What You Need to Know About SECURE 2.0

What You Need to Know About SECURE 2.0

On March 29th, the U.S. House of Representatives passed the Securing a Strong Retirement Act of 2022 (SSRA) by a 414-5 vote. Also known as “SECURE 2.0,” the bill includes over 50 retirement plan provisions—some of which could significantly affect taxpayers with retirement plans, and employers who offer workplace retirement plans. The U.S. Senate is expected to take up a similar bipartisan bill later this year.

Why SSRA?
By the end of the current decade, about 21% of the country’s population will be 65 or older,

according to forecasts by the U.S. Census Bureau. Most non-retired adults have some type of retirement savings, but only 36% think their savings are on track. Congress is aiming to bridge the retirement savings gap with many changes that should help.

Key SSRA/SECURE 2.0 Provisions

This legislation has extensive reach and provisions that affect employers and employees who participate in workplace retirement plans as well as those with IRAs. You can read the full list of provisions and details here, however, we highlight some of the objectives below:

Get more workers signed up. Employees would be automatically enrolled in 401(k), 403(b) and SIMPLE IRA retirement plans, however, they’d be able to opt out of coverage if they wish to do so. In addition, enrolled workers’ contribution rates will automatically increase each year by 1% until their contribution reaches 10% annually. Some exemptions and grandfathering guidelines apply.

Reduction in service period requirement for long-term, part-time workers. The current requirement is three years, however, the bill will drop the requirement down to two years. Typical current eligibility requirements allow employers to exclude workers with less than 1,000 hours of service in a year; this provision would require those with at least 500 hours of service in two consecutive years to become eligible to defer income into a 401(k) or 403(b) plan.

Delay the age for mandatory distributions. The required beginning date for taking required minimum distributions (RMDs) from retirement plans would be raised gradually from 72 (the new age implemented in the original SECURE Act) to 75.

Help locate old retirement plans. When workers switch jobs, they often leave behind old retirement plans. About $1.35 trillion are in “forgotten” 401(k) plans by more than 24 million participants, according to a recent study by Capitalize. This provision would create a national database to help reunite taxpayers with money that’s rightfully theirs. **Fun fact: did you know that money from old 401(k)’s can be rolled over into a self-directed retirement plan?

Make it easier to get an employer match. Typically, to get an employer matching contribution to your workplace retirement account, employees need to contribute via salary deferrals. Some people can’t afford to defer a portion of their salary because they’re paying off student loans. Under the new proposal, student loans repayments by the employee would count as elective salary deferrals, allowing the employer to make a match.

Increase “catch-up” amounts. The current 401(k) catch-up contribution limit would be increased from $6,500 to $10,000 for workers who are 62, 63 or 64 years old by the end of the taxable year.

More tax credits to encourage more small employers to offer plans. An enhanced retirement plan start-up tax credit of 100% for the first three years—as opposed to the current 50% of qualified start-up costs—would provide a bigger tax break for small employers (50 or fewer employees) who establish retirement plans for their workers. Another proposed credit represents a percentage of contributions small employers make to their qualified retirement plan (maximum of $1,000 per employee), for 401(k) and 403(b) plans, and SEP and SIMPLE IRAs.

Domestic abuse victims could make non-penalized withdrawals. They could withdraw the lesser of $10,000 or 50% of their account balance without being subject to the early distribution penalty tax. Participants could self-certify that they were victims of domestic abuse; the funds would need to be repaid to the plan over three years.

Extended period for discretionary amendments. Employers would now have until their business’s tax return due date, plus extensions, to adopt such amendments for the preceding year that increase benefits to participants (other than matching contributions). Individuals who wholly own an unincorporated business would have until their business’s tax return due date, without extensions, to make elective deferrals.

As with any legislation that affects one’s tax scenario, anyone with a retirement plan should read up on all the SSRA provisions. Discussing these proposed changes with your trusted advisor will help you prepare for updates that may affect your retirement savings strategy.

Need more information? Contact us today.

Hedge Against Inflation with a Self-Directed IRA

America is having an inflation moment. It’s all over the news and our pockets are hurting. While inflation is not forever, those price increases are tough for many people to handle right now. This bodes the question – what can we do to hedge against inflation?

