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Education General IRA FAQs
SELF-DIRECTED IRA’s
Top 'Dos' and 'Don'ts' of Self-Directed IRA Investing
Articles
Top 50 Investor Questions and Answers
General IRA FAQs
Provided by Pensco Trust Company
What is an IRA?
An Individual Retirement Account (IRA) is an investment tool created by the U.S. Government's ERISA Act of 1974 to supplement retirement income. IRAs are generally available to anyone who receives taxable earned income throughout the year. IRS Publication 590 [PDF - 448.6K] provides information on determining what types of earned income are considered taxable. Reference the IRA type you are interested in for specific rules that may apply. Please contact your tax adviser for assistance in determining the type of IRA that will best suit your needs
Account Types
IRA (Traditional / Contributory or Rollover)
Individuals can set up their own accounts for retirement through Individual Retirement Accounts (IRAs). The descriptive terms 'Traditional' or 'Contributory' indicate that the IRA is or has been funded through cash contributions by the IRA owner, as opposed to a 'Rollover IRA' that is funded via a 'rollover' of a previous employer-sponsored retirement account such as a 401(k). While there used to be reason to differentiate between the Traditional/Contributory IRAs and the Rollover IRAs so that they could be kept separate, the rules have relaxed enough to make differentiating unimportant. Knowing which type of IRA you have has now become more a matter of trivia than function. What is still important, is whether or not the funds in your IRA are pre-tax.
Roth IRA
Established in 1997 and effective in 1998, the Roth IRA is similar to the IRA except for the way in which it is taxed. Contributions to a Roth IRA are nondeductible - i.e. made with after-tax funds, but if certain requirements are satisfied, all withdrawals from a Roth IRA will be tax-free. Simplified Employee Pension (SEP)
IRA SEP IRAs were created for self-employed individuals and smaller companies. Employers can make tax-deductible contributions to SEP IRAs for eligible employees. For more information regarding eligibility, reference IRS Publication 590 [PDF] or IRS Publication 560 [PDF] . For tax year 2007, SEP contributions are limited to 25% of your annual income, not to exceed $45,000. For tax year 2008, SEP contributions are limited to 25% and $46,000. Effective for years beginning on or after January 1, 2002, as a result of EGTRRA, the maximum amount of compensation that may be taken into account for various plan purposes is raised to $200,000, with potential COLA increase thereafter in $5,000 increments.
Each year the IRS sets a limit on the total compensation amount that your employer can consider. Transfers may be made to this account from Traditional, Rollover, SEP or SIMPLE IRAs and qualified retirement plans (401k, 403b, etc.).SIMPLE IRAs must meet the two-year rule. Education IRA
Previously known as the Education IRA, the new re-named Coverdell Education Savings Account (ESA) is a great way to create an on-going tax-free educational savings fund for your own family. If used for educational purposes, withdrawals remain tax-free like from a Roth IRA. However, unlike the Roth, contributions do not have to consist of the child's own earned income and can be made as soon as the child is born. Beneficiaries
Can I change the beneficiary on my IRA?
Yes, to change the beneficiary(ies), complete an Change of Beneficiary Request Form Contributions
How much can I contribute tax-free or tax-deferred?
In Traditional or Roth IRAs, you can generally contribute up to the maximum limit each year, not to exceed your annual earned income.
For tax year 2007:
If you have no earned income, your spouse may make a $4,000 (or $5,000 for those who have attained age 50) contribution to your Traditional or Roth IRA as long as the total of both contributions does not exceed your spouse's total earned income.
For tax year 2008:
If you have no earned income, your spouse may make a $5,000 (or $6,000 for those who have attained age 50) contribution to your Traditional or Roth IRA as long as the total of both contributions does not exceed your spouse's total earned income.
Is my contribution tax deductible?
Contributions to a Traditional IRA may be tax deductible. Consult your tax adviser for details. All contributions to a Roth IRA are taxable
What should I do if I made an excess contribution to my IRA?
Please consult your tax adviser to determine the best course of action when an excess contribution has been made to your IRA. To remove the excess amount from your account, you must complete a Distribution Request Form. Any tax liabilities and/or penalties involved in doing so will need to be determined by your tax adviser. Distributions
With the exception of Roth IRAs, beginning in the year that the IRA owner turns age 70½, distributions must begin. At this time, you have the option of either calculating the required minimum distribution (RMD) amount on your own (or through a tax adviser), or PENSCO Trust will calculate it for a fee.
If you fail to take the required distribution, or take only a portion of the required amount, you may be subject to substantial penalty. Consult your tax adviser for assistance in determining the amount of your required distribution.
Distributions cannot be processed until the total amount requested has settled. All trades have a three-day settlement period during which time the positions (or cash proceeds) may not be removed from the account.
The distribution will remain pending until any trades and/or open orders that affect the requested distribution amount have settled or been cancelled by the account owner. You will receive a 1099-R shortly after the end of the year showing the cumulative distribution value reported to the IRS. Please contact a tax adviser for additional information regarding any tax liabilities involved when taking early distributions.
