All posts by Quincy Long

Can I Have a Roth Too, Please? Yes, You Can!!!

By H. Quincy Long

            Most people want a Roth IRA once they understand the tremendous tax benefits.  You do not receive a tax deduction for contributing money to a Roth IRA, but qualified distributions are TAX FREE FOREVER.  Essentially the concept of a Roth IRA is that you pay taxes on the “acorn” (the initial contribution) instead of the “oak tree” (the potentially large amount in the Roth IRA after many years of tax deferred accumulation).  This is especially beneficial in a truly self-directed IRA, which can invest in real estate, notes, options, private company stock, LLCs, limited partnerships and other non-traditional asset

            Unfortunately, there are income limits for contributing to a Roth IRA or converting money from a Traditional IRA to a Roth IRA.  For contributions, a married couple filing jointly may not contribute if they have Modified Adjusted Gross Income (MAGI) of more than $176,000 for 2009.  For single individuals the MAGI limit is no more than $120,000 for 2009 to be able to contribute to a Roth IRA.  The news is even worse if you want to convert assets from a Traditional IRA to a Roth IRA.  Whether married or single, you are not eligible to do a Roth conversion if your MAGI is more than $100,000.

            For people who exceed these income limits, it might at first appear that they are left out in the cold when it comes to Roth IRAs.  Fortunately, this is not actually true.  There are at least 3 ways in which a person who exceeds the income limits may end up with a Roth IRA.  The key phrase is “end up with” in the preceding statement.

            The first method of acquiring a Roth IRA if you exceed the income limits is to inherit one.  There is no age discrimination for contributing to a Roth IRA, unlike the Traditional IRA.  Anyone with earned income within the limits can contribute.  Earned income is generally income on which you must pay Social Security and Medicare taxes.  Passive or investment income, including rents, interest and dividends do not count as earned income, but it is not that hard to create earned income.  An elderly relative or friend may be able to help in your business in some way, for example, and your payment to them for their assistance would be earned income.  They may even be predisposed to name you as their beneficiary in the event of their death.

When a Roth IRA is inherited, the new account owner must take required minimum distributions from the IRA, unless the inheritor is a spouse.  Required minimum distributions are not required for the original account owner.  However, this does not mean that the balance in the account cannot be invested, and it is easy, at least with a self-directed IRA, to create income which exceeds the yearly required minimum distributions.  Even better, if the person who died had a Roth IRA for at least 5 tax years, distributions from the account are tax free, even if the inheritor is under age 59 ½.  There is never a 10% premature distribution penalty either, since the distribution is due to death.

            A second method to acquire a Roth IRA has to do with excess contributions.  Many people do not really know whether their income will exceed the limits when they make their Roth IRA contribution, especially if they contribute early in the year.  This is certainly true of self-employed persons.  So what happens if you make a mistake by contributing early and it turns out your income exceeded the MAGI limit for the year? 

If you take action before your tax filing deadline, including extensions (generally October 15), you can recharacterize the contribution to a traditional IRA as long as you are under age 70 1/2, along with all of the net income attributable (NIA) to the contribution.  You may also remove the contribution from the Roth IRA, along with any net income attributable.  In this case the only penalty which you might have to pay is on the income attributed to the contribution, not on the contribution itself.  If you remove the contribution after your tax filing deadline plus extensions, it is unclear from the regulations whether you must also remove the net income attributable from the Roth IRA.  A third choice is to leave the contribution in the Roth IRA and pay a penalty on the excess contribution.  In many circumstances this may be the wisest choice.

If you leave the money in your Roth IRA, you are required to pay a penalty of 6% of the amount of the excess contribution for each year that the excess remains in the Roth IRA.  For example, if you make an excess contribution $4,000 to a Roth IRA and your MAGI exceeds the limit, your penalty is only $240 for each year the excess remains in the account.  This is the penalty regardless of how much money you make in the Roth!  Since the penalty only applies for as long as the excess contribution remains in the Roth IRA, you will no longer have to pay the penalty if you qualify for a Roth in a future year and do not contribute or if you remove the contribution.  Once you have a Roth IRA, the account may continue to be invested regardless of your current year income. 

