 would need to save between 11 percent and 13 percent in pre-tax dollars to maintain their standard of living, while the same couple with household income of $100,000 would need to save between 13 percent and 16 percent.
Since investors are experiencing high asset prices on stocks and lower returns on safe assets such as bonds, aggressive savings alone won’t resolve this fiscal challenge. In fact, a consistently low-return environment means the percentage of income a person needs to save to meet a retirement goal needs to increase and also reduces the income a person can expect to receive once that goal is reached. All of this translates into lower expected returns in the future.
If reality bites, bite back
Here are some suggestions to overcome the financial reality:
- Calculate how much income you will need to save for retirement using a lower than expected rate of return. Not sure if you will have enough to retire? Check out CNN’s Money retirement calculator.
- Save more now in order to be able to fund your desired standard of living in retirement. (High earners will need to save even more.)
- Lower the percent you need to save by retiring later. This will reduce the number of years you will have to draw from your nest egg.
- Evaluate your Social Security strategy. You can maximize your Social Security with a delayed benefit claim.
- Self-direct your retirement savings. By taking control of what your retirement savings are invested in, you can maximize your returns.
Self-directed IRAs can provide informed investors the ability to develop a more diversified portfolio that they control. A self-directed retirement plan allows the individual to respond to economic downturns or take advantage of opportunistic (and tax-advantaged) investments with greater flexibility.
At Next Generation, our professionals are available to answer questions about self-directed retirement plans and the alternative assets allowed within these plans, and our transaction specialists ensure that you are investing within IRS guidelines. Since we do not give investment advice, we strongly recommend you consult your trusted financial advisors about your investments and any tax implications they have for your unique situation.
Want to put your retirement plan in a better state? Contact Next Generation at 888.857.8058 or Info@NextGenerationTrust.com, or read through our Starter Kits for more information.
Real Estate Investments and Self-Directed Retirement Accounts: What you Need to Know
For savvy investors who already know and understand real estate investing—and might be doing so outside of their existing IRA—using funds in a self-directed retirement plan to buy real estate has a number of positive financial and tax benefits.
As with all alternative assets allowed through self-direction, real estate is a great way to diversify your retirement portfolio and go beyond the traditional stocks, bonds, and mutual funds. You can also generate tax-deferred (Traditional IRA) or tax-free (Roth IRA) income or gains with real estate investments.
Investment gains
When your self-directed Traditional IRA purchases real estate, all gains are tax deferred until a distribution is made or, if your Roth IRA made the investment, the gains are tax free (after-tax). Using personal funds to purchase property is a different tax scenario, leading to gains that are subject to federal income tax and very often, state income tax as well.
Income and expenses
As with all investments made through self-directed accounts, all income and expenses associated with the asset must flow through the retirement account. Expenses include repairs and maintenance, real estate taxes, and other costs related to the property. No personal funds may be used so investors are wise to make sure their self-directed retirement plan is funded amply to take care of these expenses. Rental income on investment property is paid to the self-directed IRA. Be sure to keep good records of all income and expenses generated by real estate investment that is owned by your self-directed retirement account (your account administrator and your accountant will be pleased!).
In accordance with Internal Revenue Code Section 4975, the retirement account holder cannot make an investment that will directly or indirectly benefit oneself or any disqualified person. Nor can the account holder perform any service in connection with the investment, guarantee any retirement account loan, extend any credit to or from the retirement account, or enter into any transaction with the retirement account that would present a conflict of interest.
Financing issues
Should your real estate transaction require financing, only a non-recourse loan should be used. A non-recourse loan is one that is not personally guaranteed by the retirement account holder or any disqualified person; that way, and whereby the lender’s only recourse is against the property (thereby protecting the borrower).
Note that when using a non-recourse loan to purchase real estate with a self-directed IRA, you may trigger unrelated business income tax (UBIT). We always strongly recommend that our clients discuss these transactions in full with their trusted tax professional to make sure they are going into the purchase with full visibility and having conducted due diligence. No one likes nasty surprises! Note that if you owe UBIT tax, IRS Form 990-T must be filed.
Trust your self-directed retirement account to Next Generation Trust Services
As a third-party administrator of self-directed retirement accounts, Next Generation Trust Services carefully reviews all of our clients’ transactions before executing the instructions in order to determine the feasibility of holding the asset and to try to ensure no prohibited transaction is taking place.We can answer your questions about what constitutes a disqualified person or what kinds of activity could trigger the IRS prohibited transaction rules.
