Rule Breaker or Exception Maker?

I often get asked about exceptions to the 10% early distribution penalty for distributions taken from Traditional and Roth IRA accounts before reaching age 59 ½. Rather than tying to explain this in my own words I think it is best to give information taken directly from the IRS website:

Topic 557 - Tax on Early Distributions from Traditional and ROTH IRAs

To discourage the use of IRAs for purposes other than retirement, the law imposes a 10% additional tax on early distributions from traditional and Roth IRAs unless an exception applies. Generally, early distributions are those you receive from an IRA before reaching age 59 ½. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.

Distributions that you roll over or transfer to another IRA or qualified retirement plan are not subject to this 10% additional tax. For more information on rollovers, refer to Topic 413.

There are exceptions to this 10% additional tax for early distributions that are:

• made to a beneficiary or estate on account of the IRA owner's death
• made on account of disability
• made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
• qualified first-time home buyer distributions
• not in excess of your qualified higher education expenses
• not in excess of certain medical insurance premiums paid while unemployed
• not in excess of your unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
• due to an IRS levy, or
• A qualified reservist distribution

Refer to Publication 590, Individual Retirement Arrangements, for more information on these exceptions.

Increased 401(k) Contribution for 2012!

IRS Announces Pension Plan Limitations for 2012

IR-2011-103, Oct. 20, 2011 WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.  Highlights include: The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000. The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000. The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011.  For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000.  For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000. The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250. See the full IRS announcement here: http://www.irs.gov/newsroom/article/0,,id=248482,00.html

Dear Mr. Realtor

Dear Mr. Realtor:

We felt the need to write you a quick letter to tell you a little bit about our company, IRA Express, located in Cedar City, Utah and how it can benefit you and your clients. We really do appreciate your time and hope that you will take a minute to learn a little bit more about IRA Express, what our purpose is, and how it can benefit and help your business to grow.

Our primary goal is to provide record keeping and administration so individuals can further diversify their retirement accounts through self-direction. A self-directed retirement account has the freedom to invest in a wide variety of assets including real estate, trust deeds, promissory notes, private money loans, and private placement opportunities.

There are currently over 4 trillion dollars of retirement assets held in financial institutions around the country. IRA’s and other retirement accounts are a great source of capital for investment opportunities relating to real estate. A opportunity exists in that only a small fraction of the total retirement assets in the country are held outside of the stock market. This means that there are essentially trillions of dollars available as additional capital to close real estate transactions.

As a real estate professional you can use self-directed retirement accounts as a tool to help you grow your business. You can use your IRA account to invest in real estate. You can inform your clients of this opportunity and earn the commission on the sale. You can use IRA money to fund a private money loan secured by deed of trust. The possibilities are abundant!

IRA Express provides administration for these types of transactions. Our main objective is to educate you, your agency, and your clients about the freedom that is available through using self-directed retirement accounts. In order to help investors enter the realms of self-direction we generally give educational seminars about self-directed IRA accounts and would love to present to you, your clients, and your agency. I believe this knowledge is something that every real estate professional must know!

We hope that you have found this information useful. Please contact us at 888-328-8008 or email sent to ira.admin@iraxp.com You can also visit www.iraxp.com if you have any questions. Thank you for your time. We hope to hear from you soon.

Sincerely,

IRA Express, Inc.

Back To School

With school starting around the country I think it is important to talk a little bit about the basic steps and rules relating to owning real estate in your IRA. I wrote this article a while ago and am eager to share it on the blog...

Day after day we receive phone calls from prospective clients all stating the obvious; “I am tired of having my retirement in the stock market.  I do not like the fluctuations in my account. I want to move my retirement funds into alternative ‘real’ assets. I want to use my IRA funds to purchase real estate. Will you help me set up a self-directed IRA?”

A lot of people think that owning real estate in a “Self-directed IRA” is a new phenomenon, but the truth is you have been allowed to hold real estate as an alternative investment in your IRA for over 25 years.  Most people have not heard this though because the big banks and brokerage houses have done an excellent job of teaching the public that an IRA is a retirement account that is used to own an asset that they sell such as mutual funds or CDs.

