Self-Directed IRA’s – Are these for you?

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Many of us are familiar with the Traditional IRA’s and the investment opportunities they provide. Less commonly known is the Self- Directed IRA, which offers a greater choice of investment options, including real estate.

I am not a financial advisor selling investments.

I am a CPA who just finished reading a book titled, ‘Leverage Your IRA, Maximize Your Profits with Real Estate’. One of the authors is a CPA and a Certified Financial Planner. I read this book for personal reasons and to learn the tax aspects so that I could be an informed resource for others. I found the information beneficial and hope you will as well.

Investment Opportunities:

There are two types of Individual Retirement Accounts (IRA’s):

  • Traditional: IRA’S: Most retirement plans are tax deferred and are funded with pre-tax dollars. Traditional IRA’s, SEP IRA’S, SIMPLE IRA’S, and 401 (K) plans are in this category; tax is deferred and paid at a future event such as a withdrawal /distribution
  • Roth IRA’s and Roth 401k’s are tax-free because they are funded with after -tax dollars

Traditional IRA’s allow funds to be invested with banks, brokerage firms, mutual fund companies, and insurance companies.

Self-Directed IRA’s allow the Account Holder many more investment options. For example, Self-Directed IRA retirement account funds can be invested in mortgages without having to “cash out” to make the investment. Investments are made inside this type IRA and funds can be rolled over from traditional accounts without a penalty.

Self-Directed IRA’s can invest in just about anything except:

  • Collectibles
  • Life Insurance contracts
  • Subchapter S Corporation stock (S-Corps cannot have an IRA as a stock holder)

Your Self-Directed IRA can purchase rental properties, commercial properties, tax liens, foreign real estate, buy mortgage notes, loan money earning interest, and more. Assets need to be handled as investments and cannot be used personally by you or any disqualified person. Your IRA owns the investment, not you. Investment possibilities may include:

  • Buying real estate from an unrelated party with cash
  • Buying property with a down payment and obtaining an “unsecured loan”
  • Co-investing with other parties

Income and capital gains can flow back to IRA’s tax-deferred (Traditional) or tax-free (Roth), if the IRA does not have a related real estate loan.

Real Estate Loans are possible and are “Unsecured”; your IRA funds cannot be used as collateral as security and there is no recourse against the Account Holder. In the event of default, the lender can only look to the property or the leases for repayment.

Non-Secured Loan Qualification is underwritten similar to a commercial real estate property loan. Criteria includes:

  • The Property – the lender needs to be satisfied with the value, marketability, and the condition of the property
  • Cash Flow – does the property cover the mortgage and the expenses?
  • IRA Funds – are the funds sufficient to cover the down payment, closing costs, pre-paid costs for taxes and insurance, and reserves for repairs or vacancies?

Down payment requirements vary by the lender and the property type. One such lender that provides Unsecured IRA Loans is North American Savings Bank (www.nasb.com)

Safeguards – how to protect your investment

Transactions need to be handled by a Specialized Custodian or Administrator. If you handle the transactions, the transaction could become taxable and the value of your money is at risk. Always follow the rules and keep your IRA funds and you safe.

While the Self-Directed IRA’s offer greater investment choices, there are also specific IRS rules that must be followed to protect your IRA. For example, “Self-Dealing” and “Prohibited Transactions” must be avoided.

The Exclusive Benefit Rule applies to all IRA’s. This means only the IRA can benefit from the transaction and that the IRA owner nor any other “disqualified person” may receive a personal benefit as a result of a transaction by their IRA; i.e. your IRA cannot buy your vacation home.

IRS Publication 590 (2013), Individual Retirement Arrangements (IRAs) includes the following about Prohibited Transactions:

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are some examples of prohibited transactions with a traditional IRA. ***

  • Borrowing money from it
  • Selling property to it
  • Using it as security for a loan
  • Buying property for personal use (present or future) with IRA funds.

With any investment, Due Diligence is always important. Knowledge is power. As Benjamin Franklin said, “An investment in knowledge pays the best interest”.