Our informative video series includes one on how to fill out a real estate starter kit properly (used to open a self-directed IRA at Next Generation, for the purpose of purchasing investment property with a self-directed retirement account) as well as how to avoid making a prohibited transaction (and details on who those disqualified individuals are—including the account holder). We also have some encore webinar presentations on the topic of self-direction and real estate investing; we encourage you to watch these as well.
At Next Generation Trust Services, our team of experts manages all the paperwork related to the account and expedites the transactions on behalf of our clients after a thorough administrative review. We also handle all the mandatory reporting related to these accounts. For more information, please do not hesitate to contact us at Info@NextGenerationTrust.com or 888.857.8058 and get started today!
Age is More than Just a Number
When it comes to planning for retirement, everyone should be aware of certain milestones because everyone starts and stops at different times in their lives. Your retirement age could differ from your friends, coworkers, or relatives, but what matters most is knowing the four milestone ages that are important to the growth of your retirement plans. Keeping these ages in mind can help you optimize your self-directed retirement accounts- so be sure to make note of them!
1st Milestone: When You Start Saving for Retirement
Congratulations! You have started your retirement journey! The age you start this journey could be any age. The moment you begin thinking about your future and saving for retirement is a milestone. You could be putting away as little or as much as you’d like. The act of saving for your future can help you reach your retirement goals. If you haven’t started yet, the best time to start is always right now!
2nd Milestone: Fifty Years Old – Begin to Catch Up
Once you hit fifty, you can begin catch up contributions to your IRAs. The limit for annual contributions to all of your IRA accounts is $5,500 if you are under the age of fifty. Once you hit fifty, your contribution limit increases to $6,500 annually. Being able to put more money into your retirement accounts means you can increase the potential growth until you decide to begin taking of your distributions. Speaking of distributions…
3rd Milestone: Fifty Nine and a Half Years Old – No Penalty for Early Withdrawals
Once you turn fifty nine and a half, there is no longer a penalty for early withdrawals from your IRA. This does not mean you must begin taking distributions if you do not want to, but you can if you desire. Just make sure to remember that when you withdraw from certain accounts, like a Traditional IRA, you will need to pay income tax on the money received. If you are distributing cash from an account that has already been taxed, like a Roth IRA, you will not be taxed upon distribution since the money was taxed prior to entering the account.
4th Milestone: Seventy and a Half Year Old – RMDs Begin
Seventy and a half is when Required Minimum Distributions (RMDs) begin. It is crucial to keep this in mind, because if you do not take your RMD, you can be penalized up to 50% of the amount you were going to take. This is not the case if you have a Roth IRA. If you have a Roth IRA, distributions are not required at any age. If you need to take an RMD from your Next Generation account, please feel free to contact us at 888.857.8058 so we can calculate the amount you would need to take.
Self-directed retirement plans are administered by third-party professionals, like Next Generation Trust Services, that review and execute the transactions, hold the assets, and manage all the paperwork associated with the plan.
Next Generation Trust Services makes it easy to get started on the path to a more eclectic, and potentially more lucrative, retirement portfolio. In addition to the information available in our white paper on the topic and on our website, our Starter Kits walk you through the steps needed to open and fund a new self-directed retirement plan. Once you’ve carefully researched your investment, send us the instructions to execute your transaction and you’re on your way to being better prepared for your retirement needs.
If you have questions about the various nontraditional investments these plans allow, contact our helpful professionals for answers at Info@NextGenerationTrust.com or 888.857.8058.
Ways to Keep Your Mind – and Your Investment Portfolio – Sharp During Retirement
Mental and physical activities are important as we get older; they keep our cognition and our bodies in better shape. Crosswords, jigsaw puzzles, and math games keep your brain active. Age-appropriate workouts and fitness classes, hikes and bike rides, even mall walking are ways to keep your muscles toned at any age.
Pushing yourself to stay fit and active in all ways is an important part of maintaining a healthy retirement. The same goes for pushing yourself to build a diverse investment portfolio to maintain healthier finances in your later years. One way to build retirement wealth is to use self-directed IRA’s.
While you’re seeking something new to learn, why not apply that quest for knowledge into researching alternative assets that are allowed in self-directed retirement plans? Through self-direction, individuals make all their own investment decisions and may include a broad array of nontraditional investments within these plans.
The self-directed the planned investment, which is something he or she already knows and understands (and may already be investing in outside of an existing IRA or other retirement plan). The investor sends instructions to the retirement plan administrator, such as Next Generation Trust Services, who then performs a thorough transaction review for asset feasibility, and then processes the transaction on behalf of the account holder.
