Archive for Individual Retirement Annuity (IRA)

Contribution Limits to Tax Shelters and 401k Loan Limits

This post is meant to serve as a reference for contribution limits to the various tax shelters. Below are the yearly contribution limits for each type of account.

  • IRAs: in 2007 the limit is $4,000 – this rises to $5,000 in 2008 and increases yearly by $500 in the following years. This limit can be reached by a onetime contribution, or by consecutive contributions throughout the tax year. Employees over the age of 50 can make yearly contributions of $5,000 in 2007 and $6,000 in 2008 with the same $500 increment in following years.
  • 401k: in 2007 the limit is $15,500, this rises to $16,000 in 2008. Employees over the age of 50 can make additional “catch-up” contributions amounting to an additional $5,000. Additional limits may be imposed by your employer, typically at 10% of your annual salary.
  • 403b: same as 401k limits with the same incentives offered at age 50 and above. 403b plans are essentially 401k plans offered by non-profit organizations.
  • 457: same as 401k and 403b limits with the same incentives offered at age 50 and above. 457 plans are essentially 401k plans offered by governmental employers or non-church tax-exempt organizations.
  • Keogh: also the same contribution limits with the same age incentives as 401k, 403b, and 457 plans. Keogh plans are constructed for the self-employed or unincorporated firms.
  • SEP IRA: determined as 20% of total net income and limited to $45,000 in 2007, with subsequent contribution limits raised according to a cost-of-living increase. SEP IRAs are constructed specifically for sole proprietorships and small business owners, just as Keogh plans are.

Many employees choose to take out loans against their 401k plans. It has been estimated that about 20% of employees eligible for a plan loan have one. Generally, these loans are limited to 50% of the amount in the 401k account or at $50,000, whichever is the lesser amount. Loans are generally repaid through payroll deductions in monthly installments over a 5 year period, except in the case of a loan for a home mortgage when the loan can be extended over a longer period.

Self Directed Custodian IRA LLC - The Secret IRA

An IRA Retirement LLC is a specialized self-directed IRA account. These IRAs are structured in such a way that the accountholder has “checkbook control” of the account. The trustee doesn’t have to be directed to make transactions on behalf of the account owner; the account owner can make decisions on the fly, even by writing a check. Of course the funds are used in a retirement account, so usage of the funds has to follow the IRS rules established for other types of IRAs. The IRA Retirement LLC is truly a self-directed IRA account.

As this type of account infers in its title, IRA LLCs, also called ICOs, are actually structured as a Limited Liability Corporation (LLC). The IRA LLC is either partially or fully owned by a retirement account in terms of shares. This structure offers a lot more leniency in the usage of the retirement funds, even more than a “regular” self-directed IRA. For example, the IRA LLC can use funds as a down payment to purchase an asset, and then use the IRA LLC to finance the balance. In this situation the IRA LLC is functioning both as the borrower and the lender.

The LLC structure also keeps liability issues to a minimum. A “regular” self-directed IRA can invest in real estate but the funds in the account have direct liability to the asset. This liability is isolated in the IRA LLC. Many IRA custodians would not allow such “risky” investments because of the liability involved so the LLC IRA structure is the only alternative available to investors seeking these types of options. With “checkbook control” the trustee isn’t involved. Still, all income generated from the IRA LLC is deferred for retirement.

Another advantage is an owner of this type of account can expect low maintenance fees from the custodian due to the low level of involvement. However, the structure of the account is much more complex than other IRAs so higher fees can be expected during initial setup. Attorneys or incorporation specialists must be involved in the setup.

The possibilities available within the IRA LLC are nearly limitless.

Self Directed IRA Inheritance Custodian / Trustee Requirements

With all this discussion about different types of IRAs and the exciting investment possibilities available with these accounts, I thought an article detailing exactly what requirements an account trustee/custodian must have in order to manage them. These requirements are all held by the Internal Revenue Service (IRS) who also enforces compliance. Basically, to qualify as a trustee, the entity must be a bank or, if not a bank, the entity must be able to prove that:

  • IRA accounts must be maintained separately from employer retirement plans even if held in a single trust as a whole; that is, the assets from these accounts cannot commingle. This is to guard against IRA accounts investing in assets that employer plans are allowed to, but the IRAs are not (life insurance, for example).
  • Roth IRAs and traditional IRAs must be maintained in separate accounts. This is for similar reasons as above, the two types of IRAs have different governing regulations and the only compliance guarantee can come from managing separate accounts for the two types.
  • Accountholder account interest is not forfeitable.
  • Ultimately, the non-bank custodian must receive approval from the IRS. The IRS will seek confirmation that the prospective IRA custodian meets requirements in Section 408 of the IRS Code.