I encourage you to take the time to become an educated investor prior to considering using any portion of your retirement funds in a Self Directed IRA. Additional information can be found at:

  • Retirement Industry Trust Association (RITA) is a non-profit trade association formed in 1987which represents Trust Companies, banks, attorneys, accountants and other service providers in the self-directed retirement plan industry. http://www.self-directed-retirement.org/investor-resources/
  • Review “Self-Directed IRA Custodian” websites
  • For more in-depth information on Prohibited Transactions, you may wish to read IRC 4975
  • Discuss with your CPA, Tax Attorney, or other experienced investors about their Self-Directed IRA

The information provided in this post is intended to be a good basic primer about Self Directed IRA’s. A comprehensive review is beyond the scope of this blog post.

Please let me know if you have any questions or if you would like me to post a more technical blog about UDFI (Unrelated Debt-Financed Income) and UBIT (Unrelated Business Income Tax), which can apply if an IRA real-estate loan is part of the IRA transaction.

Deb Fox is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointment. More information is available at www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com.

Where is “The Help?”

We have a need. We have a want. Where is The Help?

Where is the help if we want to talk to an affordable professional about our money?

The Need:

Many of us worry about our money situation because of consumer debt, student debt, limited savings, or the ability to retire.

We might worry, but talking about our money is not something we like to do. A recent survey by the National Foundation for Credit Counseling (NFCC) showed that we would rather tell people how much we weigh than the amount of our credit card debit or our FICO score. Many of us are embarrassed.

We might not want to talk about our money situation, but we also know that we could benefit if we did. We know what we don’t know or understand.  We might be comfortable not thinking about it, but this only allows anxiety to grow and does not change anything. A comfort zone can be a beautiful place to be, but nothing ever grows there.

The Want:

We all need and want financial stability.

We might know what to do with our money and just not do it. We know that we need to spend less than we make, but doing that is hard. It can also be hard to save and not spend. We have heard, pay your self first, but do we? We leave money on the table by not getting the full company match for our 401k plans at work.

Most of us were not taught how to manage our finances when we were in school.  We learned the hard way: through trial and error and through the “school of hard knocks”.

Increasingly, we want financial literacy taught in our schools. Students need to learn how to balance their bank account, manage debt, credit, and avoid financial traps.  In short, we want our children or the youth of our community to be better prepared than we were.

The Help:

Clearly, we have a need and a want. Where can we go for affordable help?

Historically, formal financial planning services were designed for and enjoyed by those who had large sums of money to protect. Comprehensive Financial Plans are expensive and time consuming to prepare. Financial Planning service firms may have provided this service at a nominal cost and made their money by selling insurance or investment products or by providing investment management services.  This works well for people who have plenty of money and the need for a comprehensive plan.

Where is the help for those that have less money?

Where is the help for those that do not yet need comprehensive financial plans, but have questions about their money?

Where is The Help for the:

  • Young Adult?
  • Young Career?
  • Young Family?
  • Families living paycheck to paycheck?
  • Working Poor?
  • Shrinking Middle Class?

Over the last few years, service providers have started to pop up. The marketplace had a void and some are stating to fill it, including me. I want to make financial planning, understanding, and capability more accessible for this underserved market for both individuals and small business owners.

For personal finance, maybe you would like to:

  • Talk about your money situation, evaluate, prioritize, act, and build confidence about your economic future?
  • Learn to use a systematic approach to evaluate a financial decision?
  • Have a mentor/friend to help empower you to become more accountable?

For the entrepreneur or small business owner, would you benefit by learning new business skills about:

  • Pro-Forma financials for your business plan?
  • Budgets and cash flow?
  • Tax planning?

For those that like to read and learn on your own, there are a lot of good resources out there to help you.  I have resources listed on my website at www.debfoxfinancial.com. I also blog, post frequently on my Facebook page and share information on Twitter.