What you should know about self-directed retirement plans
- Self-directed plans are as varied as your investment interests. Just as you wouldn’t plan a boring retirement, you don’t need to plan a boring investment strategy. The nontraditional investments within these plans may be real estate, precious metals, commodities, private placements, loans or mortgages, and much more.
- Self-directed retirement plans offer the same tax advantages of regular plans. Depending on whether you open a Traditional or a Roth IRA, you’ll enjoy tax-deferred or tax-free growth on your investments.
- All income and expenses related to the asset flow through the plan. You may not use personal funds or benefit personally from the asset; the self-directed IRA or 401(k) pays for all the expenses and income goes to the retirement account—not to the account owner.
- Opening a self-directed retirement plan is easy with Next Generation Trust Services. All the forms you need to get your account open and funded are on our website here. You’ll also find informative videos about various types of forms or accounts to sharpen your knowledge.
As always, our helpful professionals are available to answer your questions about the various types of plans, alternative assets and self-directed transactions available; they can also help you get you started on your way to a potentially sharper financial future through self-direction. Contact us at Info@NextGenerationTrust.com or 888.857.8058.
2017 Tax Day Promotion!
At Next Generation, we believe you deserve credit for opening a self-directed retirement account.That’s why, now through April 18, 2017, Next Generation Trust Services is giving new clients a very special offer with our Tax Day Special:
Open a new self-directed retirement plan by April 18, funded with a rollover or a transfer of funds from another retirement account, and we’ll waive the $50 setup fee.
Earn your $50 today—go to our Starter Kits on the Client Forms page of our website to open your new self-directed IRA. You’ll find all the necessary documents to complete for rollovers and transfers along with the application and more. Please write Tax Promo 2017 on the promo line of your application.
As long as our staff has all the completed documents in hand, along with the statement from your current plan custodian by April 18, we’ll waive the setup fee of $50 (it’s okay if the transfer or rollover comes in after that date).
For more information about the differences between transfers and rollovers of funds into your retirement account, you can watch our informative video on the topic. Our blog post titled, “Funding Your Self-Directed IRA with a Transfer” explains in detail how to go about transferring funds into your Next Generation TS IRA. You can also read more about IRA contributions here. And of course, if you have any questions that still need answers, you can always contact our helpful self-directed IRA professionals at 888.857.8058 or Info@NextGenerationTrust.com.
Have You Completed Your IRA Rollover Correctly?
Rolling funds over from one retirement plan to another is not always as easy as it sounds. Direct and indirect rollovers have specific applications and IRS rules, which must be followed carefully to avoid ending up in tax court. Therefore, it is important to know all the ins and outs of the rollover process and to discuss your best strategy with a trusted financial advisor.
One study conducted by the Employee Benefit Research Institute found that 56 percent of workers preferred taking their retirement assets as a lump sum, many of which were destined for IRA rollovers.
Another statistic from Cerulli Associates claims that retiring baby boomers could push the IRA rollover surge to $12 trillion by 2020. This represents a lot of retirement funds that must be handled carefully when moving from one retirement plan to another.
Here are some basic rules about rollovers:
- There are two types of rollovers—direct and indirect. Here is the difference:
- Direct Rollovers – This is the most common type of rollover. Usually done from one custodian to the other, the client is responsible for initiating this type of money movement to the new account. The timeline for a direct rollover can usually range between a week and up to a month depending on the transaction time of the initiating custodian. Be sure to consult your current custodian for more information.
- Indirect rollovers — also called “60-day rollovers,” funds do not go directly to the new IRA. A check is made payable to the investor who has 60 days to roll over the money into another IRA (or back to the same one if chosen). You will be penalized if you go over the 60-day period.
- You may only do one rollover per year to avoid taking a taxable distribution. If you make a second rollover within one year of the initial 60-day rollover, you may be hit with a tax penalty of up to 10 percent depending on your age (under 59 ½ years old). You could possibly lose your IRA investment status in the process, so be sure to consult with your advisor or a tax professional before attempting to initiate a second rollover within a 12-month period.
- You can also do a “Trustee-to-Trustee Direct Transfer” – a more hybrid approach. In this process, you will receive a distribution check that is already made payable to the receiving IRA custodian.
Of course, everyone’s financial situation is different, so any rollover strategy should be researched first.
At Next Generation Trust Services, we are here to help with the rollover process. Whether you plan to establish a new self-directed retirement account with funds to be rolled over or with other funding for your new investments, our professional team can answer any questions and provide assistance. For instance, you can learn more about rollovers and contributions for your self-directed retirement plan with this informational video. If you are “ready to roll” (pun intended), you may open an account using our starter kits which guide you through all the steps and necessary documentation we require to administer your self-directed retirement plan. Please do not hesitate to contact us with your questions at Info@NextGenerationTrust.com or 888.857.8058.
