Welcome to Self Direction! Self Directed Retirement Plan Services
Our Agenda - Who Am I? • Who is Entrust Georgia, LLC • Tax-Deferred & TAX–FREE Investing • Types of Accounts • Self-Directed Accounts & Administrators • Potential & Opportunities • Pitfalls & IRS Rules • Case Studies
Agenda - Ask Questions! - Complete Evaluations - CE Certificates
Monte Smith Education Director Entrust Georgia, LLC 3525 Piedmont Rd NE Building Eight, Suite 101 Atlanta, GA 30305 • Former financial analyst • Former HS Spanish Teacher • Started working for Entrust in 2007 • Moved to Atlanta in Feb., 2009
Entrust Has a Legacy of Self-Direction • The Entrust Group was Founded by CEO Hubert Bromma (who still is the CEO today) • Entrust’s only business is self-directed investment administration and record-keeping • Entrust is the only self-directed administrator to open affiliate offices across the US in order to better service their clients • Over four billion $ in self-directed assets
Overview: Self Direction • What Makes A Truly Self-Directed Plan: • Self-Directed IRA = Real Estate IRA • You choose and control the investments in your retirement plan. • You choose the tools - IRA and/or Qualified Plan. • You direct the trustee or custodian to make legal investments on your behalf. Greater Freedom to Control YOUR Tax Advantaged Assets
2 Types of Self Directed Clients Two Main Reasons Clients Invest IRA/401(k) Funds into Real Estate: - A “New” Source of Capital - Tax Deferral/Tax Free Investing
Opportunities for the Real Estate Professional • Your Own Account • Capitalize on your expertise • Clients IRA’s • Currently trillions of $$ in Retirement Accounts • Currently less than 2% Self-Directed • Real Estate is tangible, safe, & comfortable • Typical Client?
Tax Deferred Investing Why Think Tax Deferral? • A tax-deferred or tax/fee environment may permit you to compound assets faster as a result (Rule of 72). • A Roth may permit you to prepay the tax & never pay tax again. Rule of 72:If your assets earn a 10% return it will take 7.2 years for them to double. (Divide your expected rate of return into 72. For example, 72/12=6 years, 72/10=7.2 years, 72/6=12 years. If paying tax on gains, how much longer will it take you to compound your assets?
Overview: Self Directed Benefits Take Control: • Make your own investment choices Diversification: • Invest in all types of assets • Invest in what you know & understand Tax Savings: • Contributions maybe tax deductible • Tax deferred or Tax free growth
Overview: The Techniques Potential Self-Directed Investment Choices: • Undeveloped land • Rentals • Real Estate Options • Pre Construction Contracts • Private Placements • LLC and Partnerships • Privately Held Stock • Tenants In Common • Timeshares • Foreign Currency Exchange • Notes/Mortgage Receivable
Overview: The Techniques How might one use retirement funds? IRA and/or 401(k) Investment Techniques: • Purchase using cash from retirement funds • Partnering retirement funds and personal funds • Partnering retirement funds with other investors • Leverage with non-recourse financing • Other options
Overview: The Tools Individual Retirement Arrangements • Traditional (deductible/non-deductible, spousal) – Tax Deferred • Roth (non-deductible, spousal) – Tax Deferred, possibly Tax Free IRAs established by Employers, using traditional IRAs • SEP-IRAs and SIMPLE IRAs Other savings plan (Not really an IRA or a Qualified Plan) • Coverdell Education Savings Accounts • Health Savings Accounts Employer Based Qualified Plans • Defined Benefit – Pension Plan (not as common any longer) • Defined Contribution Money Purchase, 401(k) employee deferral
Traditional IRA Who is it for? Individuals under 70½ What is the criteria? Anyone with earned income is eligible to contribute to a Traditional IRA, deductibility is based on annual income. Traditional IRA What benefits does it have? • Tax deduction, lowering your current tax bill.* • Retirement savings. *Note: Some individuals still contribute to a traditional IRA even without the tax deduction. 14
The Tools: Traditional/Roth • Traditional IRA: • Tax deduction (if eligible) • Tax-deferred earnings • Why a Traditional IRA • Pay tax later – Not Now • Old 401(k) can be rolled directly in without any tax penalty • Taxes equal or higher upon retirement • Not qualified for Roth IRA
Traditional IRA Distributions Taxed at ordinary income after 59½ Required Minimum Distributions (RMDs) at 70 ½ Beneficiary of a Deceased Owner Not more than qualified higher education expenses Disabled First-time home buyer 16 16
Roth IRA Who is it for? Individuals of all ages. What is the criteria? Anyone with earned income which does not exceed the income limits is eligible to contribute to ato a Roth IRA. Roth IRA What benefits does it have? • Tax-free earnings and no taxation on withdrawals. • You may invest for retirement and still access your funds. • Low tax situation this year and expect higher taxes in the future • Contributions may be made after age 70½. 17