            Finally, in 2010 the $100,000 MAGI limit for converting assets from a Traditional IRA to a Roth IRA is eliminated.  Although a person who exceeds the MAGI limit will still not be able to contribute to a Roth IRA, in 2010 and future years anyone may convert assets in a Traditional IRA to a Roth IRA, no matter what their income level.  The amount converted is generally added to your taxable income for the year of conversion to extent it exceeds any non-deductible contributions in the account.  For conversions in the year 2010 only, however, the person converting has the choice of paying 50% of the taxes on the conversion in 2011 and the other 50% in 2012.  You have 3 years to pay taxes on Roth conversions done in 2010!

            As I always say, there are worse things than not qualifying for a Roth IRA, such as qualifying for a Roth IRA!  Whether by inheriting a Roth IRA, through an inadvertent excess contribution, or by conversion in 2010, even those who are fortunate enough not to qualify for a Roth IRA due to income exceeding the MAGI limit may end up with a Roth IRA.  Even a small Roth IRA can be built into a large IRA with careful investing, which means that even the wealthy can have a substantial amount of tax free retirement income.

What’s in a Name? – Why It’s Important to Name a Beneficiary for Your IRA

By H. Quincy Long

             Many people probably don’t think too much about how important it is to name a beneficiary for their IRAs.  However, as my family recently found out, ignoring this important detail when setting up your IRA can be costly from a tax perspective.

             I recently received a distribution check from an IRA of my father, who passed away last year.  My father was a very careful planner, so I was quite shocked at his lack of tax planning with his IRA.  When setting up his IRA he named his estate as the beneficiary of the IRA (this is equivalent to not naming a beneficiary at all).  This meant that when he passed away the estate had to be probated, even though the IRAs were the only assets requiring probate in his estate.  IRAs that have named beneficiaries are generally non-probate assets, meaning that they pass directly to the beneficiaries instead of passing through a will.  That was the first problem. 

The larger problem came because of the lack of choices he left us by naming his estate as beneficiary.  In a Traditional IRA, required minimum distributions must begin no later than April 1 of the year after the IRA owner turns age 70 ½.  This is known as the required beginning date.  My father died before his required beginning date.  Since his estate is a non-individual beneficiary, the IRA had to be distributed within 5 years, or by December 31, 2011.  If my father had died after his required beginning date without having a named individual beneficiary, the yearly required minimum distributions would have been based on his remaining life expectancy in the year of his death reduced by one for each year following the year of his death. 

In contrast, the choices available to our family had my father simply named beneficiaries would have been much more favorable.  Assuming my father wanted his wife and 3 sons to split the IRA in the same percentages he listed in the will, he could have named us specifically instead of requiring the distribution to be made through his estate.  If the IRA was not split into separate IRAs by September 30 of the year following the year of his death, then required minimum distributions would have been based on the remaining life expectancy of the oldest beneficiary, which was of course his wife.  As his wife is a few years younger than he was, this certainly would have been a large improvement over taking the entire IRA over the next 5 years.

Had my father named the 4 of us as beneficiaries specifically, an even better plan would have been to separate the IRAs into 4 beneficiary IRAs with each of us as the sole beneficiary prior to September 30 of 2007 (the year following his death).  In his wife’s case this would mean that she could choose to take all the money out within 5 tax years, leave the IRA as a beneficiary IRA, thereby allowing her to take distributions without penalty even if she was under age 59 1/2, or she could have elected to treat the IRA as her own.  In the case of his sons, we could have

taken the IRA over 5 years or we could have stretched the distributions over our life expectancy.  For example, in my case I could have elected to take the distributions over the next 39 years instead of all at once!

Since I expected nothing from my father’s estate and have no critical need for the funds, I would have taken the longer distribution period.  Instead I must add the distribution check to my taxable income for this year, which in my tax bracket means a substantial bite out of the money for taxes.  Since I am reasonably good at investing in my self-directed IRAs, having the ability to stretch the distributions out over 39 years would have meant an inheritance of many times what I will end up with after taxes because I had to take it all within 5 years.

