Category: Individual Retirement Accounts

Investment Types

You should never feel as if your retirement funds might be able to do more outside of your IRA vs inside. Funny concept, when all we have been taught over the years is to invest in the stock market and earn an average return to grow your retirement. Thankfully, Mountain West IRA allows you to invest in what you know best!

Let’s talk about the different options of investments.

Common Investments vs. Alternative Investments

  • Common Investments: Public stocks, bonds, mutual funds. You can open an IRA with almost any financial custodian that you see on TV or at your local bank, and you can have the option to invest in a public stock trading platform.
  • Alternative Assets: Real estate, promissory notes, private companies, or precious metals. YES, you can use your IRA to invest in all of the above. You will not find this type of account at your local bank or big-name financial organization. You will want a company that specializes in self-directed IRA’s with alternative assets. You choose the investment and have the opportunity to invest in what you know. You do Not have to go with a company that offers the same cookie cutter investments as every other company. You can have the freedom of self-direction, where you can build your retirement employing the same tax-deferred or tax-free methods of retirement accounts.

Our favorite thing to hear after a client does their first transaction is, “Why have I not heard about this sooner!” The education is out there. However, you must wade through a swamp of commission-seeking financial advisors to get it. Keep in mind, someone who is only trained in common investments may not be educated in alternative assets.

Diversification is very important when it comes to retirement. This is your future – putting time aside to learn the methods that fits you and your family best are important.

Invest in what you know best! Click the link below that interests you.

Promissory Notes

Real Estate

The Differences Between a Traditional IRA and a Roth IRA

Choosing the correct account for yourself and your family may seem complicated and confusing, but you only have a few options when it comes to how you wish to be taxed. Below we share a comparison between a Traditional IRA vs a Roth IRA.

Traditional vs. Roth

  • Traditional: You may potentially receive a write-off on your taxes for contributions, determined by your household income. The funds then grow tax-deferred by revenue and dividends generated from your investments. Upon retirement age (59.5) you can begin distributing funds from your Traditional IRA without penalty, but this income will be added to your gross household income, so you will have to pay taxes on these funds. You can, if you wish, wait to distribute any funds from your account until 70.5 years old. At that point, the IRS rules say you must begin taking Required Minimum Distributions or RMD’s. This is basically the government’s way of saying, you received a write-off when you put these funds into this account we need to make sure to get our taxes before you pass away. I know, somewhat morbid!
  • Roth: You do NOT receive a write-off on your taxes for contributions. The contributions you make to this account are “after-tax dollars.” However, you will get to grow your retirement money tax-free, forever! Like the Traditional IRA, the funds then grow by revenue and dividends generated from your investments. After age (59.5 and 5 years of the account being opened) you can take a distribution that is both penalty and tax-free. This tax-free distribution increases your NET household income. This is also an excellent choice for an estate planning tool, as you do not have to take any RMD’s, at any age. You have already paid your taxes. You are free to do what you wish with your distributions.

* High-income households: your financial advisor may tell you that you do not qualify for a Roth. There is something called a backdoor conversion that you can contribute to a Traditional and not receive a write-off, then convert the next day to a Roth. There is never a no iif this is the account type you want!

These are the primary differences between Traditional and Roth retirement accounts. There are some other rules that may or may not apply to you depending on your household income. Please speak to a Mountain West IRA representative if you wish to learn more.

Are you interested in learning more? Here is a no cost, no obligation webinar for you to check out: Alternative Asset Allocation Model

How to Double Your Retirement Overnight

The following is a hypothetical model based off of an investors figures he figured on this actual property.

Back in 2007, the average IRA that was transferred to a self-directed IRA was about $200,000. After the crash in 2007-2008. The average value of IRAs decreases to about half, thus putting the current value at $100,000.

We will be walking through this example of a $200,000 IRA in a real-life scenario to show you how you can double your retirement overnight.

The investor purchased a rental property at the height of the market in the name of his IRA. The investor is utilizing a self-directed IRA where he can purchase alternative assets, NOT taking a distribution from your retirement account.

The property was purchased for $180,000 in a self-directed IRA coupled with a non-recourse loan. The investor was able to leverage the funds in his IRA to purchase an investment property.