The Tools: Traditional/Roth Roth IRA – Pay Tax Now, Not Later • No Tax Deduction • Tax-Deferred Earnings • Tax-Free Earnings (for qualified distributions) • No RMDs • Estate Planning Tool • Contributions Post 70 ½ Note: See Individual Roth(k) for larger contributions
Roth IRA Distributions Tax Free Income After 59½ Tax Free IncomeAfter five years Contributions are distributed first Amounts converted from a Traditional IRA are distributed second (may be subject to a 10% penalty) Disabled First-time home buyer 19 19
Roth IRA Special Distribution Rules REGULAR, SPOUSAL, AND CATCH-UP CONTRIBUTIONS CONVERSIONS EARNINGS
Roth IRAExample Ben established a Roth IRA in 2006 with a regular contribution of $3,000 to NW Bank Ben made contributions of $4,000 in 2007 and 2008 to a Roth IRA at TGI Securities (for a total of $11,00) Bens current balance of his Roth IRA’s is $16,000 In 2009, at age 43, Ben takes a distribution of $4,000 for a new 4 wheeler Is the distribution taxable to Ben? ____________
Technique: Conversions Traditional IRA to Roth IRA Conversions • Everyone Is Eligible To Convert In 2010 • Can pay 100% on 2010 tax filing OR 50% on 2011 tax filing and 50% on 2012 tax filing • Pay Tax Now & NOT Later Why Convert? • Low Tax Situation This Year • Expect Higher Taxes In The Future • Assets in current Traditional IRA have lowered in value
Definition: Transfer vs. Rollover vs. Direct Rollover Rollover/Transfer Assets to IRA Advantages: • Transfers occur between like accounts (e.g., Traditional IRA to Traditional IRA) • A Direct Rollover moves funds from a Qualified Plan to an IRA • A Qualified Plan Rollover is when… (20% withholding) • IRA rollover (1 time for 60 days only every 12 months
Employer Plan-to-IRA Direct Roll Over $ QRP, 401(k), 403(b) or Governmental 457(b) Plans Traditional IRA Indirect Rollover LESS 20% Federal Withholding
IRA RolloverExample Mike Artison, age 64, recently changed jobs from Potlatch Inc. to Mills Motor. Mike has a balance in Potlatch’s 401(k) of $100,000 If Mike chooses to have the 401(k) distribution made payable to Mike, how much will the check be made payable to Mike for? $_____________ If Mike chooses to have the check made payable to his Traditional IRA, how much will the check be made payable for? ____________
Employer Sponsored Plan SEP Simple Individual(k) Contributions and Distributions 26 26
The Tools:SEP/SIMPLE/Individual 401(k) Who Would Benefit: • Owner-Only/Self Employed • Sole Proprietorship • Family-Operated Business • Businesses With “Excludable” Employees • SIMPLE IRA Plan
IRA Based Employer Plan: Who is it for? Sole proprietors, independent contractor, self-employed, partner, corporation, or S corporation. What is the criteria? Self employed individuals who received earned income. SEP IRA What benefits does it have? • Low start-up and administrative costs. • Helps you to reduce business taxes. • Easy to set up and run. 28
IRA Based Employer Plan: Who is it for? Sole proprietors, independent contractor, self-employed, partner, corporation, or S corporation. What is the criteria? Designed for small business with less then 100 employees or self-employed who receive earned income. What benefits does it have? SIMPLE IRA • Low start-up and administrative costs & easy to set up and run. • Provides you and your employees with a simplified way to contribute toward retirement. • Helps you to reduce business taxes. • Employees may contribute through convenient payroll deductions. • The plan provides for flexibility in how much to contribute for your employees. 30
The Tools:SEP/SIMPLE/Individual 401(k) What Types of Employees Are Excludable? • Those under age 21, • Those who work <1000hrs./Yr. for Individual(k) Plan • Individuals working for less than • 3 years for SEP Plans • 2 years for SIMPLE Plans • Nonresident aliens • Union employees
The Tools:SEP/SIMPLE/Individual 401(k) SIMPLE/SEP ADVANTAGES: Simple Administration • Contributions to IRA’s No Fiduciary Liability • Individual chooses IRA Custodian Flexible Contribution And Distribution Features • Employer contributions only to those employees with more than: • 2 years of service for SIMPLE • 3 years of service with SEP
Employer Plan: Indy 401(k) Who is it for? Sole proprietors, independent contractor, self-employed, partner, corporation, or S corporation. What is the criteria? This plan is a defined contribution plan for businesses that employ only the owners, their spouses, and partners. Individual(k) What benefits does it have? • Largest potential contribution for business without employees. • Reduce business taxes. • You want the capability of borrowing from your plan. • You want to purchase leveraged real estate in your plan and wish to avoid UDFI (Unrelated Debt Financed Income Tax). • Roth Individual(k) option available. 34
The Tools:SEP/SIMPLE/Individual 401(k) What Makes Individual (k) Plans So Appealing? All the benefits of traditional business retirement plans plus: • Higher Funding Limits • Defer A Larger Amount Of Your Earned Income • Complete Funding Flexibility • Rollover Opportunities • Access To Tax-Free Loans • Flexible Distribution Options • Cost-Effective Administration • ROTH 401(K)!!!!
