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Now that I have an Individual(K) Plan, what do I do with it?

In the first part of our series on Individual (k) accounts we discussed who can have one, and all of the great benefits to starting up an Individual K account. But now that you have one, do you understand what your options really are? Do you know what steps to take to get the most benefit out of this incredible tool?

You have the freedom

A Self-directed Retirement account gives you freedom to invest in more than stocks, bonds, or mutual funds. Under your direction, you can buy everything from real estate to deeds of trust and mortgages. Your IRA can do secured or unsecured notes, partnerships and joint ventures and even private stock. You can invest in many other types of assets as well.
While this is all true about any self-directed IRA (Trad, Roth, SEP, Simple, etc.) the Individual (K) gives you additional tools and protections not found in the other SDIRA options.

The “Superhero of the Self Direct IRA’s”

You can do many things with your self-directed retirement accounts no matter what type you have, but when you have an Individual K account you can do even more. You can;

1. Take a loan from the account that is tax free.
   1. Use for any purpose
   2. Borrow 50% of the account up to $50,000
2. More Investment freedom
   1. Invest in any non-prohibited opportunity that you choose
   2. Gains and income flow back into your IK
3. Checkbook Control
   1. No LLC required
   2. Easy access to your funds so you can react quickly in a volatile market
   3. Avoid transaction fees
4. Protection from Creditors
   1. Self-Directed IK plans have full bankruptcy immunity (Bankruptcy Code, 11 U.S.C. §522)
   2. Most states offer protection of IK funds and assets even outside of bankruptcy
5. Leverage without UDFI
   1. Purchase real estate using Non-recourse lending
      -Frees up your IK funds for additional investments
      -The lenders recovery is limited to the collateral
   2. Individual K is generally exempt from UDFI

The Individual K is one of the most attractive retirement solutions for sole proprietor business owners and the self employed for all those reasons and more.

The Tax Cuts and Jobs Act and your Self-Directed IRA

There was quite a bit of both commotion and breath holding leading up to the actual passage of the tax reform bill. While you may personally be upset, be cheering, or even be a bit bewildered, retirement plans were for the most part left untouched.

Only a handful of changes were made to retirement planning laws which could apply to your self-directed IRA. The main change, which could affect your yearly tax planning, was to Roth recharacterizations. In 2017 you had the ability to convert funds from a tax deferred Traditional IRA and later, if you changed your mind, you could do a recharacterization and basically “take back” that decision.

You may choose to recharacterize a Roth conversion for a several reasons: the conversion is a failed or ineligible conversion, the amount of taxes which will be owed on the converted amount will prove to be too much of a hardship, the value of the assets actually declined in value since conversion, or you simply changed your mind and no longer choose to keep the assets in a Roth IRA.

However, beginning Jan 1, 2018, The Tax Cuts and Jobs Act has eliminated the option to recharacterize. According to the IRS website:
A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018. A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized. For details, see “Recharacterizations” in Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).

You should always remember to consult a tax professional about your specific situation.

What is an IK account?

Unlike employer sponsored 401(K) plans, most people have never heard of an Individual (k) plan. An Individual 401(k) (or IK) works much the same as traditional 401(k) plans offered by large companies, and resemble the SEP IRA which is designed for the self-employed. However, an IK is designed strictly for sole proprietor business owners with no employees. The IK can be either a traditional and/or Roth version giving you the freedom to choose to either save money on a pretax basis where it can grow tax-deferred or, if you opt for the Roth version, save money post tax and have it grow potentially tax free.

Who can contribute to one?

An individual 401(k) is strictly for sole proprietors who have no employees (although your spouse may open one to contribute if he or she earns income from your business). If you are an employee of a company by day, and work your own home business in your off hours you may also qualify. But that can get thorny very quickly, so be sure to check with your CPA to be certain that you qualify.

Why is an individual 401(k)s a good idea?

These plans are ideal if you intend to save large sums of money. An IK allows you to save for retirement both as an employer and an employee, often enabling you to contribute more than would be possible with other retirement plans.

Here’s how: As an employee, you can stash away as much as $18,000. As the boss, you can contribute an additional 25% of compensation, up to a maximum of $53,000, including your employee contribution.

These contributions are optional and completely discretionary, so you can contribute up to the maximum in good years and during tough time you can hold off and contribute nothing at all.

Does an individual 401(k) make sense for me?

These plans are a good idea if:

You intend to contribute large sums.
– As much as $60,000 overall contribution in 2017 if you are over 50.
– As much as $54,000 overall contribution in 2017 if you are under 50.

If you want the capability of borrowing from your plan.
– You can take out an IK loan, which uses the balance of the account as collateral. You can borrow up to half of the total balance on your IK, as long as the loan doesn’t exceed $50,000.
– The remainder of your balance is still invested in your IK, with tax-deferred investment earnings growth, and you loan payment including interest are paid back to your IK.