Perhaps, you learn best by working “one on one” and would benefit by having the opportunity to ask financial questions and then work together, as a team, to learn, grow, and achieve your financial goals.

I believe that the scope of financial services should be broader than is currently available and want to use my expertise and experience to help others.  We could work together on one project, many projects, or perhaps, I can just be a resource for financial information?

Execution matters. I can help. It is important that you know that I would not tell you what to do.  I can be a financial compass and help you sort through choices and evaluate the potential costs and the benefits of the available options. You decide what is best for you.

I am a financial literacy advocate and want to provide affordable financial solutions by providing meaningful, actionable, advice. If you can afford a personal fitness trainer; you could afford “one on one” help from me.

Takeaways:

  • Decisions made today affect the options available to you in the future
  • What you do today with “Your Present Self” has a direct impact on “Your Future Self”
  • An investment in you today can result in a financially stronger you tomorrow
  • Financial strength brings more freedom of choice

“Tell me and I’ll forget. Teach me & I may remember. Involve me & I learn” – Benjamin Franklin

Deb Fox is working to “make a difference in peoples lives, hearts, and wallets”. Although she earned her CPA designation in 1997, she is not currently practicing as a CPA. She does use her knowledge to help others. She does not give investment advice; this is outside her areas of expertise. She can help with financial planning, tax, accounting, and commercial property and casualty insurance questions.

Website: www.debfoxfinancial.com

E-mail: debfoxfinancial@gmail.com

Twitter: @debfoxfinancial

 

2013 Federal Tax Filing

tax2• Tax returns are due 4/15/14 – about 3 weeks from now
• You can extend the dead-line if you apply for an extension
• You cannot extend the time to pay the tax that you owe; this means you must estimate the amount owed to ensure you have paid in the correct amount, on time, to avoid interest and a possible penalty
• A penalty may be imposed if:

1. If the amount owed is at least $1,000 and it is more than 10% of the tax shown on your tax return
2. You did not pay enough estimated tax by any of the due dates. This is true even if you are owed a refund
3. There are exceptions; it is safer not to count on them or you can read about them in the Instructions for 1040


Filing Options:

• Do it yourselfers, with Adjusted Gross Income less than $58,000 can, generally, use the IRS Free File Program
• Hire A Professional – Someone that is educated, experienced, licensed (or in California, this includes being registered with CTEC –California Tax Education Council)

Food for thought:
• Typically, the Income Tax is the single biggest bill in an U.S. household. Understanding, planning, and using tax breaks, by year, can reduce your lifetime tax burden
• If you like to file your own taxes, sometimes it provides comfort to have a professional review your taxes to ensure accuracy or to use your tax return as a “road map” to see if there are options to lessen your tax bill – now or in the future
• From an IRS audit perspective, history has shown that Self-Employed people underestimate their income and overstate their deductions. Watch for these IRS audit redflags: http://www.Kiplinger.com/links/auditredflags

Things to think about for Same-Sex Married Couples:
• Same-Sex Married (SSM) couples can file their federal taxes together this year for the 1st time
• If it would benefit you, you can chose to amend any/all previous returns
• Dead-lines to amend previous returns are:
1. 4/15/14 to amend 2010
2. 4/15/15 to amend 2011
3. 4/15/16 to amend 2012

An investment in knowledge pays the best interest – Benjamin Franklin.
http://www.debfoxfinancial.com

Congratulations Same Sex Married couples; The IRS – Post DOMA – Ruling is effective 9-16-13

 

This recent IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

This recent IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

Effective Monday September 16, 2013 all Same Sex Married (SSM) couples can file their Federal tax return as either Married Filing Separate or Married Filing Joint.  Filing as single is no longer an option.

The change was announced in an 8/29/13 IRS Press Release:

  • All Same-Sex Married (SSM) couples must file as married even if they are living in a state that does not recognize their marriage
  • Couples can evaluate returns filed in 2010, 2011, and 2012 to see if amending their return results in an overpayment and money back to you
  • Amending returns is an option and is not required

From a tax standpoint, SSM couples have incurred a lot of financial change since the DOMA ruling.