Individual(k) Contribution Limits Roth option available… 36
Techniques:RMDs Distribution & Inheritance Options: • Age 70 ½ Techniques • Required Minimum Distributions • Taxable Distribution • Continue To Contribute – Roth IRA Option • Inheriting IRA Options • Roll To Own IRA (Spouse Only) • Roll To Beneficiary IRA Receive Life Expectancy Distributions From IRA
SELF-DIRECTION • People & Companies with investment products to sell, have changed our perception of what is possible! • The product providers wrote plans and IRAs which limited the scope of investments. • Stocks, bonds, mutual funds, CDs, Annuities • Self-direction within these products is also permitted, but only to the extent that the custodian’s document permits. • Losses are not necessarily self directed if people are convinced by their advisors that they have no other choices.
Possible IRA investments LPs & LLCs Auto Paper Trust Deeds Like & Unlike Exchanges Contract Options Building Bonds Commercial Paper Commodity & Option Exchanges Commodities / Futures Leases Joint Ventures Foreign Currency Exchange Real Estate Mortgage Notes, Unsecured Loans, Tax Lien Certificates Stocks, Bonds, Mutual Funds Extraordinary Investments Security Agreements & Notes Private Placements Certificates of Deposit Tangible Asset Deeds Foreign Sales Corporate Stock Accounts Receivable Financing Precious Metals
IRS RULES… • Collectibles & Life Insurance = PROHIBITED • Self Dealing / Current Personal Benefit • Prohibited Transactions - Disqualified Persons • UBIT – Unrelated Business Income Tax • Business/ Operating Income (NOT rents, dividends, etc.) • Debt Financed Income
IRS Rules and Regulations:ProhibitedInvestments Collectibles & Life Insurance • Any Work Of Art, • Any Rug Or Antique, • Any Metal Or Gem, • Any Stamp Or Coin**, • Any Alcoholic Beverage **Exception US Government Minted Gold Or Silver Eagle, Gold & Palladium Bullion
IRS Rules and Regulations:Disqualified Persons Examples ofDisqualified Persons: • You & Your Spouse • Lineal Ascendants (Their Spouses) • Lineal Descendants (Their Spouses) • Any Fiduciary Of IRA • Anyone Providing Services To Your IRA • Corporations, Partnerships, Trusts, or Estates in which you own, directly or indirectly, at least 50%
IRS Rules and Regulations:Prohibited Transactions • Some examples of prohibited transactions • between a disqualified person and an IRA are: • Selling, Exchanging Or Leasing Property • Lending Money Or Extending Credit • Furnishing Goods, Services Or Facilities • Two Key Points With IRAs & Real Estate: • NO Self Dealing & NO Personal Use!
Rules, Rules, Rules… • You MUST have a custodian/trustee between you and the plan. That custodian must be an approved IRS custodian. • You decide what investment to use, the custodian makes the actual investment of the plans assets and holds all assets. • You CANNOT borrow from the plan. • You CANNOT pledge your IRA as collateral for ANY purpose. • Debt financed property held by IRA must be a non-recourse loan. • You can roll over the assets of any/each IRA you have once a year and not have to put them back for 60 days. • Depending on state law, your IRA might be able to be attached.
Structuring the Deal I have $50K in an IRA and I want to buy a parcel of real estate that is $100K. How can I accomplish that? 3 Options 1) Partnering (IRA funds and Personal cash) 2) Partnering with Personal Financing (home equity line, etc.) 3) IRA gets non-recourse loan (UBIT/UDFI) for difference
Take Control in 3 Easy Steps • Account Set Up: Contact Your Local Entrust Office For An Application • Fund Your Account: YOU Choose How To fund Your IRA – Transfer, Rollover, Contribution • Find The Asset: You Are Ready To Purchase Your First Asset!
8 Steps To PurchasingReal Estate In A Retirement Plan • Locate Investment 2. Make Offer In IRA Name • Complete “Buy Direction Letter” 4. Entrust Will Assist In The Closing Process
8 Steps to PurchasingReal Estate in a Retirement Plan 5. Review & Approve Closing Documents • Entrust Wires Funds To Escrow 7. Deed Is Recorded In The Name Of Your IRA 8. Entrust Provides Record Keeping Services
Techniques: Long Term Growth Investment Options: For Long Term Growth • Undeveloped Land • LLC’s • Partnerships • Tenants In Common • Closely Held Stocks
Case Study: Undeveloped Land Bill Smith wants to use his $50,000 Rollover IRA to purchase a $40,000 piece of undeveloped land.