Buying real estate in your IRA is not something that you can just go out and begin doing on your own.  You must have a good understanding of the rules first. I received a call yesterday from a gentleman that wanted to by a vacation condo in southern California. He wanted to live there for part of the year and rent it out to beachgoers when he was not there. The problem with this scenario is that he would be benefiting from his IRA and thus would have disqualified the tax status of his IRA. When owning real estate it is important to remember that you or any other disqualified person cannot use the property for your benefit. If you ever do you would be required to pay the prohibited transaction penalties on your IRA along with any income taxes that may be due.

Various types of scenarios exist for permissible real estate investments in your IRA. You can own property such as houses, condos, commercial properties, and undeveloped and developed land. Using real estate as an alternative investment vehicle could benefit your retirement account just as any other asset could. If your IRA purchased a rental home and leased it to a good family your IRA would collect the rents every month, and when the property was sold your IRA would receive all of the proceeds from that sale!  A traditional way to look at this scenario would be if you owned stock in your IRA and monthly dividend was issued. When that stock appreciates and you decide to sell your IRA receives the proceeds from the sale.

If you have a small IRA and cannot pay cash for real estate do not fret. There are ways to overcome this problem. One way is to try to qualify for a “non-recourse” loan. These loans can be hard to qualify for, and generally have higher than market interest rates with low loan to value requirements. With this type of loan the IRA must pay the note payment and your IRA could be liable for the UDFI tax. It would be a good idea to consult with a tax advisor if you choose to go with this method. Another option would be to partner with others to purchase the real estate where each party would own an undivided interest in the property.

One rule that must be followed is that the IRA is required to pay any expenses for the property such as property taxes, HOA fees, utility bills, or maintenance costs. Likewise the IRA is the entity that collects any income that is generated from the property. This rule is very important to follow. If you don’t do this you could jeopardize that tax status of your IRA.

It is always best to maintain a ‘hands off approach’ to the real estate owned in your IRA. You can do this by hiring a property management company to maintain the property, do any needed repairs, pay the utilities and fees, find good tenants, and to collect the rents. Using a property management company is beneficial in that it helps you show that you have remained completely separate from this property and have received no benefit from it.

Anyone who does not have a self-directed IRA can transfer their retirement assets to a self-directed account. All you need is a self-directed IRA custodian or administrator to help you open your account. Once your account is open and funded, you can begin looking for your investment property.  The administrator of your account will assist with closing the transaction, and the property will be vested in the name of your IRA. Once you reach this point, your IRA has entered the realms of self-direction and if situated correctly, will reap the rewards!

Please Note:

As with most investments the real estate market experiences fluctuations. It is imperative that you consult with a competent investment adviser before deciding to make an investment in your self-directed IRA.

All information contained in this article is for informational purposes only. IRA Express does not offer investment products or provide accounting, tax, legal, or investment advice. Interested parties seeking investment products or advice should seek and consult with persons or entities licensed and qualified in those areas relating to those matters.

Get That Monkey Off Your Back!

Bananas. I like bananas. Monkeys like bananas. I think having a pet monkey would be fun. We would be best friends. I could feed it bananas, play with it, care for it when it is sick, clean up after it when it....oh wait....yuck. Maybe not so much fun after all.  That sounds like more work than fun.

If only our retirement accounts weren't so much work. It seems like all we do is take care of our retirement accounts - we feed it money, play with it, try to care for it when it is sick, and then we end up having to clean up after it when it...well, you know. I guess if you ride a roller coaster long enough you will get sick eventually!

Here's an idea. Instead of continually feeding the monkey, get that darn monkey off your back and let him take care of you. Let your monkey feed you a banana every once in a while. Cater to your talents. Invest your retirement in assets that you know. If you have a talent of buying and selling real estate to make a living you should be using this same skill to build wealth in your tax-advantaged retirement account. If you make your living as a lender or by buying and selling paper, why not do this using funds from your IRA or 401(k)? Hmmm....what a concept! Investing your retirement funds into assets that you actually know something about. The investment possibilities are wide open. This is easy to do. Transfer your starved IRA or 401(k) to a self directed IRA administrator like IRA Express and start letting your monkey pamper you instead of the other way around. People like bananas too!