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Self Directed IRAs: NEWS ALERT

6 Strategies to Make Sure You Have Enough Money to Retire?

By: Carl Fischer principal of CamaPlan a self directed IRA company.

Mar 2014

How much money do you need for a financially secure retirement? It seems like a simple question, however the answer is complicated because there are so many variables—some known, others impossible to pin down—that can shape the answer, sometimes dramatically.  The following strategies are presented for your review and in the authors opinion some are better than others, but it will depend on your particular and unique situation which are implemented.

Develop a plan

The first step is to have a plan and make some assumptions such as: When will you start saving? How much can you save every year? What age will you retire? And what will your investments return? How long will you live? What are the tax rates? What will inflation be? Will you be eligible for social security and Medicare?  The answers to these and other key questions will impact the odds of reaching your retirement savings goals. Approximately 85% of working age households are concerned about having enough money for retirement. (source: National Institute on Retirement Security).

“Approximately 85% of working age households are concerned about having enough money for retirement.”

Rule of thumb:

Save at least 10 preferably 20 times (X) your ending salary to help increase the odds that you won’t outlive your savings during 30 years in retirement. The more you want to spend per year the higher the multiple required. Setting up clear goals linked to your salary can help simplify your planning, and help you determine if you are on track throughout your working life.

Having these milestones is particularly important in today’s workplace, where layoffs, job switching, longer life expectancy, and escalating health care costs can complicate your efforts to save for retirement. Some advisors suggest you will spend approximately 85% of what you spend when you are working.  Other data suggests it more like 100% or the same as you spend now.  to go along with it.

Life expectancy

In general, CamaPlan recommends assuming a lifetime of 92 years for men and 94 for women. However, healthy men and women at age 65 have a 25% chance of living beyond these ages. If you’re a man and live to 85 (88 for women), you have a 50% chance of living beyond 85 (88 for women), and a higher chance of outliving your assets.

As you age, your health becomes more of a factor for your life expectancy. So, you may want to look at this assumption again, or at least understand the sensitivity of savings targets to longevity assumptions.

Of course, your life might not fit neatly into such a precise formula. However, it’s important to consider your particular situation, and adjust accordingly.  The majority of individuals do not plan for retirement and hope they will be financially secure in retirement. 

There are many on-line calculators to aid in determining the exact amount and a lot of number crunching. Should you need help consider a fee based planner or your CPA opposed to someone making a commission on products that are ultimately suggested.

Save more

It is easier said than done. The earlier you start saving for retirement, the better. Can you wait to save until you’re 30 instead of 25? Probably, but the longer you delay, the harder it will be to reach your retirement savings goal. To catch up, you may have to allocate a bigger portion of your salary to retirement savings.

It may be hard to save when you are younger especially if you are raising a family, or have to care for an elderly parent.  It is very important to save as much as possible for your retirement so you are not a burden to other family members.

Save smarter

Even though Americans are saving more, most are still not taking full advantage of their, personal savings plans, workplace savings plans, and Health Savings Accounts (HSAs), when available to them.  You must use qualified plans to ease or eliminate the tax burden.  Tax free and tax deferred plans provide a substantial advantage over savings accounts when saving for retirement.

IRAs have different yearly limits than workplace savings plans. Plus, there are catch-up provisions that let people age 50 and older save more in IRAs and workplace savings plans.  It is far better to learn how to have your money working for you opposed to you working for money.  Self direction of your qualified plans should be considered if you believe “No one is more concerned with my safety and earnings than I am.”

Look for assets with less volatility, not necessarily less return, as you get closer to your retirement.

Plan to spend less

As you approach retirement, envision the lifestyle you want, and estimate what it will cost. If you don’t have enough funds and working longer is not an option, you need to figure where you can make cuts in spending. A reduction in the standard of living should not be your first choice although many individuals were forced down this road in 2008 and 2009 as the economy, stock market, and their savings plunged. 

Some consider moving to less costly geographical areas but that generally means more travel to visit family and friends thus savings are not necessarily realized.

Work longer

Your retirement age can have an even bigger impact on your retirement savings. The longer you can postpone retirement, the lower your projected savings factor needs to be. For example, retiring at age 67 instead of age 63 would have given four more years of income and savings, and four fewer years of retirement spending to worry about. Plus, you would be eligible to receive higher monthly Social Security.

If you love your job this may be a viable option but many want to retire while they are still healthy enough to enjoy it.  You can’t always control when you retire; health and job availability may alter your plans.

Improve investment performance

It’s impossible to predict the markets, but the performance of your portfolio will affect your retirement savings needs. It is important to dedicate time to keeping your money working for you. Diversification is a main staple of any portfolio but CamaPlan suggests you only diversify into investments you understand and can control.  Become an investor!

Many financial advisers say, “You cannot pick your return. In practice, rate of return is driven largely by asset allocation and market performance.  The higher the rate of return the riskier the investment will be.”  Many CamaPlan clients have found quite the opposite-It is simple to determine your return when your IRA acts as a mini bank and makes a secured loan with a specific interest rate, a specific term, and a hard asset as security.

IRA’s or 401ks

Others clients are using their IRA’s or 401ks to purchase real estate with known rental rates, potential appreciation, and potential tax savings.  Again easy to predict and provides a potential for combating inflation.  Precious metals have minimal carrying costs, are very liquid, and have been known as a valid store of wealth over time.  No investment is without risk, but the riskiest investment is the one you know nothing about.  Return is not necessarily a function of risk.