What the investor had to put down on this property to qualify for a non-recourse loan was $63,000. The remainder was a loan from the bank in the investor’s IRA. The IRA will have a mortgage and a deed of trust that goes inside of the IRA. The investor does not own the property, the IRA does.

The market value on the day that IRA closed on the property increased the value to $217,000. Let’s break down how this happened; $180,000 on the property and $37,000 cash. The day before the value was $100,000.

If you recall the original value before the crash was $200,000, then the market crashed which brought the value of the IRA to $100,000. The current value was able to double overnight by using other people’s money through a non-recourse loan.

When the investor calculated this investment he chooses to calculate the value of the investment now and projected value in the future to determine when and if he would like to sell the property.

The investor projected about a 3% capital appreciation on this property per year. This percentage is based on the market value of the property at the time of purchase ($180,000). The property should make about $5,400 per year and the investor plans on holding this property for 10 years. After 10 years, the capital gain is estimated to be $54,000.

At this point, we are 10 years after the purchase. The investor’s calculations are almost spot on, the calculations fell a little below 3% but has caught up recently. The original idea was to sell this property after 10 years.

The value of the property and cash in the self-directed IRA is now $271,000. Remember, the investor started with only $100,000 in this IRA. You may be saying, “yes, but there is a loan on the property.” You are correct. However, the investor paid more than the minimum of $700 per month on the loan. This property is currently producing $1,350 per month in income. The net income has been about $900 after setting aside money for property taxes, management fees, and repairs that must be paid by the IRA. After 10 years of paying more than the minimum, the balance is now at $40,000. If the property would have been sold at 10 years for the IRA would receive $231,000 – the investors IRA only put $63,000. That is about 30% per year average annual return on this investment in a tax-sheltered self-directed IRA.

Here is a table to show how the IRA doubled overnight:
2007 IRA account value $200,000

 
After crash IRA account value $100,000

 
Investment Property Purchased:
Funds from IRA $63,000

 
Funds from non-recourse mortgage $117,000

 
New value of IRA + Cash Funds $180,000 + $37,000

 
Long-term Investment Calculation*:
Capital Appreciation at 3% times 10 years $54,000

 
10-year appreciation $271,000

 
Loan Payment at $900 per month (-$40,000)

 
IRA Tax Advantages Appreciation $231,000

 

*Estimated by investor, not advice

If you would like to learn more please visit our webinar, Alternative Asset Allocation Model 

Reasons People are Delaying Retirement

Not everyone is excited about the prospect of retirement. Some people feel like they are not quite ready financially, or they just will not know what to do with their free time when they retire. Here are three reasons people are delaying their retirement:

  1. Nest Egg Growth

Once the children leave the nest completely, investors generally have more money to put toward their retirement accounts. Some of these investors might want to take advantage of the extra cash flow and continue to contribute to a retirement account past age 62, the average retirement age in the United States. Traditional IRAs allow investors to contribute until they are 70 ½ years of age, giving them an extra 8 ½ years of investing and nest egg growth. With a Roth IRA, investors can continue to contribute even after the age of 70 ½. Making a contribution in any retirement account will require 1099 or W2 income, however it can be 100% of earned income.

  1. Shorter Retirement

Those who are concerned about the size of their nest egg also take into consideration the possible number of years they will need to finance without a steady income stream. Fewer years in retirement means they have less concerns about making the money stretch and can afford to take trips or support their current lifestyle.

  1. Health Insurance

Employees who are lucky enough to have health insurance provided through their employer might be reluctant to give that up for an individual policy. However, with a Health Savings Account this does not have to be an issue. Contributing to an HSA can lower the stress of health costs during retirement. Visit the Mountain West IRA website to learn more about qualifying for a Health Savings Account.

Age of retirement varies for each individual and can have its benefits whether you want to delay it a little bit longer or get started now.  Taking advantage of a self-directed IRA can be beneficial no matter which route you choose. Talk to a professional at Mountain West IRA today to find out more about the accounts, investment options, and the benefits of self-directed IRAs.