The 2012 Federal Tax filing season is almost over and SSM couples were granted the right to file their Federal return as married on 8/29/13. How will this change affect you? Is there “money in the IRS Treasury bank” or do you need to put money in the bank to pay tax obligations that you just incurred?

To help you get started evaluating how all this change could affect you, create a chart similar to the following for each of the tax years that could be amended to see if filing an amended return for Married Filing Joint (MFJ) saves you money as a couple.

Specific rules are available for each year on the IRS website. It is important to pay attention to credits, deductions, and related phase out amounts. For example, for 2012

  • The $2,500 maximum deduction for interest paid on student loans begins to phase out for married taxpayers filing a joint return at $125,000 and phases out completely at $155,000

The following chart shows TP#1 using the Standard Deduction and TP#2 using the Itemized Deduction. Hypothetical dollar amounts are not included because they would not be relevant to you.

2012 –Filed:

Prior to DOMA

Taxpayer #1 Taxpayer #2 MFJ Amended after 9-16-13
Adjusted Gross Income
Standard Deduction $5950. $0.00
Itemized Deduction 0 ?
Personal Exemption $3800 $3800.
Taxable Income
Tax Due


To see what the 2013 tax year looks like for Married Filing Joint:

  • List your combined income and Federal Tax withheld or paid to date
  • Determine if you are going to use the Standard or Itemized Deduction
  • Use the IRS Withholding Calculator to check your withholding amount
  • File a new W-4 to adjust your holding if needed

The American Taxpayer Relief Act of 2012 includes the following rules for 2013:

  • A new tax rate of 39.6% for individuals over $400,000 and $450,000 for Married Filing Joint
  • The Personal Exemption is $3900; this is phased out beginning with incomes of $250,000 and $300,000 for Married Fling Joint
  • Itemized Deductions are limited for Individuals over $250,000 and $300,000 for Married Fling Joint
  • The Alternative Minimum Tax Exemption is $51,900 ($80,000 for Married Fling Joint).

In closing, I understand that this is a lot of information to absorb, research, and evaluate to determine your financial situation.  Do-It –Yourselfers could be ready to go while others prefer to get help and spend their free time doing something enjoyable. Understandable. For now, just know that the IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

Benjamin Franklin said, “An investment in knowledge pays the best interest”.  May your investment produce a positive return for both your time and for your money.

How much do you keep of what you earn? 2013 Tax Plan

Have you noticed “The IRS” spells “Theirs”?  Paying tax is required.  How much you pay is determined, in part, by how you plan.

If you are married, or plan to be, for the 2013 Federal tax year, now is the time to look at your potential tax liability and determine your financial plan. Nobody wants to find out at the end of year that they owe taxes when there is little time to do anything about it.

The U.S. uses a graduated tax rate, which means that the tax rate increases as the income goes up.

There are five filing statuses:

  • Single (S)
  • Married Filing Joint (MFJ)
  • Married Filing Separate (MFS)
  • Head of Household (HOH)
  • Qualifying Widow (er) with Dependent Child (Q/W)

More than one filing status can apply to you. You can choose the one that gives you the lowest combined tax.

Generally, Married Filing Joint will result in the lowest amount of tax. There are exceptions and good tax planning involves reviewing “what if” scenarios.

Are you “withholding” enough to cover the estimated tax liability by the end of the year? If not, you need to either increase your withholding or use other methods, such as deferring income, to decrease the estimated amount owed.

The following will help you get started:

Filing Single is the easiest. All you need to decide is if you are going to save more money by using the Standard Deduction or to itemize deductions.

Married Filing Joint (MFJ) can be used if:

You are married on the last day of the year

Both you and your spouse report all your income, exemptions, deductions, and payments

Both spouses must sign the tax return because both of you may be held responsible for accurate reporting and tax payment

Married Filing Separate

Report your income, exemptions, credits, and deductions

Different rules apply if you live in a community property state. See Publication 555

You will “generally” pay more combined tax on Married Filing Separate returns than you would on Married Filing Joint returns for the reasons listed under “Special Rules” in IRS Publication 501

Some of the “Special Rules” include:

If your spouse itemizes deductions, generally, you cannot take the standard deduction

You cannot take the student loan interest deduction, the tuition and fees deduction, the education credits, or the earned income credit.

