by Mat Sorensen | May 20, 2020 | News
From my article on Entrepreneur.com
The SBA Paycheck Protection Program (PPP) is the most significant small-business relief effort in modern history. A key component of the $600 billion-plus (and counting) stimulus rollout is that beneficiaries can have their loans forgiven so long as they use the funds for qualifying expenses, which can include payroll, rent, mortgage interest and utility payments.
The program was extremely popular in round one, and the initial $350 billion in funding was claimed in only 13 days. The SBA began approving an additional $310 billion from the second round on April 27, but as of May 10, only $120 billion in funding remained. (A good chunk of which is owed to dozens of publicly traded companies having returned multi-million-dollar loans.)
by Mat Sorensen | Jan 7, 2020 | News
The SECURE Act was signed into law by President Trump at the end of 2019, and makes sweeping changes to the laws affecting retirement plans, including IRAs. The law, known as the SECURE Act, is a mixed bag of good, bad, and ugly. This article breaks down the details that IRA owners need to know moving forward.
The Good
RMD Age Raised to 72
- Required Minimum Distributions (RMDs) are no longer required until the IRA owner reaches 72. Prior to the new law, RMDs were required once the account owner reached age 70½. By extending the RMD requirement to 72, IRA owners can delay taking distributions from the IRA by an additional 1½ years. This is a good thing as you can let more money grow tax-deferred. The 70½ year rule was also confusing, as it takes a while to do the math and figure out what year you turn 70½. It used to be the only half-birthday you had to keep track of. There is still no RMD requirement on Roth IRAs. If you already reached 70½ in 2019 or earlier, and haven taken out previous distributions, then you continue taking distributions as usual (even if you aren’t yet 72).
IRA Age Limit for Contributions Removed
- There is no longer an age restriction on when you can contribute to an IRA. Prior to the law, Traditional IRA contributions were restricted once you reached RMD age of 70½. Under the new law, there is no longer a restriction (even when you each 72). This means older IRA owners who are still working or have earned income can continue to contribute to a Traditional IRA.
Exception to 10% Early Withdrawal Penalty for Birth or Adoption
- A new exception to the 10% early withdrawal penalty was added in the case of the birth or adoption of a child. This is limited to $5,000, but will allow new parents to withdraw up to $5,000 from any IRA or other retirement account without having a 10% early withdrawal penalty apply. Taxes would still be due on Traditional (pre-tax) funds withdrawn, but the 10% penalty is waived.
The Bad
The Stretch IRA Has Been Gutted
- The Stretch IRA, whereby a non-spouse could inherit an IRA or Roth IRA and take distributions over their lifetime, has been gutted. While a non-spouse can still inherit an IRA or Roth IRA, the account (in most instances) must be distributed in 10 years. There are no annual distributions required under this new rule over the 10-year period. Instead, the total account balance just needs to be distributed in 10 years. So, if you inherit an IRA in 2020 or later, then you will have 10 years to continue investing the account and you can take distributions whenever you want (or just at the end) with the full amount being distributed within 10 years. There are some persons who can still use the old Stretch IRA rules, but these groups are limited and include: Disabled or chronically ill persons, minor children inheriting, and beneficiaries not more than 10 years younger than the IRA owner.
The Ugly
The elimination of the Stretch IRA was bad and ugly. What else can I say? The only good news is that those who have already inherited one in 2019 or earlier can still operate as usual. Everyone else who looked forward to one will have to take solace in the fact that they at least have 10 years of “stretching” to continue investing the funds in a tax-free (Roth) or tax-deferred (Traditional) manner. And, under the new rule, there is no RMD rule in effect each year. Instead, the total amount must be distributed at the end of 10 years. This makes things a little easier with self-directed assets and also helps any IRA owner – 10 years is still a good amount of time – get a little bit of additional tax-deferred (Traditional) or tax-free (Roth) growth.
At Directed IRA we are a custodian of inherited Traditional IRAs and inherited Roth IRAs, we are keenly aware of the changes and are helping our clients understand the new rules. Please reach out and gives us a call ((602) 899-9396) if you have questions on these new rules.
Mat has been at the forefront of the self-directed IRA industry since 2006. He is the CEO of Directed IRA & Directed Trust Company where they handle all types of self-directed accounts (IRAs, Roth IRAs, HSAs, Coverdell ESA, Solo Ks, and Custodial Accounts) which are typically invested into real estate, private company/private equity, IRA/LLCs, notes, precious metals, and cryptocurrency. Mat is also a partner at KKOS Lawyers and serves clients nationwide from its Phoenix, AZ office.