Investors holding alternative assets within a self-directed IRA, or those that wish to do so, may appreciate the “inflationary advantages” those asset classes come with.

Investing in alternative assets through a self-directed IRA can help individuals save on taxes while earning retirement wealth. These investments—such as real estate, natural resources like oil and gas, precious metals or other ‘real assets’ —provide cash flow through the retirement plan, and many do well during inflationary periods as they tend to be non-correlated with the public market.

Benefits of a self-directed IRA – during inflationary periods or any time

According to the Motley Fool, commodities—a class of alternative assets many investors include in self-directed IRAs—can be an effective hedge against unexpected inflation, given that the rise in cost of consumer goods is in part driven by increased cost of raw materials (think timber used for construction). In addition, Worth reports that real estate, private credit, and commodities have often performed well during periods of rising inflation.

Since self-directed investors can take a more agile approach to opportunistic investing, building a hedge against inflation is not their only advantage. Here are some other reasons to consider self-directed IRAs:

Not correlated with the stock market. Public markets and traditional investment vehicles (stocks, bonds, mutual funds) ebb and flow—often with wild fluctuations as we have seen over the past 20+ years. The performance of most nontraditional investments does not correlate with the stock market, so savvy investors can avoid that roller coaster ride.

Tax-deferred (or free) returns. The investment returns a self-directed IRA earns are tax-deferred (and tax-free for Roth accounts), so there are no taxes on capital gains. It’s important to note that “self-directed IRA” is not an account type, and the tax status depends on the type of account an individual opens; Traditional/Roth IRAs, SEP IRAs and Solo 401k’s are all account types that can be self-directed.

Positive cash flow. Self-directed investors are usually knowledgeable of the alterative asset classes they invest in and are comfortable making all their own investment decisions and conducting their due diligence. They know and understand what it takes to earn positive cash flow from their IRA’s investments, and they may already be investing in these asset classes outside of their IRAs. They also understand that, unlike many stock holdings, these are generally long-term investments that are less likely to be affected by temporary inflation.

Generational wealth transfer. In this scenario, the account owner can reinvest their returns and put the funds back into a new or existing investment to grow the account. This wealth can be left to any designated beneficiaries upon the account owner’s death.

The bottom line is that including alternative assets within a self-directed IRA builds a more diverse retirement portfolio—and diversity is a great safeguard against market volatility.

Benefits of a self-directed IRA at Next Generation

Next Generation offers both custodial services and full account administration to individuals who open a self-directed IRA or other self-directed account with us. We offer a plethora of educational materials on our website that not only provide information about the types of investments you can hold within these accounts, but what to expect from the setup and funding processes as well.

Need more information? Contact us today.

Explore Reducing Your 2021 Tax Bill with a Prior-Year Contribution to Your Self-Directed IRA

Contributing to your self-directed IRA qualifies as a checkmark on your retirement savings strategy and provides tax advantages as well. If you overlooked making an IRA contribution for 2021 or didn’t max out your 2021 contributions, it’s not too late. Even though the tax filing deadline is right around the calendar corner on Monday, April 18, you may make a prior-year contribution to your self-directed IRA until the filing deadline and potentially reduce your 2021 taxable income (note that Roth contributions are not tax deductible).

TIP: To ensure the funds are applied to 2021 in time to file your tax return, speak to your tax advisor about the best date to submit your contribution.

How much can you contribute and/or deduct?
The annual contribution limit is $6,000 for both a Traditional and Roth IRA ($7,000 for taxpayers over age 50). Note, however, that Roth contributions may be further limited based on your modified adjusted gross income.

Contributions to a Traditional IRA are tax-deductible up to the limit and grow tax-deferred; the distributions are taxed when you take them. Contributions to a Roth IRA don’t change your adjusted gross income because that money is post-tax; you are taxed on contributions now, but the investment earnings and distributions are tax free.

Therefore, if you’d like to lower your taxable income for the previous tax year, there’s still time to do so by contributing to a Traditional IRA. However, you’ll need to determine which will provide you the greatest benefit on your tax return—current year or prior year. That should be discussed with a trusted tax or financial advisor.

Determining current, or prior-year, contribution
There’s no real right or wrong here; it all depends on your specific financial situation. Two factors to consider are how much you plan to contribute this tax year (2022) to your self-directed IRA, and what your taxable income is for last year and this year.