Banks are defined here as traditional banks, insured credit unions, or corporations subject to supervision and examination by state banking officials. Non bank entities must be able to prove as trustees of IRA accounts that they are within compliance of the IRS code. While it sounds like a lot of hoops that the non-bank entity must jump through to get IRS approval, the requirements really are not steep. However, when seeking out a non-bank entity to manage your IRA account definitely seek out their credentials. Firms managing accounts that do not meet IRS requirements could have devastating effects on your IRA account.

All About Simple Self-directed IRA Investing

A self-directed IRA account is an IRA that mandates the accountholder makes investments on behalf of the IRA. The IRA assets on this type of account are not held by the owner outright, but are held by a qualified trustee or custodian. Qualified trustees/custodians could be an accountant, banker, broker, etc., acting on behalf of the actual account owner. This trustee will keep up with all maintenance and records of transactions for the IRA account on behalf of the account owner. The investment choices really are up to the investor, who directs the trustee to take action, hence the term “self-directed.”

These types of IRA accounts are not limited in the types of assets that may be invested in. This type of IRA can invest in real estate, stocks, mortgages, private equity, franchises, even collectibles. However, the earnings these investments generate must be solely for the account owner’s retirement and cannot generate current income or else the investment becomes taxable. The biggest risk involved is making sure benefits are going towards retirement. Meticulous records must be kept by the trusty. The yearly contribution limits to a self-directed IRA are the same as a traditional IRA ($4000 a year if under 59½, $5000 if over). Also, the same tax benefits as a traditional IRA are realized. That $4000 contribution results in a savings of $1000 for the taxpayer in the 25% tax bracket.

Not all account trustees will offer the same investment opportunities with when managing your self-directed IRA. Many firms specialize in particular investment options a self-directed IRA accountholder can take advantage of, and not all of them. It can be difficult for the firm to generate any income on a self-directed IRA account considering the options involved. When comparing options for opening a self-directed IRA, be sure to check the fee schedules involved with the account. Probably the best choice for a trustee would be a personal accountant.

Roth IRA VS Traditional IRA Account - Differences in Tax Contribution, Deduction, Plan, Limitation & etc.

The main advantage of a traditional IRA versus a Roth IRA is the tax benefits immediately realized. To receive the maximum tax benefits of a traditional IRA the taxpayer must have either of the following qualifications:

  • The taxpayer can be a member of a company retirement program (401k) but must have an adjusted gross income (AGI) of less than $52,000 (single) or $83,000 (married).
  • If the traditional IRA account holder is not a member of a company sponsored retirement program there are no AGI limits.

If qualified, the yearly contributions to a traditional IRA are fully tax-deductible. A maximum contribution ($4000) would result in a tax savings of $1000 if paying taxes in the 25% bracket (AGI of $30,651 to $74,200). The maximum contribution will rise to $5000 in 2008.

The Roth IRA had an advantage when it comes time for disbursement of the account. With a Roth IRA, disbursements are tax free but these disbursements must be qualified. Contribution funds can be withdrawn at any time, penalty free. Earnings can be withdrawn if the account has been in existence for five years and the account holder has reached the age of 59½, or has died, or has become disabled, or to pay for the construction of a first home. Since Roth IRA disbursements are tax free a traditional IRA will only have a higher return than a Roth IRA if the tax savings are reinvested because traditional IRA disbursements are treated as regular income. There are guidelines to qualifying for a Roth IRA:

  • must have earned income
  • income under $99,000 for full contributions ($4000 under 50, $5000 over 50)
  • income under $114,000 for a partial contribution

Benefits of owning an IRA account are undeniable. Which type to own can be a difficult choice, unless you make over $114,000 a year then there is only one option. Traditional IRAs do benefit the taxpayer in the short term, but are penalized when it comes time to withdraw. IRAs can be converted from traditional to Roth but not vice-versa. You can own both types of IRA accounts also, but the contribution limits are less (currently $3000). To me, it seems the best way to go would be to start with a traditional IRA and convert to a Roth later down the road.