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 

Benefits of a Checkbook IRA

Cheque | Blog | Mountain West IRA

To maximize your IRA investment options, it is essential to have a retirement plan that allows you to select your own alternative IRA investments. Self-directed IRA’s allow you the freedom to invest in what you know. At Mountain West IRA we can help you with that. Your IRA can invest in real estate, private stock, notes or mortgages and even Partnerships & Joint Ventures. The list can be as diverse as your imagination and only limited by the IRS rules in place for IRA investing.

Self-Directed IRA LLC 101:

1. An LLC is a legal organization that provides the advantages of a partnership while limiting legal liability of the individual partners much the same way a corporation does.

2. An Investor can use a self-directed IRA to invest in LLCs.

3. It is not necessary to create an LLC to invest in your IRA.

4. An IRA invested in an LLC tends to be complex and requires careful management to avoid tax penalties and/or prohibited transactions.

5. When setting up an LLC for your IRA, you should always consult with a lawyer who is familiar with ERISA law.

So, what are the benefits of investing in an Self-Directed IRA LLC?

1. Speed

Normally, when making a transaction through your retirement account you would need to contact us here at Mountain West IRA as your third-party administrator. This requires some paper work, possibly some check processing or wiring of funds, and depending on the type of investment, there will be forms, You can skip all of this when you establish and LLC, and set up checkbook control with your IRA. An IRA LLC gives you easy access to your funds so you can react quickly in a volatile market, and easily take advantage of a time sensitive investment. Many investment transactions will be much quicker and can be as simple and expedient as writing a check.

2. Cost Benefits

Who doesn’t want a way to pay lower fees? Checkbook control can help you avoid the transaction fees and check-writing fees normally associated with any self-directed IRA. Also, if you own multiple investments in your LLC, rather than paying bookkeeping fees on each asset, Mountain West IRA only charges you for that single asset, the LLC.
So, an LLC with checkbook control may actually help you save money, which leaves more funds available for investing.

3. Control and Freedom

Once you identify an investment you want to purchase, you can just write a check. You don’t have to fill out paperwork or get approval from Mountain West IRA. If you have performed your due diligence and are ready to invest, you can take care of it yourself.
If you have an LLC, your Self-Directed IRA is truly in your hands. You are the one who is in total control of how your IRA operates, you have the freedom to choose how and when to invest.

Using a Self-Directed IRA To Purchase Property

When investing in real estate with a self-directed IRA, there are a few rules the account holder needs to be aware of so they don’t get penalized. Here are five rules pertaining to purchasing real estate through an IRA:

  1. Cannot be Owned or Rented by Disqualified Persons

An IRA cannot purchase a property already owned by the account holder. It is also prohibited from purchasing property or selling property to disqualified persons. A Disqualified Persons cannot rent the property from the IRA, this created a prohibited transaction. Visit the Mountain West IRA website to learn more about who is considered a disqualified person.

  1. No Indirect Benefits

The account owner cannot use the property the IRA has purchased for a vacation home or as an office space for themselves. Investments are for benefits at a later date, not right now. If the property in some way benefits the account holder or a disqualified person, that is considered an “indirect benefit.”

  1. Titles

Account holders need to view their IRA as a separate entity. As such, investments are titled in the name of the IRA, not the investor themselves. Properly titled investments make the transaction clear and easy to follow when purchasing real estate in an IRA.

  1. No Out-of-Pocket Expenses

Every expense related to the property in question must be paid for through the IRA. This includes improvements, taxes, home owner’s association fees, maintenance, and more. Paying for such items outside of the IRA could lead to penalties.

  1. Buying Real Estate

With a self-directed IRA, the investor does not have to purchase the property outright for the full amount. Options like partnering with others or using a mortgage are also available.

For more details on the process of investing in real estate with a self-directed IRA, visit the Mountain West IRA website.

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.

Benefits of Rental Properties

Real estate is a tangible investment, which is one of the main reasons it has become a popular choice for IRA accounts. Unlike stocks and bonds, investors can actually visit their properties. Rental properties are a great way to diversify a portfolio and provide the ability to earn measurable income for the investor.

Here are some benefits to investing in a rental property with a self-directed IRA:

  • Income from Renters

The main benefit of rental properties is the direct income from renters. However, this is only true if the property is occupied. With a house, this can be more difficult, because there is only one renter and the property may remain vacant during transitions between renters. Apartment complexes, duplexes and other multifamily properties have more than one renter and therefore generally provide a more balanced income stream.

  • Income from Property Value Growth

Over time, property value traditionally increases, even with no changes made to the property itself. This depends heavily on the location of the rental property as some areas increase or decrease in value more quickly than others.

  • Sweat Equity

When a property is well maintained and upgraded when necessary, it will add additional value. This allows the owner to charge more for rent and sell if for a larger profit later, if they choose. Home improvement projects such as landscaping, repainting, and upgraded appliances can significantly increase the property value and attract potential renters.

  • Property Management

For investors who do not want to personally manage the property, a property manager can be hired to take care of finding and evaluating renters and ongoing maintenance. Many investors find having a property manager relieves the stress and day-to-day activities from the owner.

For investors interested in investing in rental properties with an IRA, contact Mountain West IRA for more information. Real estate is just one of the many investment opportunities available to Mountain West IRA account holders.

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.

The Balancing Act

Many younger workers have the task of balancing debt reduction with retirement savings. Often the debt they have accrued is related to student loans and credit cards. Many of these workers believe they need to pay off their debt before they begin actively saving for retirement.

However, to be able to save a sufficient amount for their golden years, young workers are going to need to save while also paying off debt. Here are some ideas on how to do that:

  1. Focus on High Interest Debt

Getting out of high interest debt should be a priority. Credit cards are usually the main culprit with interest rates as high as 18 or even 25 percent. Once rid of high interest credit card debt, try to stay out of it. When these debts are out of the way, there will be more funds available to allocate to retirement savings.

  1. Be Smart with Loans

Often, loans are just a necessary evil in life. This is especially true when making large purchases, such as buying a new car. Try to find the best deal possible, with smaller payments. Sometimes this means buying a used car or a less expensive option. The larger the down payment, the smaller the monthly payments. With smaller payments, more money can be put toward retirement.

  1. Set Realistic Goals

Instead of having an illusion of spending very little in retirement, plan for spending more. The average annual spending for those age 65 and older is $40,938. Workers need to realize they will probably spend more and account for that in their savings.

This is especially true of spending money on healthcare. Many retirees do not account for medical needs when saving. One way to be cognizant of upcoming healthcare costs is to start a health savings account. These accounts help retirees cover the medical costs rather than dipping into their retirement savings.

Often, younger workers are only encouraged to take advantage of a 401(k) match plan through their company. While this is a great tool, opening a separate account in addition to a work-sponsored one can bump up their savings potential. Visit Mountain West IRA’s website to learn about their retirement plans and investment options.