How to make a prior-year contribution to your self-directed IRA
You may make a prior-year contribution and apply it to 2021 without issue if you have not yet filed your tax return. However, if you already submitted your 2021 return and want to make a prior-year IRA contribution, you must file an amended tax return.

Check your statements or contact your IRA administrator to ascertain your 2021 contribution amount to add funds to your self-directed IRA according to IRS regulations.

When you deposit the funds, be sure to tell your self-directed IRA administrator (and note it somewhere) to apply the contribution to 2021; otherwise, it will likely default to 2022 (and will show up on your tax return next year).

How Next Generation can help
At Next Generation, we offer client education about all things related to self-directed retirement plans. Our team is committed to making every transaction a smooth one, and handle each of our client accounts with utmost care, ensuring we maintain its tax-advantaged status.

Need more information? Contact us today.

Investing in Distressed Real Estate in a Post-Covid World

As our society moves past the Covid-19 pandemic, the rent relief and mortgage forbearance programs that were in place are coming to an end. The period of leniency and financial assistance due to the lockdown and ensuing economic downturn helped many real estate owners (both homeowners and landlords) get through a difficult time.

Distressed real estate at a glance

A sad fact of post-Covid America is that people are losing homes and landlords are losing buildings.

In the commercial realm, shuttered storefronts are a blight on downtowns. The lengthy shutdown of the travel and entertainment industries has left hotels, theatres, and retail properties whose owners cannot meet their debt payments. Office buildings suffered when tenants shifted to remote working and needed less space (if any at all).

On the residential real estate side, homeowners who lost income and could not make mortgage payments have gone into foreclosure. Compounding that is the fact that foreclosure restrictions put into place in response to the pandemic expired at the end of 2021. Property data powerhouse ATTOM (RealtyTrac’s parent company) released its January 2022 U.S. Foreclosure Market Report last month. That report showed there were 23,204 U.S. properties with foreclosure filings, a 29% increase from December 2021 and a 139% increase from one year ago.

Despite the downward trend, this has created new investment opportunities in distressed real estate assets.

Post-Covid alternative assets: distressed real estate for self-directed investors

Owners of self-directed IRAs have tremendous potential to build retirement wealth by investing in distressed properties. Real estate is the most popular alternative asset class held within self-directed IRAs, and there are many avenues to include distressed real estate in a self-directed retirement plan:

Fix & flip: Many savvy real estate investors are already engaged in the busy fix & flip market—purchasing, renovating, and reselling homes for a profit. These homes may be heading into foreclosure or are already REO (real estate owned—as in, bank owned) properties. Or they could be homes whose owners cannot afford to take on costly repairs and upgrades. Real estate investors relieve the owners of this burden by buying the house, making the upgrades to increase value, and flipping it.

Property tax liens: When an owner fails to pay property taxes, the city or county government may place a lien (a legal claim) on that property for the unpaid amount. The liens are sold at auctions as certificates that reflect the amount owed plus penalties.; the tax lien certificates are auctioned off based on the rate of interest the investors are willing to receive from the homeowner. The certificates may often be purchased for only a few hundred dollars.

The investor pays off the property taxes owed, and the homeowner repays the investor the full amount plus interest over a specified time. Individuals may use a self-directed IRA to invest in tax liens.

Investing in tax liens can be a complex transaction and as with any self-directed investment, the investor is expected to thoroughly research and understand the process and potential risks. Investopedia offers additional information on investing in tax liens.

Mortgage notes: Investors can include defaulted mortgages—another alternative asset related to distressed real estate—in a self-directed IRA. As we wrote about in a previous post, these “nonperforming mortgages” are purchased at a discount from the lender; full repayment terms are negotiated by the self-directed investor and the homeowner. Since a defaulted mortgage puts foreclosure on the homeowner’s horizon, this transaction enables the homeowner to stay in the home and make payments to the self-directed IRA that now holds the note.

We’ll be hosting a webinar on this topic at the end of the month. Register for it here.

Real estate syndicates and partnerships: Real estate syndicates are entities that invest in various types of commercial real estate. They partner sponsors (who source the real estate asset) and investors. The investors combine their human and financial resources to purchase and manage the properties. A real estate syndication could focus on investing in multiple distressed properties.