The Basics of Mortgage Notes

To diversify their portfolio, investors sometimes need to think outside the box. This means considering alternative investments such as mortgage notes. Investing in mortgage notes allows investors to get involved in the real estate investing world without flipping houses or vetting tenants for rentals.

When an investor uses their self-directed IRA to invest in a mortgage-backed note, the IRA acts like a bank by loaning money to the borrower. The IRA then receives a note and deed of trust. According to the terms of the mortgage, the borrower pays back the principal and/or interest to the IRA each month until the loan is satisfied. Once payments have been completed, the borrower owns the property outright.

The deed of trust provides protection for the investor in the event of default, putting a lien against the property so the mortgage holder can foreclose and take control of the property if necessary. If this happens, the IRA will own the property instead of the mortgage. The investor is then free to do with the property as they see fit.

To invest in a mortgage note, the investor needs to work with a title company or real estate broker. They will help to gather all of the necessary forms for the investor to sign and send to Mountain West IRA. As the custodian, Mountain West IRA will then review the paperwork before approving the investment to make sure everything is in order.

Mortgage notes do not require as much personal involvement as directly owning a piece of real estate, making them a favorable investment to many investors. For those interested in investing in mortgage notes with their self-directed IRA, visit the Mountain West IRA website to learn more.

The Basics of Limited Partnerships

In a partnership, which is a type of unincorporated business organization, multiple individuals, called general partners, manage the business and are equally liable to the debts of the business. Investors can invest their Self-Directed IRA in these businesses. These investors are then called a limited partners. They simply invest in the business but are not involved in management.
Limited partnerships are an investment option for Individual Retirement Account holders with Mountain West IRA. The partnership does not pay income taxes, but the individual partners have to report their share of business profits or losses. This means the investment is subject to Unrelated Business Income Tax. However, this is only if the IRA earns more than $1,000 in unrelated business income.
Although the investment might require the IRA to pay taxes, it requires little involvement by the owner since they are not involved in management. This is one of the benefits of this type of private placement investment. One important advantage when investing as a limited partner is the liability limitation. If the business goes bankrupt or is sued, the investor is only responsible for their own investment and not the debts of the business. General partners have a much greater liability.
Some rules regarding partnership investment with a self-directed IRA include:
• The partnership agreement must permit an individual retirement account or a qualified plan to be a partner
• The partnership must comply with the appropriate state law, have a determinate life, and be assignable
• The partnership subscription agreement must be signed by the investor as having been read and approved, and will be executed by Mountain West IRA on their behalf
Research and learn about Unrelated Business Income Tax and the company itself before making any investing decisions related to limited partnerships. Visit the Mountain West IRA website to learn more about private placements such as limited partnerships.

Investing in Raw Land

When investors with self-directed IRAs consider investing in real estate, they usually think of rental properties or homes they can flip instead of raw land. For many people it can be difficult to imagine the potential of vacant land and the healthy returns which may be available from this type of investment.

While raw land can require a longer investment timeframe than some other real estate investments, it offers great opportunities for those who understand and are willing to take on the commitment. There are a variety of prospective uses for raw land, including:

  • Residential and Commercial Development Property

If growth is expected in the area of the raw land, it could be parceled off and sold or leased to building contractors and investors. Or, investors could choose to develop the land themselves.

  • Oil and Mineral Producing Land

Investors may choose to lease mineral rights to mining companies or other investors.

  • Timberland

Soft and hard woods can be planted, harvested, and sold for profit. Tracts of the land could also be leased to others such as timber companies.

Some other uses for raw land include:

  • Raising crops
  • Raising cattle or other animals
  • Orchards
  • Vineyards

When considering investing in raw land, investors should understand not only the process, but the rules set forth by the IRS regarding this type of investment.

  1. All income and expenses relevant to the investment must flow directly into and out of IRA funds
  2. Avoid prohibited transactions and dealings with disqualified persons.
  3. Land purchased with the intent of running a business within an IRA is subject to Unrelated Business Income Tax.
  4. If the IRA took out a loan to purchase the asset, Unrelated Debt Financed Income Tax may apply.

For those interested in diversifying their portfolio by investing a self-directed IRA in raw land, contact Mountain West IRA. They can answers question investors might have before starting the process.