There are reasons why you might want to choose the Married Filing Separate (MFS) status:

  • You only want to be responsible for the accuracy and the payment of your tax liability
  • If your Adjusted Gross Income  (AGI) is lower by filing MFS than MFJ you may be able to deduct a larger amount for certain deductions that are limited by AGI such as medical expenses. For the 2012 tax year, you can deduct only the part of your medical and dental expenses that exceeds 7.5% of your Adjusted Gross Income. This increased to 10% for 2013.
  • Head of Household is for unmarried, or are considered unmarried, you provide a home for certain persons, and you meet the criteria by passing one of two tests. Detailed information can be found at IRS.Gov.

Tax rules are complicated and this is by no means comprehensive. Hopefully, it is enough to encourage you to look at your tax situation and to take action so you are not surprised with a big tax bill next year. A large return because of overpayment equates to giving the IRS an “interest free loan”.

Suggestions:

Use the 2012 tax rules to estimate your 2013 income and the amount of federal tax withheld

If it appears that you will either owe or have a possible large refund, consider filing a new W-4, the Employee withholding Allowance Certificate, with your employer

Reasons to change the amount withheld may include a change in your marital status or your dependents. Perhaps, you bought a house this year and know you will have enough deductions to itemize rather than use the standard deduction. Maybe, because of multiple jobs, too much is being withheld from your checks.

You work hard for your money. Don’t you want to keep as much as you can? After all, it is yours, not all theirs.

To Plan – It Helps to Understand – Financially

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“Remember, a dollar saved is a dollar you do not need to earn” – Deb Fox

One of my goals is to make the seemingly complex, simple.  With that in mind, I offer you an IRS Federal Tax primer.

To plan, financially, it helps to understand that not all numbers are created equal. Some numbers provide more benefit than others.

My hope is that this primer will serve as a good tool to refer back to when I write about other tax topics.

The Visual:

Income
– Above the Line Deductions
= Adjusted Gross Income
– Standard Deduction or Itemized Deductions
Exemptions
= Taxable Income
– Tax Credits
Tax Paid
= Tax Owed or Refunded

The Narrative:

Income includes all income except income that is exempt by law

Deductions reduce your tax liability by reducing the amount of income that is taxable

Income minus Above the Line deductions equals Adjusted Gross Income (AGI)

  • Above the Line deductions include, in part, monies paid for:
  1. Health Savings Account
  2. IRA Deduction
  3. Qualified Student Loan Interest
  4. Self-employed health insurance or qualified pension plans

Adjusted Gross Income minus either the Standard Deduction or Itemized Deductions

  • Use the highest number
  • The 2012 Federal Standard Deduction for Single of Married Filing Separate was $5950; $11,900 for Married Filing Joint or Qualified Widower; $8,700 for Head of Household

Then subtract $3,800 for each 2012 qualified Exemption = Taxable Income

  • Exemptions include you, your spouse, & qualified dependents

Taxable Income minus Allowable Credits

  • Credits are either Refundable or Non-Refundable
  • Refundable means you can reduce your tax liability below zero – IRS pays you
  • Non-Refundable means you can reduce your tax liability to zero

Refundable Credits Include:

  • Earned Income credit
  • Child Tax credit
  • The American Opportunity Tax credit

Non-Refundable Credits include:

  • Adoption credit
  • Retirement Savings Contributions Credit (Saver’s Credit)
  • Lifetime Learning credit

Takeaways:

  • Above the Line deductions are more valuable than Below the Line deductions because they are available to all taxpayers and are not subject to income limitation phase-outs
  • Deductions reduce the amount of income subject to tax
  • Tax credits reduce the amount of tax you pay
  • Tax planning can help you reduce your tax liability and keep more of your money
  • Remember, a dollar saved is a dollar you do not need to earn.