Secured real estate loans: A self-directed IRA can make a secured loan to a real estate investor or owner of a distressed property. The investor may need funds to renovate a house and flip it, bring a dilapidated multifamily property up to market-rate rental level, or develop an abandoned, vacant piece of land in a blighted area. The property can be held as collateral, and the IRA owner and borrower work out their terms (loan amount, interest rate, length of loan, etc.).

Partnering self-directed IRAs

Did you know that one self-directed IRA can partner with another to make an investment? As with syndicates, this arrangement brings more investing power to the transaction table. All parties work out the arrangements of that partnership, and share the expenses and income related to the asset.

Real estate and self-directed IRAs

Real estate can be a lucrative investment for investors who know and understand the market. All expenses related to the asset (construction, renovation, taxes, maintenance, etc.) flow through the IRA, which is the owner; the same goes for the income when the property is sold, the tax lien is paid, or rent is collected.

Need more information? Contact us today.

Women are Investing More—and Alternative Assets are Part of Their Retirement Strategy

NASA scientists. Corporate CEOs. Medical directors. Winning investors.

Women are roaring more loudly than ever, making history and headway as leaders in their fields . . . and winners in investing. Although women have been considered more conservative or less confident than men when it comes to investing, the Fidelity Investments’ 2021 Women and Investing Study revealed something different. Released last October, the study showed that women edged out men slightly in their investing performance from 2011 to 2020. The study also showed that:

That is a lot of money that could be invested in alternative assets. Interestingly, women are doing so in increasing numbers—and more so than men. Intelligent Partnership cited another study of high-net-worth women that showed women allocate 27% of their assets to non-traditional investments; men are only at 20%. Plus, over half (55%) said they had increased their allocation into alternative assets over the prior year.

Women investors for the win!

Some reasons why women are doing well with their investments—especially with alternatives: they are doing their research, conducting their due diligence, and investing with goals in mind. Moreover, they understand the value of a more diversified retirement portfolio that provides a hedge against stock market volatility (and inflation—a very contemporaneous concern). This trend is not new: in 2014 it was reported that 60% of women were interested in including alternative assets in their portfolios, over 47% of men. Do we call that women’s intuition or investing smarts?

Invest in those alternative assets through self-direction

Circling back to our note about the $20,000-$100,000 that women are holding in cash—yes, liquidity is important and it’s good to have cash on hand—but imagine how far those dollars could go when invested in alternative assets through a self-directed IRA. As a custodian and administrator for self-directed retirement plans, and a woman-owned business, Next Generation encourages women to continue doing that research into nontraditional investments, make their investment plans, and consider opening a self-directed IRA.

Funding a self-directed IRA opens so many doors to alternative investments that build retirement wealth—without direct correlation to the ups and downs of the stock market—and provides a tax shelter for your investment gains. Women who are already investing outside of their existing retirement plans can open and fund a self-directed IRA, and include those investments in a tax-advantaged account. Real estate, private equity, ESG investing, precious metals, and cryptocurrency are among the many alternative assets these plans allow.

Woman power = investment power

As a self-directed investor, you make all your own investment decisions; the self-directed retirement plan administrator executes the transactions based on your instructions and holds the assets. You grow your portfolio with the same tax advantages as regular IRAs, but with a much broader array of investment options.

Need more information? Contact us today.

Required Minimum Distributions and Your Self-Directed IRA

Congratulations! You’ve worked hard and have been disciplined about saving for your retirement in an IRA (or other retirement plans). Since the funds in your account are intended to support you in your retirement, you must eventually start taking Required Minimum Distributions (RMDs)—even if you plan to work well into your later years.

These mandatory annual distributions are based on the account balance at the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” This life expectancy table is used to calculate one’s required withdrawal amount for most IRA owners. (There are other tables for certain beneficiary arrangements and inherited IRAs.)

Account Types with RMDs

Just as the tax advantages of regular IRAs apply to self-directed IRAs, so do IRS rules about required minimum distributions. Taxpayers must take RMDs from a:

Note that Roth IRAs do NOT require withdrawals until the account owner dies, once the account becomes an inherited IRA.