Can I take a normal distribution from my Traditional IRA?
If you have reached the age of 59½, you may take a normal distribution from your Traditional IRA. A normal distribution is a penalty-free, taxable withdrawal. Funds may be removed from the Traditional IRA by completing an IRA Required Minimum Distribution form.
Can I take an early distribution from my Traditional IRA?
If you are under the age of 59½, you may take an early distribution from your Traditional IRA. Early distributions are subject to taxes and in some cases, an early distribution penalty. Consult your tax adviser for more information on early withdrawal penalties. Funds can be removed from your Traditional IRA by completing an IRA Distribution Request form.
Can I take a distribution from my Roth IRA?
Roth IRA owners may take a distribution from their Roth IRA assets at any time by completing an IRA Distribution Request form. Annual contributions may be withdrawn tax-free and penalty free by the due date for the tax year in which they were contributed. To take a qualified distribution exempt from taxes and penalties, two requirements must be met: "Your Roth IRA must be established for 5 years. And, your distribution must be for one of the following reasons: - You have reached the age of 59½
- You are disabled and have provided the required supporting documentation
- You are a first-time homebuyer (maximum $10,000).
Fees
Various per transaction
IRS Reporting
How are my IRA transactions reported to the IRS?
If you remove funds from your account during the calendar year, you will receive a 1099-R form showing the amounts reported to the IRS. These forms are mailed by January 31 for the preceding calendar year. All funds coming into an IRA are reported to the IRS and also mailed to our clients on Form 5498. Form 5498 covers the period between January 1 and April 15 of the following year. These forms are mailed by May 31 for the preceding tax year. Direct Transfers are not reported to the IRS and will not show on either of these forms. If you have any additional questions on how your IRA transactions are reported, please consult your tax adviser, or visit the IRS Web site at www.irs.ustreas.gov.
How will my conversion be reported to the IRS?
The value of your conversion to a Roth IRA will be reported on Form 1099-R from your Traditional IRA. You will need to pay income tax on the converted amount. It will also be reported as a conversion amount on Form 5498 from your Roth IRA. For more information on these forms, consult your tax adviser or visit the IRS Web site at www.irs.ustreas.gov. Transfers & Rollovers
When considering a transfer, keep in mind that there is a difference between a rollover and a transfer.
In a transfer, you never take possession of the assets; it goes from one institution to another. There is neither tax reporting nor any tax consequences as a result of a transfer. There are no limits to the number or frequency of IRA to IRA transfers.
A rollover occurs when: You either take a distribution from your IRA and return it to an IRA within 60 days, or you move assets from a Qualified Retirement plan (QRP) into a Traditional, Rollover, or SEP IRA.
SIMPLE IRAs can only be transferred to another SIMPLE IRA if they have been established for at least two years. You may want to consult your tax adviser before transferring your IRA. Certain tax implications could be involved if it is done incorrectly.
Can I convert money from my Traditional IRA to my Roth IRA?
If you meet the IRS eligibility requirements, you may convert a portion or all of your Traditional IRA to a Roth IRA. To process the conversion, we will need a completed Roth Conversion form. If you do not already have an existing Roth IRA at Pensco Trust Company, one will need to be established to receive the converted funds from your Traditional IRA. Contact a tax adviser for additional information regarding the tax liabilities involved when converting.
Can I change my Roth IRA back to a Traditional IRA?
Changing all or a portion of an IRA contribution from one type of IRA to another is called a recharacterization. You may recharacterize a contribution, a conversion or both. In each instance, a completed IRA Recharacterization form is required. In addition, both types of IRAs involved must be established at PENSCO Trust Company to facilitate the movement.
SELF-DIRECTED IRA’s What does ‘self-directed’ mean?
The term ‘self-directed’ does not actually have any legal connotation. It does not imply a different type of IRA, or a separate set of IRS rules. ‘Self-directed’ is simply an accepted industry term indicating that the IRA custodian (Pensco Trust Company) is allowing the IRA owner greater control over their investment decisions. When an IRA account is self-directed, the IRA owner makes all investment decisions and instructs the custodian to act. Even this control, however, can vary greatly in degree. For example, you might be offered - or have – a ‘self-directed’ IRA at a major broker dealer. This account, while offering more hands-on control, will still, in most cases, limit you to a range of publicly traded investment options such as stocks, bonds, and mutual funds.
The phenomenon of a self-directed IRA that still limits you to a brokerage account has spawned the use of yet another industry descriptive - the ‘truly self-directed’ IRA – to mean the type of account that allows for non-publicly traded assets like real estate or private placements (pre-IPO stock, Limited Liability Company membership, Limited Partnerships, etc.).
Whatever the terminology, the facts remain the same: All IRAs must adhere to the same IRS rules. The investment options available within an IRA are determined solely by the capabilities of the custodian sponsoring the IRA. What types of assets can one typically invest into with a self-directed IRA custodian?