Keep marching toward Financial Freedom. Happy Planning!

Defense of Marriage Act is Dead. Now What?

Credit: Getty Images

Credit: Getty Images / SAN FRANCISCO, CA – JUNE 28: Supporters applaud as same-sex couple Sandy Stier (2R) and Kris Perry (R) prepare to get married at San Francisco City Hall by California Attorney General Kamala Harris on June 28, 2013 in San Francisco, California.

My name is Deb Fox and I am a CPA and this is my first blog post. As a CPA I was aware of the financial inequalities created by the Defense of Marriage Act (DOMA) and I felt that it was wrong. I was elated to learn that the Supreme Court of the United States agreed with me.

I have the unusual blessing of having not one, but two gay brothers. One is my younger brother; he and his partner have been together for 13 years and they live in San Diego. The other is my older stepbrother; he and his partner have also been together for many years and live in Orlando, Florida.

Our parents are in their early 80’s and have been great role models for all of us. They have always been accepting of my brothers and their relationships. Our family is very close and we enjoy our time together as much as possible. We are fortunate to be blessed by loving and supportive relationships. This post is dedicated to my brothers and to all those that celebrate this victory with me.

A brief history of DOMA & a glimpse into what it means now for the 130,000 same-sex couples that are legally married living in the current 13 states and in the District of Columbia:

DOMA History:

  • In 1993, the Supreme Court of Hawaii, ruled that the state needed to show a “compelling state interest” in disallowing gays and lesbians from marrying
  • The case turned marriage into a possibility of obtaining the same rights of partnership as heterosexuals
  • In 1996 DOMA was signed into law, which restricted federal law from recognizing any unions between two persons who were not a man and a woman. The rule also said that no state had to accept any other states definition of marriage
  • On 6/26/13, the U.S. Supreme Court declared DOMA (section 3) unconstitutional .The federal government cannot discriminate against married lesbian and gay couples for the purposes of determining federal benefits and protections
  • States can still define marriage (section 2). The IRS will provide guidance about what happens if you are in a non-same sexed marriage recognition state

By striking down DOMA this now means that same-sex couples who are married in the 13 states and DC where same-sex marriage is legal are now “qualified” (spouse related) to receive:

Federal Benefits:

  • Receive Social Security, Medicare, & Disability Benefits
  • Receive Veterans & Military Benefits
  • Receive Cobra health insurance benefit continuation for your spouse
  • File Married Filing Joint or Married Filing Separate if you are married on 12/31/13

Employment Benefits:

  • Not be taxed by your employer for the health care benefits provided for your spouse
  • Take Family Medical Leave for your spouse
  • Receive wages and retirement plan benefits for deceased spouse

Gift/Estate Tax:

  • Make unlimited tax-free gifts to each other as long as the receiving spouse is a U.S. citizen
  • Leave your assets to your spouse without incurring estate taxes (Edie Windsor)

Congratulations to those that have been married for years & have not had the rights or the benefits as those heterosexual couples that obtained them when they spoke “I do”.

There is a lot to be considered with this recent decision by the Supreme Court which is why I have limited this initial post to the 2013 tax year. The IRS will soon let us know if we need to consider the tax implications retroactively – 3 years back or not.

But for now my friends, this is the time for you to:

  • Enjoy the 1,138 spousal benefits provided by the federal government – if you are in a same-sex marriage and living in a location that recognizes your marriage
  • Consider changing your W-4 from single to married.  You need to make sure that you are “withholding” enough to prevent being accessed a penalty
  • Know that the United States tax is a “pay as you go” tax system, which means that tax must be paid as you receive or earn your income. See IRS Topic 306 – Penalty for Underpayment of Estimated Tax
  • Celebrate – it is Pride week here in San Diego! Maybe, I will meet you there?

Happy Pride and Congratulations on a long fought battle.