Mandatory age for starting distributions

Prior to the 2019 SECURE Act, the mandatory age for starting withdrawals was 70½. For anyone who turned 70 ½ prior to January 1, 2020, that still holds. The SECURE Act changed this age requirement effective calendar year 2020; now, retirement plan participants and IRA owners may wait until age 72 to start taking their RMDs.

For IRA owners, April 1 of the calendar year after you turn age 72 is the date you must begin taking your RMDs. If you turned 70 ½ in 2020 or later, you must take your first RMD by April 1 of the year after you turn 72.  All subsequent distributions must be taken by December 31 of each year. If you delay the first RMD, you will have to take two distributions in one year (with the tax implications associated with them).

Failure to take your required minimum distribution by the deadline is costly, with a 50% penalty imposed on the entire amount you were supposed to take.

How much must you withdraw?

The IRS provides worksheets to calculate your RMD amount. Certain life changes, timing of the withdrawal, and IRA rollovers and Roth conversions also factor into the RMD. The U.S. Securities and Exchange Commission has an online RMD calculator to simplify the process.

In general, your IRA distributions are part of your taxable income, excluding any part that was previously taxed or can be withdrawn tax-free (such as a Roth IRA distribution). Your trusted tax advisor can guide you on how to plan for this additional income and its tax implications. You can prepare yourself by reading more about RMDs on the IRS website.

Some helpful things to note:

Taking distributions from a self-directed IRA
If your self-directed IRA has enough cash available and you wish to take the RMD from that account, you must provide a distribution form to your account administrator or custodian—such as Next Generation—for the RMD amount.

However, self-directed retirement accounts tend to hold illiquid assets such as real estate, precious metals, and private equity. When the account lacks sufficient cash to meet the RMD due to illiquid assets, there are several options:

Longer time to grow your self-directed IRA balance

As noted above, if you have a self-directed Roth IRA, you do not have to take RMDs. You may also continue to contribute to your Roth IRA after that age. However, you may no longer make regular contributions to a Traditional IRA after reaching the RMD age.

For owners of any type of self-directed retirement plan, a longer time horizon means:

Trust in the Next Generation Team

At Next Generation, we provide all of the information you need to learn more about the many types of self-directed retirement plans. As a full-service custodian and administrator for self-directed accounts, our team is here to answer any questions—whether it be from financial advisors assisting their clients, current clients inquiring about RMDs, or prospective clients looking to open an account.

Need more information? Contact us today.

Branch Out Your Retirement Savings with Timber Investments in a Self-Directed IRA

Investors seeking ways to avoid stock market volatility have been including alternative assets in their self-directed retirement plans for years. Including nontraditional investments in a self-directed IRA:

Among the many alternative assets these plans allow is agricultural commodities, such as timber and lumber-related investments that enable investors to really “branch out” when it comes to how they’re leveraging their retirement savings.

Money can grow on trees?

When you include timber or trees in your self-directed IRA, solo 401k or other qualified plan, it certainly can. Investing in reforestation projects, exotic tree plantations (such as rubber trees), or even your friend’s budding Christmas tree farm are ways to include these soft commodities in a retirement plan.

In addition to being a hedge against inflation and stock market volatility, timber can yield high investment returns over time. Investing in timberland gives investors a stake in owning productive forest lands or tree farms. This is also attractive to individuals who want to include ESG (environmental, sustainable, governmental) investments in their portfolios, since investing in trees is an investment in improving the environment.

There are several ways in which to include these investments in a self-directed IRA and earn a rate of return on the asset’s:

Your self-directed retirement account can realize returns on investment when the timber is harvested and sold for material production, or by selling the plot after its value has increased through appreciation and timber growth.

Different ways to invest in timberland through a self-directed IRA

Self-directed investors can join legions of large institutional investors already investing in forestry projects and timberland. Ways to do so include:

This website provides an interesting overview of what’s possible when investing in trees.

As with many alternative assets, investing in timber has a relatively long investment horizon as investors await tree growth and harvest. And with any self-directed investment, the account holder is strongly advised to perform full due diligence on the investments they’re interested in, including potential risks.

At Next Generation, we share ongoing education about self-direction as a retirement strategy and the many nontraditional investments they allow – like real estate, private equity, cryptocurrency and much more. Our firm also onboards new investors, executes those transactions, custodies the assets, and manages the tax reporting and recordkeeping.