To learn more about the advantages of an Individual (k), feel free to contact one of our experts at 866-377-3311 or watch our webinar HERE.

1.Required Minimum Distributions
If you are age 70½ or older. it is required for you to take minimum distributions (RMDs) from your IRA. You need to take your RMD before December 31 each year. The one exception is for first year that minimum distributions are required, in which you have the option of waiting until April 1 of the following year. Keep in mind that utilizing that option means that you will have to take two distributions in that year, which may shift you into a higher tax bracket. The penalty for failing to take your RMD is a 50% tax on the amount you were required to take, in addition to income tax.

2. Fair Market Valuation
Assets that are held in your IRA must be valued every year for the IRS. The value of a publicly traded stock is much easier to attain than calculating the FMV of an alternative asset which can be more challenging. It is important that any IRA holder with a self-directed IRA or 401(k) plan which owns alternative assets, such as real estate, acquire an independent valuation of the asset. This could be in the form of acquiring an independent valuation from a professional or expert in that market, or even something as simple as tax assessment records from the county or state. This is particularly important if you are over the age of 70 ½, and are subject to the IRS’s required minimum distribution rules. If you will be taking the asset as an in-kind taxable distribution as the value of the IRA asset(s) has a direct correlation to the amount of tax you will pay. If the value of that asset is wrong, you could potentially be charged penalties for under-reporting your income, or you could be paying more tax than required.

3. Estate planning
Calculating your plan contributions is important, everyone wants to be able to retire at some point in their life. Most would like to live comfortably at an earlier age. In order to retire comfortably you will need to calculate the amount and how often these contributions are required for you to retire. Creating a budget for your future is essential, not only for you, but your beneficiaries. It is recommended that you always designate your IRA beneficiaries. The foremost reason for naming beneficiaries is to avoid probate. Probate is the long and often expensive process of reviewing your estate and assets to determine proper distribution upon your death. Making sure your beneficiaries are exactly who you want them to be is very important because your named beneficiaries override any distribution requests you may make in a will.

To fully maximize your investment options, you need to have a retirement plan that allows you to select your own investments. A truly self-directed retirement plan allows you the freedom to invest in many types of assets. By investing in real estate, you are able to diversify your portfolio maximizing your potential investment goals.

1. Build or buy your dream home potentially tax free or tax deferred.

Your IRA can purchase your dream retirement property. With this asset you may attain rental income that is tax-free or tax-deferred to pay the initial cost of the home. Then, when you are ready to move into your dream retirement house you may distribute without penalty at age 59½ (or 5 years in a Roth IRA) any property from your IRA as a normal distribution.

2. Leverage your funds with non-recourse loans. Diversifying your investments.

If your IRA does not have enough money to pay for the entire purchase on its own, you may finance or leverage any income producing property. The property is used as the collateral for the loan. Because the property belongs to the IRA, the debt must be repaid from assets within the IRA, whether income from the property, permissible contributions, or other assets income in your IRA.

3. Attaining long term wealth through rental income.

Rental income can pay for the initial cost or the mortgage of the property. As well as any other expenses this property incurs. For example: The property management company expenses, upgrades inside and outside the property, and maintenance. You will never have to pay for these expenditures out of pocket. Any extra income grows tax-deferred, and will potentially be tax-free if utilizing a Roth IRA or be used to supplement any other investments.

Self-directed IRAs can become The Ultimate Retirement Machine, the IRS only provided rules on what you cannot invest in which leaves endless options for savvy investors. A truly self-directed retirement plan allows you the freedom to invest in what you know and understand. The retirement industry has been dominated by large transaction-driven custodians who have focused on a narrow universe of low return on investment choices. Accounts controlled by financial advisors, with low yielding returns may be right for some, they will never offer the kind of freedom that a Mountain West IRA Self-Directed retirement plan can offer.

We are sharing only 3 of the many of the well thought out and contradicted crazy IRA investment opportunities that our clients have inside of their IRAs. These investment opportunities that would baffle most.

Investment: Fishing License in Alaska
How is this profitable? Our client leases the contract lists, a percentage of the profits of the catch go right into his IRA

Investment: Airplane
How is this profitable? A pilot can lease the airplane from our client, all profits of the lease go directly the IRA

Investment: Cattle
How is this profitable? Let’s talk about Cowpital Gains and Bovidends. Imagine having the ability to earn 100% Cowpital Gain on your investment. This is what our client earns by investing what he knows best!

Your Financial Advisor will tell you that only stocks, CDs, and mutual funds are allowed in your retirement account, however this is a common misconception. The truth is, broader investment options have been available to the public since the inception of the IRA in 1975. Neither the IRS nor the Department of Labor has ever published a list of legal investments; however, there is a list of Prohibited Transactions and Disqualified Persons that deal with what is not permitted. Almost any investment is permitted provided you follow the IRA provided rules.

Join us on our webinar to learn more about all these crazy investments plus more: JOIN WEBINAR HERE!