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DIY Investment Management of Retirement Assets: Is There an LLC in Your Self-Directed IRA’s Future?

November 12, 2019 by Leave a Comment
An idea worth considering.

As baby boomers begin to retire, the burden of making management decisions regarding their retirement assets may seem daunting. This is especially true for those who choose to forego using professional investment advisors and instead manage their assets by themselves. If DIY appeals to you, just know there are many pros and probably as many cons.

 First, the pros of choosing to manage your own retirement funds, particularly if you are a business owner with expertise in the area in which you invest. By doing it yourself, you can:

  • Exercise greater control over investment choices,
  • Enjoy greater flexibility in allocating and diversifying these investments, and
  • Avoid high fees associated with having a financial advisor.

If you choose to pursue the DIY method, a reasonable option for you to explore is the self-directed Individual Retirement Account (IRA). A self-directed IRA is like other retirement accounts that allow individuals to save for retirement. A self-directed IRA can take the form of any of the more common ROTH, SEP, and traditional IRAs, allowing your investments to enjoy benefits like tax-free growth or specified tax-deferment. The self-directed IRA’s unique attribute relates to the types of investments that are permitted. Unlike standard IRAs, a self-directed IRA extends beyond mutual funds and stocks. With a self-directed IRA, a custodian can also invest in real estate, private company stock, precious metals, and all other investments available by law.

(Some investors have taken the self-directed IRA a step further and set up what is referred to an “IRA/LLC” or “checkbook control IRA,” an arrangement by which investors may directly manage their IRA investments through an LLC owned 100% by a self-directed IRA. This arrangement is beyond the scope of this short blog post, but since it’s an option worth considering, it’s one worth mentioning.)

Pros inevitably are accompanied by cons. Self-directed IRAs are no exception. In fact, there are considerable risks and other considerations, you should take into account:

  • Clarity of Goals. One significant limitation for individuals attempting to manage their own retirement accounts is that they haven’t given serious thought to their financial goals, let alone their retirement plans. To successfully manage retirement assets, you must understand exactly what you are trying to achieve and strategically align your investments with those goals. Failure to do so may result in inadequate savings or over-spending. Both mistakes can lead to complications once you retire.
  • Understanding of Financial Concepts. In addition to having a clear vision for your financial future, you must understand basic financial concepts associated with investing. For example, anyone interested in managing their retirement funds should be able to develop an asset allocation strategy that incorporates factors like tax rates, age of retirement, required income, and current assets. Without a solid understanding of how these various factors influence each other, you could under-save and outlive your retirement funds.
  • Compliance with complex investment rules. Understanding your goals and navigating complex financial concepts will not matter if you violate one of the many rules associated with investments. The federal government has a variety of regulations that govern the types of permitted transactions, who can be a party to such transactions, and the extent to which various taxes apply. For example, in a self-directed IRA, clearly defined rules prohibit certain transactions characterized as self-dealing. To that end, your self-directed IRA is not allowed to engage in transactions with certain people, including the account owner, family members, and business partners. What constitutes self-dealing is defined by the Internal Revenue Service and case law. Figuring out which transactions are allowed is tricky, and failure to comply with IRS rules can result in hefty fines.

In short, going DIY? Be careful out there. Better, don’t DIY in every aspect of managing your retirement funds. Be honest with yourself: Seek advice where you lack knowledge.

Filed Under: IRA, Limited Liability Company, LLCs, Roth IRA, Taxes Tagged With: ,

Estate Planning Seminar at Pleasant Grove Library

February 13, 2017 by Leave a Comment

I’ll be presenting a seminar on DIY — Do It Yourself — Estate Planning at the Pleasant Grove Library on Wednesday, March 8, 2017 at 7 PM. Come an enjoy the discussion. The address is 30 E Center St, Pleasant Grove.

If you have a question about wills, trusts, and other aspects of estate planning, maybe I can answer it.

Filed Under: Advance Health Care Directive, Ancillary Probate, Basis, Blended Families, Charitable Giving, DAPT, Decanting, Dynasty Trust, Estate Planning, Estate Tax, Guardians, Health Care Power of Attorney, Insurance, IRA, Life Insurance, Living Will, Power of Attorney, Probate, Stepfamilies, Succession Planning, Tax Court, Trust Protectors, Trusts, Wealth Transfer, Wills

IRA Rollover Gotcha Down?