The problem is even worse for my father’s wife, who will have an extraordinarily large tax burden this year, since she chose to take her share of the IRA out all at once instead of over a 5 year period.  While I am certainly grateful that my father thought of me in his will, simply naming specific beneficiaries would have made his legacy worth so much more to his family. 

Don’t let it happen to your family!  Review your IRA beneficiary designations, and if you haven’t already done so, name your beneficiaries.  Your family will be glad you did.

Using Self-Directed IRAs and 401(k)s to More Money Now and to Build Your Retirement Wealth for the Future

By H. Quincy Long

            Self-directed IRAs and 401(k) plans have been around for more than 25 years, but many people are just now becoming aware of how powerful this idea can be.  There are currently trillions of dollars in retirement plans.  Do you know how to unlock your own retirement funds as well as the retirement funds of those within your circle of influence for real estate related and other non-traditional investments?  Your knowledge of self-directed retirement plans can help make you money now as well as ensuring that you retire in style.

            Plans available for self-direction.  A lot of retirement wealth is in traditional IRAs and employer sponsored plans.  If you leave an employer, the funds in the employer plan can be moved into a self-directed traditional IRA.  This includes money rolled over from 401(k) plans, 403(b) plans, 457 deferred compensation plans, and the federal thrift savings plan.  Self-employed people may have their own Individual 401(k) plan, which may even include the new Roth 401(k), no matter what their income level.  Other employer sponsored plans which can be self-directed are SEP IRAs and SIMPLE IRAs.

            The king of all IRAs when it comes to building tax free wealth is the Roth IRA.  Even if you do not qualify for a Roth IRA due to income limitations currently, in 2010 the income limitation for conversions from a traditional IRA to a Roth IRA will be eliminated.  At that point even the very wealthy will be entitled to have a Roth IRA.  This is a great planning opportunity.

            How does paying for your child’s education or your health care expenses with tax free income sound?  You can even self-direct a Coverdell Education Savings Account (ESA) or a Health Savings Account (HSA), and as long as distributions are for qualified education or health care expenses they are TAX FREE FOREVER.  With an HSA you even get a tax deduction for putting the money in!

            Perhaps the best news of all is that you may combine your IRAs and other self-directed plans to make non-traditional investments.  Even better, you can invest your IRAs with other people’s IRAs or even non-IRA money of people you know.  The key element is that you must have your plans administered at a self-directed IRA company like Quest IRA, Inc.

            Make money now.  We have all heard that knowledge is power.  Your knowledge of self-directed retirement plans can translate into money in your pocket today.  How?  It’s easy!  While it is true that you may not derive a current benefit from your own IRA’s investments, this does not mean that you cannot benefit right now from Other People’s IRAs (OPI).  Simply become knowledgeable about self-directed plans by reading books and attending seminars or workshops, then spread the good news!

            Quest IRA, Inc has many seminars and workshops to help you and those whose IRAs you want to use to make money for yourself.  There are also numerous books on the market explaining the power of self-directed retirement plans, such as Hubert Bromma’s “Investing in Real Estate With Your IRA and 401(k)” which are selling quickly.  For more information on seminars and workshops in your area, visit the Quest IRA website at www.QuestIRA.com  Even if you don’t have a dime of retirement funds yourself, you can use your knowledge to:

            *          Borrow other people’s IRA money to do your deals today

            *          Sell real estate, notes or other non-traditional assets to people’s IRAs

*          Make others aware of an opportunity to invest in your business (always be aware of securities laws when raising money)

            Anytime you go to a gathering of people, there are most likely millions of dollars available for non-traditional investments in their retirement plans.  It is up to you to let people know about this powerful tool, and how they can take some or all of that anemic money and put it to work in a way that benefits both you and them.  You will look highly intelligent and will inspire confidence with your advanced knowledge.  You owe it to yourself to learn more today.  Quest IRA, Inc. can help.

            Invest your own IRA in what you know best.  With all your knowledge of self-directed IRAs, you will most likely want to invest your own retirement funds in non-traditional investments as well.  What investments do you know the most about?  Almost without exception, you can invest in what you know best with your own IRA.  The law contains very few investment restrictions for retirement plans, but most custodians refuse to allow IRAs to invest in non-traditional investments such as real estate simply because they are not set up to handle them.  Not true with Quest IRA, Inc.!