Stay fully invested as much as possible.  Tax free accounts such as the Roth IRA and Health Savings Accounts are, by far, considered the best money to have in your retirement.  There are many arguments as to when is the best time to create, contribute, and convert to these accounts but you should seek help and education to make that determination.  These accounts can remove the uncertainty risk associated with the tax rates and remove a variable in your overall plan.

There is no magic number for the amount you should have in retirement savings. Every individual’s priorities and needs are unique. Determining how much income you’ll need in retirement is a critical step in meeting your goals. Develop your plan, amend it as necessary, and stick with it.


Did you file the form 990-T? The IRS may be watching you!

By:  Wayne P. Kerr, Esquire, CPA, JD, LLM (Taxation)

Now that you have discovered the wonderful world of Self Directed Individual Retirement Accounts (often referred to as SDIRA), you need to be aware of the hidden tax traps.

Law and Tax Considerations

There are two predominant legal and tax issues that must be considered with any SDIRA investment. The first issue is whether the investment could raise a prohibited transaction problem under Section 4975 of the Internal Revenue Code of 1986, as amended.

The second issue is have you considered whether a Form 990-T is required by the IRS to report activity within your SDIRA.  Prohibited transactions are an extremely important area and will have devastating tax consequences if the rules are not followed. 

Seeking Legal Counsel

Competent legal counsel can help you avoid the disastrous consequences of this mine field.  We would encourage you to review the webinars that we presented at the CAMA Academy for additional assistance.  

Once you have made an investment with your SDIRA, continuing to carefully monitor the IRS requirements is imperative. Since tax season is upon us we will focus on the second issue: whether your SDIRA investment results in current tax to the SDIRA as a result of either unrelated business taxable income (UBTI) or unrelated debt-financed income (UDFI).

Unrelated Business Taxable Income

Section 512 of the Internal Revenue Code imposes a tax on income earned by a tax-exempt organization in a trade or business that is unrelated to the organization’s exempt purpose (UBTI).

In laymen’s terms, the tax code defines any trade or business to be unrelated to the IRAs purpose, however, there are exclusions and knowledgeable tax advisors can aid in minimizing your tax consequences.

For example an SDIRA that has invested in Wimpy’s, a hot new burger franchise, will be subject to UBTI. Additionally, what may appear to be an investment in an operating business would be subject to UBTI. These sometimes subtle, but nevertheless impactful, differences should be reviewed by experienced professionals to insure your SDIRA has met its tax filing requirements.

The Impact of Taxes

UBTI/UDFI is not necessarily a negative aspect of SDIRA investments since the tax burden means your IRA is earning income. However you should be mindful of the impact of these taxes and consult professionals to insure you are well informed of the tax consequences prior to making an investment decision.

 The premise behind the unrelated business taxable income is that Congress did not intend for IRAs to have an unfair advantage i.e. no tax consequences and to compete with active businesses. Quite the opposite, the IRA is designed to be a passive investor.

If your SDIRA is subject to tax, the amount of tax is computed at the estate and trust income tax rates.  These rates reach the 39.6% bracket once the income, in 2014, reaches $12,150.00 (the rates and income limits imposed by the IRS can vary yearly), a substantial tax rate if you are not aware.

Consequently, what looked like a great tax strategy turns into a tax nightmare!

Unrelated Debt-Financed Income

The other area of concern can occur when an SDIRA invests in real estate, either through its LLC or a partnership of other investors. Oftentimes there is debt involved through a limited liability company where other members are involved or a partnership and this may create adverse tax consequences for the SDIRA.

The income from the debt-financed property would be partially taxable (a formula computes the taxable portion by dividing the amount of debt by the total acquisition price of the real estate) under the UDFI rules.

These taxes may more than likely be minimal due to the flow through of other tax items (i.e. depreciation). Regardless of the tax implications, the SDIRA will likely be required to file a Form 990-T, even if no tax is due.  This form can assist in tracking the accumulation of passive real estate losses for future tax benefit.  

When a sale takes place the sales proceeds from the underlying real estate will also be partially taxable due to the debt financing however this tax may be offset by the prior unused passive losses.  

Failure to File

We find the failure to file Form 990-T a common occurrence.  Simply stated, if a property was purchased with an SDIRA using debt-financing (i.e. seller financing or bank financing) experienced tax professionals should review and determine the tax implications and filing requirements.

Tax and legal professionals can also advise investors in utilizing various strategies and techniques to help minimize UDFI.

As illustrated above, it is imperative that the account holder retains an attorney/accountant who understands the complexities of SDIRA investments and can safely navigate around the traps outlined in this article. 

Please remember that the self directed IRA, administrator or trustee is not responsible for your tax and filing requirements; this responsibility rests with the account holder.

Advice from the Pro’s

We find that experienced professionals who have already traveled this road would be valuable resources on this investment journey.  We are available to assist you in this exciting adventure.

Mr. Kerr is a shareholder of Kerr Law Associates, P.C. located in Philadelphia, Pennsylvania and writes and lectures in the area of SDIRA.  Elizabeth Cummings, CPA and Elizabeth Morrow, Esquire have delivered webinars for the CAMA Academy on the subject.  For further inquiries, please contact him at waynekerr@wpkerr.com.