October 11, 2016 by Leave a Comment

We all know the rule:

Sections 402(c)(3) and 408(d)(3) provide that any amount distributed from a qualified plan or IRA will be excluded from income if it is transferred to an eligible retirement plan no later than the 60th day following the day of receipt. A similar rule applies to § 403(a) annuity plans, § 403(b) tax sheltered annuities, and § 457 eligible governmental plans. See §§ 403(a)(4)(B), 403(b)(8)(B), and 457(e)(16)(B).

No, actually, we all know that rule stated this way:

You have 60 days to get your distribution from one IRA or retirement plan to another IRA or retirement plan, or you suffer the tax consequences. The “getting to one from another” is called a rollover–typically an IRA rollover.

If you fail to complete the rollover within 60 days, the penalties can be severe, including income and excise taxes, interest, and penalties.

get-out-of-jail-freePeople do rollovers for a variety of reasons. They retire. They change jobs. They become dissatisfied with their current IRA provider. In those cases and others, there’s a need to change move your retirement money from one plan to another. And typically the move goes smoothly–without a hitch.

Except when it doesn’t. What if the rollover takes more than 60 days? Then what?

Well, the IRS recently issued a new rule, Revenue Procedure 2016-47, that recognizes certain realities: Life happens.

  • Checks get misplaced
  • Houses burn down
  • The Post Office screws up
  • The fish were biting (just kidding)

Yup. If life hits you in the face, the IRS is going to wipe the tears away and tell you to go back outside and play–that is, they’re going to waive any penalties. There is a catch–of course:

  • What hit you in the face must be among the many excuses the IRS lists in the Revenue Procedure 2016-47 AND
  • You must complete the rollover “as soon as practicable” after the intervening reason no longer exists (there’s a 30 day safe harbor, though you can take longer) AND
  • You must self certify to your new plan administrator or IRA trustee that you meet the requirements of the Revenue Procedure AND
  • The IRS previously must not have denied a waiver.

The Revenue Procedure provides a  handy self-certification letter, the wording of which you must follow almost to the T.  You can find the sample letter here, in the appendix of the actual Revenue Procedure. Enjoy the read.

Filed Under: Estate Planning, IRA, Retirement Planning, Roth IRA, Taxes

Stretch IRAs Under Seige?

March 31, 2016 by Leave a Comment

What’s a stretch IRA, you say? Well, it’s not a new type of IRA, rather it’s a strategy to preserve the value of an inherited IRA, to defer the tax on as much of the IRA as possible for as long as possible. As the law now stands, the owner of an IRA has to begin taking required minimum distributions (RMDs) for his or her IRA at 70 1/2. Those RMDs are based on the person’s life expectancy at that time.

Should the IRA owner die, the beneficiary of the IRA must then take RMDs based on the beneficiary’s life expectancy–regardless of how old the beneficiary is at the time. Typically, beneficiaries are spouses, people of roughly the same age as the owner, so their RMDs will be more or less the same as the IRA owner’s.

To “stretch” the tax deferral benefits of an IRA, some advisors suggest their clients change the beneficiary designation on their IRA from their spouse to their children, that is, if their spouse has other income and will have no need for the income from the IRA. Though the children beneficiaries will have to take RMDs as well, those RMDs will be “stretched” out over a longer life expectancy and therefore will be much smaller and therefore more dollars will remain in the IRA for a longer period, safe from the tax man–for now.

Got that?

Well apparently stretch IRAs are under attack, according to a piece at Wealthmanagement.com. Here’s the first paragraph, with a teaser at the end. Yes Virginia, there are some possible solutions to the problem.

The stretch IRA is under siege.

If it’s eliminated, a non-spouse beneficiary of an IRA will be required to pay income taxes on the entire inherited IRA within five years of the IRA owner’s death. Here are two promising solutions using tax-free income that your clients can act on before the law changes. Let’s discuss Roth IRA conversions and life insurance.

There’s much to talk about with regard to IRAs, so check back later.

Filed Under: Asset Protection, Estate Planning, Financial Advisors, IRA, Life Insurance, Roth IRA, Taxes
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