Friday, April 30, 2010

Roth IRA and Taxes


Putnam recently surveyed clients about this and found that investors who could pay the taxes on their tax-deferred accounts now, at their current tax rate, are not flocking to this retirement product the way they assumed they would.  The Putnam Investments LLC survey was focused on the higher tax bracket IRA owners who could take advantage of the window of opportunity that would allow them to spread their tax liability over 2011 and 2012 making their future tax obligation disappear.
According to Christine Fahlund, senior financial planner for Baltimore-based T. Rowe Price Group Inc. the fear of the government lifting the tax-free status of these plans would leave the higher income earners – the IRS lifted the income restrictions which had previously been at $100,000 – in jeopardy.  She said in a recent Bloomberg article: “If that happened, you would have accelerated your tax payments unnecessarily.”
More here on Roth IRAs and Taxes

Friday, April 23, 2010

Doing it Yourself: A Retirement Plan You Control

Today we are going to tackle the self-directed IRA. We all know what an Individual Retirement Account or IRA is. Briefly, it is the retirement tool for those of us who may not have access to a 401(k) that defers taxes for retirement. The deferring part is not really as complicated as it seems. In a 401(k), you have your contribution taken out before you pay taxes; in an IRA, you pay with after-tax money and then take the deduction when you file, basically subtracting the taxes from your contribution to be paid later.


How is a regular IRA different than a self-directed IRA?
The differences are not as obvious as the title of these products sounds. An IRA is an investment chosen by you and you direct the funds to it for your retirement. It seems like this should be called self-directed but in reality, it is very different from what the IRS views as a self-directed IRA.

In a self-directed IRA, you become the manager of the whole process. Rather than simply sending money to a mutual, fund company, the most common sponsors of IRAs, you direct the underlying investments. In the previous example, the institution is the middleman. In a self-directed IRA, the institution, whomever or whatever one you chose, does what you tell them to do.

While it might seem complicated and finding good help at a reasonable cost is not that easy, the rules are relatively straightforward. Following to the letter is something you have assumed was done for you in the past; not it is up to you.


Find a Trustee for your Self-Directed IRA
A person looking to open a self-directed IRA is in the same position as someone who is opening a Solo 401(k), which we discussed a couple months ago in our retirement planning for small business owners. You need to find a company that will open the self-directed IRA and act as a Trustee, essentially doing whatever you tell them to do. Then you sign broker-to-broker papers and you are done.

Keep in mind, that if you have a Solo 401(k) for self-employed investors, this process was already completed. If you have what is known as Customized Business Pension, you are also ready to take the next step. Sometimes, a self-directed IRA is referred to as checkbook IRA and the rules may require you to open an LLC or limited liability company. Either of these plans removes the custodian and that makes the investment possibilities immediate and up-to-you.

This is relatively easy and worth the effort. But you do have to be careful. Be sure that whatever the self-directed IRA profits from is paid to the trust and not to you directly. This will be the same as a distribution before they are done without penalty. This means that any gains in the IRA will be tax-deferred. So what you are doing is making your money work harder for you now than it might have been in the past.

You can invest it virtually anywhere: a franchise, rental property, annuities, you name it. You are in charge. The only two things you cannot invest in are life insurance and collectibles.


The Rules
There are few rules to follow when choosing your investments. One, you can’t invest in yourself or the spouse of the IRA owner. For that matter, the Internal Revenue Code or IRC prohibits you from investing with any of your lineal descendants and ascendants. This also includes an entity with combined ownership greater than 50% by a disqualified person(s), a 10% owner, officer, director or highly compensated employee of such entity or a fiduciary of the IRA or person providing services to the IRA.

You can’t sell your assets to the IRA either. You can’t use it to loan money to your kids or pay yourself fees for the work you have done. And you can’t use it to buy the home you live in now.


Opportunities for the Post-Recession World
This types of retirement plans opens a whole slew of possibilities for someone who as an IRA or possibly has been rolled over into one because of a job loss. There are some hard fast rules, which you can check last week’s show link to hear about, but done right, this can create outsized gains your plan may not have created otherwise.
First off, I want to caution you. Not so much about following the rules, but understanding right away, that every investment involves risk and investing in real estate can involve quite a lot of it.

The money in this IRA can be used to buy anything from Single family and multi-unit homes, apartment buildings, co-ops, condominiums, commercial property or land, improved or unimproved, leveraged or not.

The goal here is to find income producing property and have it pay your IRA. Whether you buy the property outright or finance it, the IRA owns the asset, not you.


Can You Finance this sort of loan with your IRA?
Because the IRA owns the property and the property’s value is the collateral for the loan, the only thing you have to figure out is how to pay off the loan. If the property is producing income, it pays the IRA which in turn pays the mortgage holder. Sometimes you can use other assets in the IRA or permissible contributions can be made. This is what is known as a non-recourse loan because you cannot extend credit to your own IRA.

The whole transaction needs to flow through the IRA as if it were separate from you, which it sort of is.
The cost is broken down into two categories. Management fees that the custodian charges. Not all firms who manage retirement accounts can so your choices are limited. I’ve included a few links to begin your research but by no means are these companies recommended. This is relatively small, niche market with only about 2% of the almost $4 trillion invested in IRAs under management.