What Would The Three Bears Say About YOUR Retirement Fund?
Are you saving too little, too much (is that even possible?) or just enough?
The Bureau of Labor Statistics states that roughly half of United States workers participate in a workplace retirement savings plan. However most of those participants do not calculate how much money they’ll need to fund their retirement, let alone check to see if they’re even on track to meet that goal.
Some advisers suggest using ages as milestones to gauge if you’re saving enough or not. For example, Fidelity Investments used to recommend for those starting out to estimate one’s salary by age 35 in order to have reasonable financial security in those golden years. However, the firm is now recalculating and moving up that timeline by recommending you save one times your salary by age 30. That means a lot of hustle (and saving) in one’s 20s.
Adding to that hustle is the recommendation to have your savings equal twice your annual pay by age 35, and three times your salary by age 40. By age 67, which is currently the full retirement age for today’s younger workers, you’d better go all Papa Bear on your retirement savings at ten times your annual pay. These guidelines are meant for people who plan to retire at 67 and who want to have their savings provide at least 45 percent of their pre-retirement pay. Those who want to work past 67, will have to anticipate their needs and make adjustments to their expenses or savings.
Don’t hibernate when it comes to retirement savings
Of course, with the behavior of the stock market over the past 20 years, it’s hard to predict future performance and return. With so many Americans struggling to sock enough away while also paying their bills, many people are caught short when it comes to retirement savings. In fact, a 2015 report from the Government Accountability Office revealed that more than half of people age 55 and up don’t have any money saved for retirement, and about half of those people aren’t getting a pension. Without any retirement savings, they will end up relying heavily on Social Security benefits—which were never meant to replace full retirement income.
Rather than stay in that bear den and hope your retirement fund grows on its own, get proactive and save, save, save—whether you are just entering the workforce or see retirement in the near future. One way to grow your IRA is to open a self-directed retirement plan and include alternative assets you already know and understand. For example, do you already invest in real estate? Do you trade in commodities such livestock or agricultural products, or natural resources? Are precious metals already adding shine to your investment holdings? You can include all of these and more in a self-directed retirement plan, and build a more diverse portfolio that is potentially more lucrative.
You can read more here about self-direction to see if it’s right for you. If you are a younger worker with many years ahead of you before you retire, now is the time to open and fund a retirement plan, whether Traditional or Roth; you may even be able to self-direct your workplace 401(k) plan (ask your employer about that) and go from savings that are not enough to just right—and then some.
Have a question about self-directed IRAs? Give our helpful professionals a call at 888.857.8058 or send an email to Info@NextGenerationTrust.com. We’ll give you the answers that are just right to help you get started.
Increased IRS Scrutiny? We Can Handle It!
At Next Generation Trust Services, we want to protect the tax-advantaged status of your account. IRAs holding non-traditional assets are being placed under increased scrutiny by the IRS because of the higher likelihood that a prohibited transaction will take place and/or proper vales will not be reported. Because of the increased scrutiny from the IRS, we will be requiring more documentation for transactions.
In order to ensure that each client receives top notch service, we have a two to five
business day review period for all transactions. Our review period reflects the amount of transactions in our queue as well as the complexity of your investment. By taking this time to review your investments thoroughly we ensure that it is administratively feasible to hold your asset.
We also like to ensure that investments are set up for success. Moving forward the following transaction types have increased requirements:
Investing in an IRA LLC will require an ERISA attorney to set up the operating agreement. It may also become required that an ERISA attorney or a CPA review all of the transactions that occur within the LLC. The increased review of single member LLCs is to help retain the tax advantaged status of your account.
Lending funds from your IRA in the form of an Unsecured Promissory Note will require a loan application from the borrower to submit to the lender (your IRA). A copy of the loan application will remain on file.
We take great pride in our customer service, and want to ensure our clients receive the best possible care. Our entire staff is cross trained so that if one associate is unavailable, another can assist you without delay. We have also added new email addresses so you can email your inquiries to us. Rest assured that you will be answered within 24 hours.
For transaction related questions or documents, please email Transactions@NextGenerationTrust.com
For questions about assets or Fair Market Values, please email Assets@NextGenerationTrust.com
For questions about accounts and online access, please email Accounts@NextGenerationTrust.com
For questions about billing, please email Billing@NextGenerationTrust.com
For general inquiries, please email Info@NextGenerationTrust.com