He is published regularly on retirement, tax, and business topics, as well as a VIP Contributor at Entrepreneur.com. Mat is the best-selling author of the most widely used book in the self-directed IRA industry, The Self-Directed IRA Handbook: An Authoritative Guide for Self-Directed Retirement Plan Investors and Their Advisors.
by Mat Sorensen | Aug 13, 2019 | Investing
If you’ve inherited an IRA from a parent or another loved one, it is likely that you have an Inherited IRA (aka, Beneficiary IRA). These can be powerful accounts, but you need to understand the Required Minimum Distribution (“RMD”) rules for your Inherited IRA to properly utilize it. The inherited IRA may be a Traditional or Roth IRA, and there are three different distribution options you may elect when you inherit the IRA. These distribution options dictate how you can invest the account. Please note that if you inherit an account from a spouse, you can just do a spousal rollover and consider the account as yours. This article is for those inheriting an IRA from a non-spouse.
Distribution Options
You will have three distribution options upon the death of your loved one to receive the funds from their IRA. In general, the best option is the “Life Expectancy Method” as it allows you to delay the withdrawal of funds from the IRA, and allows the money invested to grow tax-deferred (Traditional) or tax-free (Roth). The three options are outlined fully below:
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Lump Sum
The first option is to simply take a lump-sum and be taxed on the full distribution. There is no 10% early withdrawal penalty (regardless of your age or the deceased owner), but you are taxed on the amount distributed if it is a Traditional IRA. You’re also giving up the tax-deferred (Traditional) or tax-free (Roth) benefits of the account. Don’t take this option. It’s the worst tax and financial option available to you.
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Life Expectancy Method – Stretch IRA
The Life Expectancy Method is the best option. Under this option, you take distributions from the inherited IRA over your lifetime based on the value of the account. These distributions are required for Traditional IRAs and even for inherited Roth IRAs. For example, if you inherited a $100,000 IRA at age 50, you would have to take about $3,000 a year as a required minimum distribution each year and the rest can stay invested. The RMD amount changes each year as you age and as the account value grows or decreases. There is no 10% early withdrawal penalty when you pull money out of the account regardless of your age. Traditional Inherited IRA distributions are taxable to the Beneficiary while Roth IRA distributions are tax-free. And yes, Inherited Roth IRAs are subject to RMD even though there is no RMD for regular Roth IRAs.
There is pending legislation which the House has passed, but the Senate has sat on, which would limit the ability to stretch the IRA out to a maximum of 10 years. Even if that legislation passes, the Stretch IRA will be a good option to at least continue the tax benefits of the inherited IRA for 10 years.
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Five-Year Method
This option is available to all inherited Roth accounts, but is only available to inherited Traditional IRAs where the deceased account owner was under age 70 1/2 at the date of their death. Under this option, the Inherited IRA is not subject to RMD. However, it must be fully distributed by December 31st of the fifth year following the year of the account owner’s death. There is no 10% early withdrawal penalty, and distributions are subject to tax. Again, this option is only available to Traditional accounts.
Investing with a Self-Directed Inherited IRA
Yes, you can self-direct your Inherited IRA (aka, beneficiary IRA). Before you do, make sure you understand the amount of funds you’ll need to take as an RMD, and that you will have available cash in the account to cover those RMDs. As I described above, assume you are 50 and inherited an Inherited IRA for $100,000. You will need to take annual distributions of around $3,000. So, if you invest all of the $100,000 into an illiquid asset, then you will be unable to take RMDs and you will force the IRA account to pay stiff penalties. Consequently, when making a self-directed investment from an Inherited IRA, you must take into account the amount of the investment, the total value of the account, and the timeline of the investment (when will it generate cash back to the IRA). If you inherited the $100,000 account above, you may decide to only invest $70,000 of the Inherited IRA into an illiquid investment (e.g. real estate or private company), while leaving the other $30,000 to be invested into liquid investments like publicly-traded stocks, CDs, cash or mutual funds. This will leave funds available for RMD until such time as the illiquid investment generates income or is sold for profit.
Stretching out the benefits of an inherited IRA can be powerful, but make sure you plan for RMDs before you make any self-directed investments from your Inherited IRA.
Self-directed Inherited IRA accounts can be set-up at Directed IRA in as little as five minutes on-line at www.directedira.com.