            Quest IRA, Inc. self-directed retirement plans are under the same laws as plans at any other custodian or administrator.  We are simply more flexible when it comes to administering non-traditional investments in your IRA or other self-directed plan.  Quest IRA, Inc. clients have used their retirement plans to purchase all of the following and much more:  real estate, both foreign and domestic, including debt leveraged real estate, real estate options, loans secured by real estate, unsecured loans, limited partnership interests, limited liability company shares, stock in non-publicly traded corporations, land trusts, factored invoices (including factored real estate commissions), tax lien certificates, foreclosure property, joint ventures, oil and gas interests and even race horse colts!  You are limited only by your imagination.

Ignorance may be bliss, but it will not make you wealthy.  Use your knowledge of self-directed IRAs to make money now, to help others build their retirement wealth as well as your own, and to retire in the style and comfort in which you would like to become accustomed.  Contact Quest IRA, Inc. today!

Either a Lender or Borrower Be

By:  H. Quincy Long         

            Personally, I think Shakespeare had it wrong when he penned this advice in Hamlet:  “Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.”  Perhaps he may be forgiven for his error, however, since Shakespeare suffered from a lack of the tremendous benefits of a truly self-directed IRA. 

            Money in self-directed IRAs can be loaned out to any person who is not a “disqualified person.”  While this means that you cannot loan yourself or other related disqualified persons money from your self-directed IRA, you can loan the money to anyone else.  Loans can be secured by real estate, mobile homes, equipment or anything you like.  If you are really a trusting soul, you can even make a loan from your IRA unsecured (although in that case I personally would tend to support Shakespeare’s advice).

            First, let’s look at it from the borrower’s perspective.  At our office we offer a seminar entitled “Make Money Now With Self-Directed IRAs.”  One of the ways you can make money for yourself right now with your knowledge of self-directed IRAs is by creating your own “private bank.”  To do this, simply share the news that an IRA can be a private lender, refer people with IRA money to Quest IRA, Inc. to open a self-directed IRA, and then borrow their IRA money for your own financing needs.

            With private financing the loan terms can be whatever the borrower and the lender agree to within the legal limits.  If you know a person who is getting 5% in a “safe” IRA at a bank, and you can offer them 9% secured by a first lien on real estate with only a 70% loan to value, would they be happy with that?  Even with a higher interest rate, private financing can work for you. IRA loans can be done quickly and without a lot of fees or fuss, which may mean you can get a deal which might be lost if you had to wait on the bank.  This is especially true in distressed sale situations, such as a pre-foreclosure purchase.

            From a lending perspective, your IRA can grow at a nice rate while someone else does all the work.  In a typical hard money loan, the borrower even pays all of Quest IRA, Inc. modest fees as well as any legal fees for preparation of the loan documents.  True, you won’t hit a home run with lending, unless you are fortunate enough to foreclose on the collateral.  But the returns can be quite solid.  For example, by making very conservative hard money loans my Mom’s IRA has grown by about 10.5% in one year.  This is much better than the amount she was earning in her money market fund before she moved her IRA to an Quest IRA, Inc. self-directed IRA. 

            Even small IRAs can combine with other self-directed accounts to make a hard money loan.  My brother recently combined his Roth IRA, his traditional IRA, his wife’s Roth IRA, his son’s Roth IRA, his Health Savings Account (HSA), and 5 other IRAs to make a hard money loan.  The smallest IRA participating in this loan was for $1,827.00!  Each IRA made 2% up front and 12% interest on an 18 month loan, secured by a first lien on real estate with no more than 70% loan to value.

            One thing to avoid in hard money lending is usury.  Usury is defined as contracting for or receiving interest above the legal limit.  The usury limit varies from state to state, with a few lucky states having no usury limit at all on commercial loans.  Some people have the theory of “What’s a little usury among friends?”  However, if the investment goes bad and your IRA has made a usurious loan, the consequences of the borrower making a claim of usury could include the loss of all the principal of the loan plus damages equal to 3 times the interest.  Some states even have criminal usury statutes.  It is best to consult with a competent attorney prior to making a hard money loan to make sure your IRA does not violate any usury laws.