Need more information? Contact us today.

Mega Roth IRAs Explained

A mega Roth IRA and the related mega backdoor Roth IRA conversion comprise a strategy to build retirement wealth with a supersizing feature (the “mega” part). Taxpayers must meet certain income eligibility requirements for contributing to a Roth IRA and the mega backdoor IRA became a way for high-net-worth or highly compensated employees to do so, through a Roth conversion.

Roth conversions – the foundation of the mega Roth IRA strategy
Doing a Roth conversion (rolling over funds from a Traditional IRA into a Roth IRA) is the basis for the mega Roth IRA strategy.

A Roth conversion occurs when the taxpayer converts pre-tax money in a Traditional IRA (funds that will be taxed upon distribution from that retirement account) into after-tax money in a Roth (since funds are taxed going into the Roth IRA and are withdrawn tax free).

Account owners may opt to convert some portion of their existing Traditional IRA to a Roth IRA every year (depending on the account balance and one’s overall financial picture). You will likely pay some taxes on the money that’s rolled over. This may make financial sense based on prevailing tax rates that year or your income.

As always, we recommend you consult with your CPA or tax advisor about executing this type of transaction, as well as determining which account will cover the tax payments (to maximize what is in the Roth IRA).

Backdoor Roth IRA
Money that is rolled over to a Roth IRA can also be from an employer-sponsored retirement plan into a Roth IRA or the plan’s Roth “bucket.” This generally involves 401(k) plans (including self-directed solo 401(k)s).

Taxpayers who build wealth through the figurative backdoor generally have income that is too high to qualify for making annual contributions to a Roth IRA or take advantage of the deductibility of Traditional IRA contributions. Even so, there are ways to shift money to the Roth IRA with the potential for tax-free withdrawals later.

Participants in a 401(k) can put up to $20,500 (or $27,000 for those over age 50) into their account. The employer may make matching or flat contributions to the employee’s account. This can be done on either on a Traditional or Roth basis. Some employers also offer the Roth 401(k) option so the employee’s contributions can be made with post-tax money and grow tax free.

The Roth conversion can be for any amount of money but again, since it could trigger a taxable event, account owners should consult their trusted advisor before doing so.

The Mega Backdoor Roth IRA
The mega backdoor Roth IRA occurs when the 401(k) participant:

  1. a) makes an extra non-deductible, after-tax voluntary contribution to the plan (up to the maximum annual limit), and;
  2. b) converts that amount to the Roth IRA or keeps it in the plan’s Roth portion.

It also requires that:

  1. a) the plan design offers this feature to add after-tax contributions to the 401(k);
  2. b) the plan allows either an in-plan Roth conversion (employee’s after-tax contributions are rolled into the plan’s Roth bucket), or;
  3. c) the employee is permitted to roll the funds out of the plan into a Roth IRA.

How is “Mega” Status Achieved?
If the employer plan offers the option, eligible taxpayers can put away up to $40,500 in after-tax dollars in a Roth IRA or a Roth 401(k) in 2022. This amount is on top of the regular 401(k) contribution limits of $20,500/$27,000 this calendar year. That means a total contribution of $61,000-$67,500 (depending on age) in 2022.

These additional voluntary contributions can be made each year, with an annual Roth conversion.

Beware: Mega Roth IRAs May Be in Danger
Some investors have notably created portfolios valued in the hundreds of millions or billions through their mega backdoor Roth IRAs. This wealth-building strategy for very high-net-worth individuals caught the attention of federal legislators last year as they crafted the Build Back Better (BBB) Act. BBB has a provision to:

However, when the BBB Act stalled in Congress, President Biden announced last month that the U.S. Senate will take it up again in 2022, so for now, the mega backdoor Roth strategy is still in play. Therefore, solo 401(k) taxpayers can still make voluntary after-tax contributions in 2022 for the 2022 tax year and subsequently convert the contribution to a Roth IRA or the Roth solo 401(k) in 2022.