And the cost of property management, taxes, and repairs is another fee the IRA must pay. With any luck, the property will be able to cover these costs with the rental or lease payments.


Some might say “buyer beware”.
Whenever you have such a small marketplace, oversight is not always done the same way it is done among bigger segments of the investment world. I expect that this particular segment of the world will begin to grow rapidly as folks realize that their old job isn’t coming back, their unemployment insurance is about to run out and they haven’t borrowed from their IRA – so far.

Another reason you should be careful is more about what you know. Buying real estate with your retirement money is actually done best by folks who have some prior knowledge about what they are getting into. Perhaps they were involved in the business before. That doesn’t mean it can’t be done, but the more you bring to the game, the better your chances of winning.

You might also look into a franchise with this money. You can also buy debt. Your IRA can become a lender of sorts buying notes on cars, Treasury bills, even lending money to companies looking to raise capital. Always wanted to invest in a hedge fund, with a self-directed IRA, it can invest. Want to invest in precious metals, foreign stock or partnerships and/or joint ventures; your IRA can do this as well.


A couple of simple pieces of adviceObviously there is the risk factor, which makes this not the be-all-to-end-all for all investors. But if you know what you are investing in and the pitfalls of that investment, you can calculate the costs in advance, this can be like heaven-sent. If you are looking at real estate, the potential is there for people who have the money to pursue some amazing bargains. 

Paul Petillo is the Managing Editor of Target2025.com

Tuesday, April 20, 2010

How Much Control over Your Retirement Plan Do You Have?


Today we are going to tackle the self-directed IRA. We all know what an Individual Retirement Account or IRA is. Briefly, it is the retirement tool for those of us who may not have access to a 401(k) that defers taxes for retirement. The deferring part is not really as complicated as it seems. In a 401(k), you have your contribution taken out before you pay taxes; in an IRA, you pay with after-tax money and then take the deduction when you file, basically subtracting the taxes from your contribution to be paid later.
How is a regular IRA different than a self-directed IRA?
The differences are not as obvious as the title of these products sounds. An IRA is an investment chosen by you and you direct the funds to it for your retirement. It seems like this should be called self-directed but in reality, it is very different from what the IRS views as a self-directed IRA.
In a self-directed IRA, you become the manager of the whole process. Rather than simply sending money to a mutual, fund company, the most common sponsors of IRAs, you direct the underlying investments. In the previous example, the institution is the middleman. In a self-directed IRA, the institution, whomever or whatever one you chose, does what you tell them to do.
Learn more about self-directed IRAs.
Catch our daily column: Repercussions, a Retirement Review

Tuesday, April 6, 2010

Take Risks with Your 401(k); Social Security has your Back

Far too many of us have moved into too conservative of a mindset when it comes to retirement planning.  Worried that we will lose our investments, we have chosen investments in our 401(k)s better suited for those who are much older, have greater accumulated wealth and need the protection fixed income investments provide.  Yet many younger investors have taken the same approach.  Avoiding risk is not what you should be doing.


You should consider Social Security as part of your retirement plan. For three reasons: one, the program offers those who pay into it – and you do so from the first dollar you make right up until the last one you earn – about a 5.5% return on your investment; two, this contribution, half by you, half by your employer or all of it by you if you are self-employed – up to $106,800 – is conservatively invested leaving you the opportunity to take a few more risks with your 401(k); three, no matter when you begin to collect it – and for the youngest among us, those first years will get pushed further back as we continue to assess the program’s solvency, which right now is good until 2037 – it will be there.

And that should be comforting thought for Boomers worried that they have not done well enough. More thoughts on the subject of Social Security and your retirement plan here.

Paul Petillo is the Managing Editor of Target2025.com

Friday, April 2, 2010

It's Time for Some Retirement Housecleaning

Every Friday morning, Paul Petillo of Target 2025.com offers his take on the world of finance and investing on MomsMakingaMillion radio.  This informative show offers listeners a unique look at the journey of retirement, the task of wealth accumulation and some simple explanations for those of us who are utterly confused.

Here is a brief excerpt from the show on 04.02.10 with a link to the entire script below.


MomsMakingaMillion: For some reason, spring is the time of year when we want to clean out the winter dreariness and usher in the new season.  This is also a good time of year to take a look at your financial house and see whether it too needs a little sprucing up.  Today, we are going to discuss the how-tos and what-fors of that task.

Paul Petillo:  There is nothing like the feeling of spring.  And we should use it to trigger some financial house cleaning.  A lot like figuring out what in your closet you should toss or give to charity, using this spring-cleaning feeling to look at your finances can and should become a regular habit.

MomsMakingaMillion: The toughest thing is figuring out where to start.

Paul:  Surprisingly, it doesn’t take that long.  None of us goes a day without thinking about where we are in terms of how much money we have, where it is going and how do I get more.  So we already know some of the answers to the question: does this old financial plan still fit?

It probably doesn’t.  Most of us are mid-career and probably have a house, kids, a job or a business (which is like a job only you get to pick the sixty hours a week you work).  Some of us have parents who may or may not live with us.  So basically, this spring financial cleaning is a way to reorganize that closet, reprioritizing what your will need to do sooner rather than later.  More...

Paul Petillo is the Managing Editor of Target2025.com