            To see how well hard money lending can work, let me give you an actual example.  One of our clients made a hard money loan from his IRA to an investor who purchased a property needing rehab.  The terms of the loan were 15% interest with no points or other fees except for the attorney who drew up the loan documents.  The loan included not only the purchase price but also the estimated rehab costs.  The minimum interest due on the loan was 3 months, or 3.75%.  The investor began the rehab by having the slab repaired, and before he could take the next step in the rehab process, a person offered him a fair price for the property as is.  The investor accepted the offer, and they closed about 6 weeks after the loan was initiated.

            From the investor’s perspective, was this a good deal?  Yes, it certainly was!  True, he was paying a relatively high interest rate for the time he borrowed the money.  However, he was able to purchase a property with substantial equity which a bank most likely would not have loaned him money to buy due to the condition of the property.  Also, while the interest rate was high, the cost of financing was actually comparatively low.  With a normal bank or mortgage company there are fees and expenses incurred in obtaining the loan.  Common fees include origination fees, discount points, processing fees, underwriting fees, appraisal fees and various other expenses relating to the loan.  On the surface an interest rate may be 8%, but the cost of the financing is actually higher than 8% since a borrower has to pay the lender’s fees in addition to the interest on the loan.  Spread out over a lengthy loan term these additional fees do not add much to the cost of the financing.  However, if an investor has to pay all of these fees up front and then pays the loan off in only 6 weeks, the cost of the financing goes way up. 

            In this case the investor’s total loan costs were limited to 3 months minimum interest at 3.75% plus $300 in attorney’s fees for preparing the loan documents.  Best of all, the investor walked away from closing with $20,000 profit and no money out of his pocket!  Far from “dulling the edge of husbandry” this loan actually made the “husbandry” (ie. the purchase and resale of the property) possible.  Incidentally, the purchaser of the property was absolutely thrilled to get the property at less than full market value so that they could fix it up the way that they wanted it.

            What about the lender in this case?  The lender was also quite happy with this loan.  His IRA received 3 months of interest at 15% while only having his money loaned out for 6 weeks.  For the 6 week period of the investment, his IRA grew at a rate of approximately 30% per annum!  Although his yield was above the legal limit for interest in Texas on loans secured by real estate, prepayment penalties are generally not included in the calculation of usury here, so there was no problem.  The investor was happy, the new homeowner was happy, and the lender was happy.  Anytime you can create an investment opportunity with a win-win-win scenario, you should.

            When I lecture about hard money lending, I ask the audience what they think is the worst thing that happens if you are a hard money lender.  Invariably, most people in the audience answer that you have to foreclose on the property.  Nonsense!  If you are doing hard money lending correctly, the worst thing that can happen is that the borrower pays you back!  Unfortunately, this is a common risk of hard money lending.  Most hard money loans are made at 70% or less of the fair market value of the property.  If you are fortunate enough to foreclose on a hard money loan, your IRA will have acquired a property with substantial equity while the investor did all the work of finding and rehabbing the property! 

            While it is true that foreclosing on a property owned by a friend may cause an end to that friendship, a properly secured hard money loan will at least not “lose itself” as Shakespeare asserts.  In fact, it may lead to substantial profit for your IRA!  To avoid losing a friend, simply don’t loan money from your IRA to someone you would feel bad foreclosing on.  In order to be a successful hard money lender, you do have to be prepared to foreclose on the property if necessary.

            In modern times I believe the proper advice, at least in the right circumstances, is “Either a lender or a borrower be!”  You can make more money for yourself right now by borrowing OPI (Other People’s IRAs).  Borrowing from someone else’s IRA can even lower the total cost of your financing compared to a conventional loan from a bank or mortgage company, especially on short term financing.  From a lending perspective, your IRA can make great returns by being a hard money lender, either through higher than average interest rates or, better yet, through foreclosing on property with equity.  You may find that hard money lending from your self-directed IRA is a great way to boost your retirement savings without a lot of time and energy invested on your part.