Mat has been at the forefront of the self-directed IRA industry since 2006. He is the CEO of Directed IRA & Directed Trust Company where they handle all types of self-directed accounts (IRAs, Roth IRAs, HSAs, Coverdell ESA, Solo Ks, and Custodial Accounts) which are typically invested into real estate, private company/private equity, IRA/LLCs, notes, precious metals, and cryptocurrency. Mat is also a partner at KKOS Lawyers and serves clients nationwide from its Phoenix, AZ office.
He is published regularly on retirement, tax, and business topics, and is a VIP Contributor at Entrepreneur.com. Mat is the best-selling author of the most widely used book in the self-directed IRA industry, The Self-Directed IRA Handbook: An Authoritative Guide for Self-Directed Retirement Plan Investors and Their Advisors.
by Mat Sorensen | Jul 8, 2019 | IRA/LLCs
Many self-directed IRA investors use an IRA/LLC (aka “checkbook-controlled IRA”) to hold their self-directed IRA investments. For an overview, see my video here. When using the IRA/LLC structure, the name of the LLC is on title to the assets, and the LLC’s bank account receives the income. As a result of this structure, the self-directed IRA owner may be asked by a title company, property management company, or other third-party to complete an IRS Form W-9 form for the IRA/LLC. Form W-9 is the document these parties request in order to issue 1099’s for rental income or for sale proceeds for real estate, stock, or other assets sold by the LLC. Form W-9 can be tricky and needs to be handled differently when you have a single-member IRA/LLC (i.e. when the IRA owns the LLC 100%) than when the LLC has two or more owners (aka “partnership”). It is important that the W-9 is completed properly so that the IRS does not confuse whether the LLC is owned by the IRA or by the IRA owner personally.
Single-Member IRA/LLC
The W-9 can be tricky to complete in the single-member IRA/LLC situation. Many IRA owners will include the LLC EIN in Part I of the form or will provide the owner’s SSN. Both of those answers are incorrect. I have provided a sample W-9 form for “ABC Investments, LLC” below:
Let’s go through each line to explain the responses. I’ll start on line 1.
- Name: In the instance of a single-member IRA/LLC, the IRS considers the LLC to be disregarded, which means that the LLC is not a separate taxable entity and instead the tax reporting goes directly to the owner. In this instance, the owner of the LLC is the IRA. Consequently, the name on line 1 should be the name of your IRA. If you have a self-directed IRA with our company, that name would be something like, “Directed Trust Company FBO John Doe IRA.”
- Business Name: Line 2 is where you will list the name of the LLC. So, for example, if your IRA/LLC is called “ABC Investments, LLC,” then you would provide that name on line 2.
- Tax Classification Box: This is the section that causes confusion and often results in incorrect selections. In this section you would check the first box, “Individual/sole proprietor, single-member LLC.” When the IRA owns the LLC 100%, the LLC is considered a single-member LLC.
- Exemptions: IRA/LLCs and IRAs are an exempt payee, and as a result, you should include Code 1 on the first blank space on line 4. See line 4 instruction on Code 1 for more details.
- Address: On line 5 and 6 you will include the mailing address for the LLC. Do not include your IRA custodian’s address as any 1099s for the IRA will be sent to the IRA custodian’s address. While most 1099s and tax reporting forms generated from a W-9 do not result in a reporting or tax obligation for the IRA, it is best that the IRA owner, who is responsible for the account and decisions, receive the 1099s at their address.
- Address (Cont’d): See line 5 response information above.
- List Account Number (Optional): You may include the IRA account number with your IRA custodian on line 7, but this is optional and is not required. If you have multiple IRAs with the same custodian, it would be helpful to also provide your account number for the specific accounts involved. Otherwise, if needed, the IRA is identifiable by the name line 1.
Part I
The next section is called Part I, and is the section where a social security number or employer identification number is used. This section is often completed incorrectly. The correct response is the EIN of party on Line 1. In this instance, Line 1 is the IRA. Most IRAs should not have their own EIN, and you should not obtain an EIN for the purpose of a W-9. You may have an EIN for your IRA because you have Unrelated Business Income Tax (UBIT) for your IRA (which is less common). However, most self-directed IRA custodians do not have an EIN for their IRA. Instead, what you should use is the reporting EIN of your IRA custodian. All IRA custodians have an EIN that is used for their customer accounts, and this EIN can be obtained by contacting your IRA custodian.