Self-directed Roth IRAs (of any size) at Next Generation
If you have a self-directed Traditional IRA, the same rules apply if you wish to convert some of those funds into after-tax dollars by converting funds into a self-directed Roth IRA. As the administrator and custodian of self-directed retirement plans, Next Generation will issue Form 1099-R to the IRS to report the conversion from Traditional IRA to Roth IRA or from the solo 401(k) to the plan’s Roth IRA feature. Our team also manages all the account paperwork and required reporting for our clients’ plans.

While we do not provide investment advice, our team does provide client education about the many aspects of self-direction as a retirement strategy. This includes answers to your questions about Roth conversions and the types of alternative assets allowed through self-direction.

Need more information? Contact us today.

Don’t Put Your Self-Directed IRA LLC at Risk for Prohibited Transactions!

An IRA LLC (or “checkbook IRA”) is when the account holder of a self-directed IRA gains direct control over the IRA funds. This is achieved when the individual sets up and manages a self-directed IRA LLC, which in turn, as a business entity, establishes a checking account (for purposes of making/managing investments). The LLC is funded with cash from the IRA, which can then be deployed from the LLC’s checking account.

This approach allows self-directed IRA holders to manage their cash and account assets directly as the LLC manager, with total signing authority over an account with access to the retirement funds.

There are certain investments that may require an IRA LLC, such as cryptocurrency or foreign real estate investments, or an investor may choose to use one as a matter of preference. While a self-directed IRA LLC offers enhanced freedom, there are important rules to follow to maintain the account’s tax-advantaged status.

What NOT to do with your IRA LLC

As detailed in  a recent article, the U.S. Tax Court in McNulty v. Commissioner, 157 T.C. No. 10 (Nov. 18, 2021) concluded that an individual who purchased gold coins using her IRA received a de facto distribution of those coins when she took physical possession and stored them at home (rather than a precious metals depository as outlined in this blog article). The individual did not buy the coins directly through her IRA, but used a separate bank account in the name of an “IRA LLC” created and held by her IRA.

While the court found that she had “unfettered command” over her IRA assets, it also found there was no “independent oversight” by the custodian, resulting in a deemed distribution of those assets.

The entire transaction was conducted via the IRA using cash from the retirement plan to a bank account in the name of the LLC, so the court found that the IRA custodian “did not have any role in the management of [the LLC], the purchase of the (American Eagle) coins.” The custodian filed annual Forms 5498 reporting the value of the IRA assets, but relied solely on the owner’s reported valuation for the LLC.

What this ruling means

Even with “checkbook control” (another term for this type of investment strategy) over the funds in a self-directed IRA and an account owner’s right to fully direct the investments, according to the court in McNulty v. Commissioner, an IRA trustee must be a bank or IRS-approved non-bank custodian that will “administer” the trust in accordance with the requirements of Internal Revenue Code section 408.

The court’s ruling stipulates that a self-directed IRA custodian (like Next Generation Trust Company) is responsible for the management and disposition of the property held within a self-directed IRA. However, using an IRA LLC places more responsibility on the account holder to ensure that they NEVER take personal possession of ANY assets (whether precious metals or not) directly from their IRA LLC. If they wish to take a distribution, they must work with the custodian to deploy funds from the LLC back to the IRA itself, and then request a distribution directly from their custodian.

Mitigating risk for IRA LLCs

As you can see, checkbook control over IRA assets offers investing freedom but carries with it an element of risk regarding compliance and prohibited transactions.

It is the responsibility of self-directed investors to conduct full due diligence on their investments and their retirement plans. However, as custodians for our clients’ self-directed IRAs, we provide guidance with respect to prohibited transactions associated with use of funds through an IRA LLC—transactions over which we do not have the same level of oversight as compared to those that are held directly in the name of the IRA.

When it comes to IRA LLCs, prohibited transactions and potentially improper use of IRA funds are often not discovered until account owners are required to provide fair market values and statements from the LLC itself.

At Next Generation, we want to make sure our clients with IRA LLCs protect their retirement plan’s tax-advantaged status by avoiding prohibited transactions. That’s why we require them to:

1 – Establish and maintain the IRA LLC with an ERISA attorney (ERISA stands for Employment Retirement Income Security Act of 1974, a federal law that sets minimum standards for most voluntarily established retirement and health plans), and

2 – Sign a disclosure acknowledging what they cannot do with the LLC, per IRS guidelines regarding prohibited transactions.

Need more information? Contact us today.