Brooklyn Troy’s preferred custodian, Pensco Trust Company, permits clients to invest in most IRS permitted investment types. Because the law governing the types of investments permitted within IRAs is exclusive rather than inclusive, there is a specific list of investments that are prohibited (See IRS Publication 590 for complete details). These are: - Collectibles (e.g. art, antiques, jewelry etc.)
- Life insurance
- Coins (other than U.S. gold coins)
- "party-in-interest" transactions (These are transactions involving "disqualified" parties such as ascendants, descendants, fiduciaries etc. See Internal Revenue Code 4975 for details)
With these exclusions, the range of permitted investments is quite broad and includes mutual funds, stocks, bonds, certificates of deposit, private placements (LLC memberships, LP interests, private C-Corp stock, and in the case of certain banks, S-Corp stock, etc.), promissory notes, trust deeds or mortgages, real property, and more. | Top 'Dos' and 'Don'ts' of Self-Directed IRA Investing | | Provided by Pensco Trust Company | The Don’ts:
1. Don’t create a prohibited transaction by having your IRA transact with yourself personally, your spouse, descendents, or ascendants (e.g. avoid self-dealing); Click here for information on prohibited transactions.
2. Don’t engage in a transaction with your IRA and a third party’s IRA on a “quid pro quo” or reciprocal basis in attempt to circumvent an otherwise prohibited transaction;
3. Don’t deal with an entity that you or the some of your related disqualified persons own 50% or more of;
4. Don’t personally guarantee a loan that your IRA obtains;
5. Don’t make personal (including disqualified persons) use of any asset your IRA owns;
6. Don’t provide more than ministerial services (e.g., decision-making) to your IRA or IRA owned entity (e.g., no “sweat equity”);
7. Don’t take any personal compensation for any services provided to your IRA or as a result of a transaction that your IRA participates in;
8. Don’t engage in any transaction that results in any personal gain for you or your disqualified persons (other than the benefit that the IRA receives (e.g., a guarantee of employment);
9. Don’t co-invest personally with your IRA in any asset that you use as a loan collateral;
10. Don’t take constructive receipt of any income from assets owned by your IRA and do not pay (personally) the expenses of assets held by your IRA. | | The Dos:
1. Do consider including alternative assets in your retirement portfolio for diversification and risk protection;
2. Do consult with a knowledgeable advisor.
3. Do educate yourself. Read all the free educational material we have available on this website and “IRA Wealth” by Patrick Rice;
4. Do find out how you can accelerate earnings on real estate through leverage.
5. Do consider using an IRA when you, a relative or friend starts a new business. .
6. Do consider your Roth IRA for those investments with the greatest upside potential;
7. Do maximize your contributions to 401(k)s that are matched by your employer and contribute to Roth IRAs each year, if eligible;
8. Do tell your friends about the possibilities of self-directed IRAs - they’ll thank you;
9. Do consider the ways you can expand your business practice by being the “go to” self-directed IRA expert in your area. |
Articles
Stocks vs. Land Which is a Better Investment?
Jeffery Watson, 09/08
http://www.jeffreywatsonlandtrust.com/article.html
Why you should consider alternative assets in your client' retirement portfolios, and how do you get paid for doing so?
Tom Anderson, TomAndersonBlog.com, 4/25/08
Click here to read the article.
Stocks vs. Land Which is a Better Investment?
Curtis Seltzer, 04/10/08
http://www.landthink.com/opinions/stocks-vs-land-which-is-the-better-investment/
Investors tap retirement savings to make real estate bets
Janet Morrissey, 3/31/08
Click here to read the article on InvestmentNews.com
Self-directed IRAs offer alternatives to the stock market
Eve Mitchell, Contra Costa Times, 3/28/08
Click here to read the article on ContraCostaTimes.com
Why Limit Your IRA or Pension Plan to Stocks, Bonds and Mutual Funds
PR Web Press Release, 03/18/08
Click here for the PDF version.
Click here for the text version.
Take Charge of your Retirement Account Investments Interview
Simply Wealth, Interview by Paula Straub with Tom Anderson, 02/25/08
Click here to listen to the interview on the Simply Wealth website.
Golden Opportunities In Real Estate For Savvy Investors
Producer's Web, Tom Anderson, 12/14/07
Click here to read the article on the Producer's Web website.
Click here to see the text version on our website.
Interview with Tom Anderson: Self-Directed Investing with your IRA
Charrissa Cawley, REIConferences.com, 11/27/07
Click here to listen to the MP3.
Click here to go to reiconferences.com Why to Choose a Self-Directed IRA
The Street, Farnoosh Torabi, 10/23/07
Click here for the article on The Street's website.
Take Charge of your IRA
Fortune Small Business Magazine, Jeanne Lee, 05/30/2007
Click here for the article on the Fortune Small Business website.
Top 50 Investor Questions and Answers
Provided by Pensco Trust Company Click here to download PDF
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