Most IRA/LLC owners have an EIN for their LLC and some will use that EIN in Part I. While that is the correct response in the multi-member IRA/LLC (“partnership”) context, it is not the correct response for the single member IRA/LLC. Another incorrect response on Part I is to use the social security number of the IRA owner. This is also incorrect as you do not personally own the LLC. An incorrect response on Part I doesn’t cause a prohibited transaction or disqualify the IRA, but it could create tax reporting confusions with the IRS.
Finally, the manager of the LLC would sign on Part II.
Multi-Member IRA/LLC
If your IRA/LLC has more than one owner, it is considered a multi-member IRA/LLC. Most multi-member IRA/LLCs are taxed as partnerships and as a result, the W-9 for a multi-member IRA/LLC is different from the single-member IRA/LLC.
The multi-member IRA/LLC is far more straightforward. I have provided a sample W-9 below. The important items for the W-9 in this instance are as follows:
- Line 1 is the name of the LLC: In a multi-member IRA/LLC, the entity files a tax return and is recognized at the LLC level by the IRS.
- Line 2 is blank as line 1 is the LLC name and they are the same.
- Check the box limited liability company and then indicate letter “P” for partnership.
- Skip the exemption code since the LLC itself has its own tax status (partnership usually). Even though it may be owned by IRAs the exemption doesn’t apply at the LLC level.
- Include the LLC mailing address.
- Continued mailing address.
- There is no need to list the account numbers of the IRAs here as the taxable entity itself is the LLC – not the IRAs – and there isn’t an account number for the LLC.
Part I
The LLC’s EIN should be used and provided in the box for employer identification number. Since a multi-member LLC is taxable itself as an entity (partnership return), it provides its own EIN for reporting uses on the W-9. The IRA custodian’s EIN is not used in this instance.
by Mat Sorensen | Jun 17, 2019 | Investing
HSAs (“Health Savings Accounts”) are growing in popularity as Americans are discovering significant tax savings with these accounts. Why are they popular? There are many reasons why; some well known and others not so well known.
Let’s start with the primary benefits that are generally well known:
First, contributions to an HSA are fully deductible regardless of your income, and there is no high-income phase-out. The deduction also applies whether you itemize on your tax return or not, so everyone gets to use it. This isn’t the case for other major deductions like charitable contributions or mortgage interest, which only apply if you itemize on your tax return and itemizing is getting less common after tax reform that was enacted in late 2017. The other commonly known benefit of the HSA is that it can grow from the investments tax-free and comes out entirely tax-free to pay for or to reimburse the account owner for their qualifying medical expenses. For a quick summary of the basics and for qualifying rules, check out my partner Mark J. Kohler’s article here.
Now, lets discuss the additional benefits of an HSA that aren’t as well known:
You don’t need earned income to contribute to an HSA
Contrary to retirement plan rules for IRAs and 401(k)s, which require you to have earned income (i.e. wage, self-employment income) to contribute, you do not need to have earned income to contribute to an HSA. You can make the contribution from any source and that contribution will be a deduction against other income on your tax return (i.e. rental income, investment income, etc.).
Your spouse can inherit your HSA with no tax due
If you’ve built up an HSA that you don’t end up using, you can pass the HSA on to your spouse. A spouse can inherit the HSA and can transfer it over to an HSA in their name. The surviving spouse can then use the funds for their qualifying medical expenses during their lifetime. If the account is inherited by a non-spouse beneficiary, then the account is considered fully taxable to the person receiving the account. Non-spouse beneficiaries (i.e. children) are allowed to use the account to pay for the deceased account owner’s qualifying medical expenses for up to one year of the date of death as medical bills and expenses are determined, and then any remaining balance is distributed to the non-spouse beneficiaries and is subject to taxation.
You can self-direct your HSA and invest it into real estate or other alternative assets
Many HSA account owners just let their HSA funds sit in a savings account or they invest into mutual funds. Some place their HSA funds into a brokerage account,and buy and sell stock. And others are investing them into real estate, private LLCs, precious metals, private equity, venture capital or start-ups. Like a self-directed IRA, an HSA can be invested into all of these alternative assets and are subject to the same prohibited transaction rules and UBTI tax as IRAs and other accounts. We’ve been advising clients for years on how to self-direct their HSA and are now helping clients establish self-directed HSA accounts at Directed IRA & Directed Trust Company. We’ve seen account holders invest them into private placements, real estate, and into HSA-owned LLCs.
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