How to Make “Alternative” Investments in Your IRA

Most IRA trustees handle only typical IRA investments such as mutual funds, stocks and bonds, certificates of deposits, etc. They’re leery of other investment types for fear of violating IRS rules(1) on prohibited investments and transactions. Such violations will cause you to lose your IRA tax benefits and trigger penalties.

But alternative investments may interest you. If you wish to follow your interests, here are some facts and issues to consider. Note that alternative investment offerings may carry significant risks, including high volatility and lack of diversification.

About the only investments prohibited for IRAs are life insurance policies and certain collectibles, such as works of art, rugs, antiques, metals, gems, stamps, coins and alcoholic beverages. However, you can buy certain gold and silver coins minted by the U.S. or by U.S. states.

So what's allowed?

A sample of alternative investments include: stock from an initial public offering, closely held stock, real estate, options to buy real estate, oil and gas royalty interests, stock options, mortgages or other loans to be held for investment.

You can see, some of these options are inherently illiquid, which can cause problems. If you have too much of your account balance tied up in illiquid investments, you may not be able to dip into your IRA for cash anytime you please or easily make your annual MDR(2).

You need to find the right trustee to handle your investment

Some IRA trustees specialize in alternative investments. You can locate some trustees by searching the Internet using the key words "self-directed IRA." Do your due diligence to find who’s reputable and then check their fee schedules. Alternative investments inevitably cost more than the garden-variety investments.

Know the prohibited transaction rules

When investing in alternative investments, you need to avoid the "prohibited transaction rules". These rules are intended to prevent using your IRA account for "self dealing". You can’t use your IRA

· To buy stock or other assets from you or sell them to you,

· To lease assets from you or to you,

· To buy stock in a corporation in which you have a controlling interest.

· To lend to you or borrow from you.

· To engage in transactions with certain related parties and/or family members.

Avoid "Unrelated Business Taxable Income" (UBTI)

Certain types of income (not including investment income) are prohibited in IRAs. The UBTI rules are intended to prevent IRAs from investing in income-producing businesses via direct ownership or via ownership of a partnership or LLC interest. An example might include using an IRA to buy an interest in a cattle-breeding partnership.

Give us a call or fill out the card so we can help you find and overcome the hurdles of alternative investments in IRAs that are suited to you.

Article written and provided by Javelin Marketing

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[1] IRS Pub 590 – outlines the banned investments and prohibited transactions

[2] Minimum Distribution Requirements due annually after reaching age 70 ½

Avoid Paying Penalties on Your Early Withdrawals

Millions of Americans that save money in their IRAs or qualified plans have no intention of withdrawing that money until after they reach age 59 ½. Unfortunately, there are times when circumstances dictate that this is absolutely necessary. Any number of of misfortunes, such as medical expenses from an uninsured accident or an extended period of unemployment can leave all other sources of liquid assets depleted.

Of course, your retirement assets are probably the last source of assets that you want to draw on in the event of a financial hardship, but at times you may have no choice. At all costs you would like to avoid the 10% early withdrawal penalty inherent in any kind of premature distribution. However, the IRS has allowed for several exceptions to this rule over time, although the rules for traditional and Roth IRAs versus qualified plans differ somewhat. These exceptions can be broken down as follows:

Traditional IRA:

· Death

· Total and permanent disability

· 72(t) distribution (a series of substantially equal and periodic payments)

· IRS levy of the plan

· Medical expenses

· Qualified higher education expenses

· First-time homebuyer expenses up to $10,000

· Health insurance premiums for the unemployed

Roth IRA:

· The same exceptions as for the Traditional IRA (first-time homebuyers can pull out $10,000 in profits penalty free and tax-free if the money has been in the Roth IRA for at least five tax years)

Qualified Plans

· All of the exceptions that apply to Traditional IRAs

· Separation from service from your employer at age 55 or later

· Distributions made to your ex-spouse due to a qualified domestic relations order (QDRO)

· Dividend distributions from employee stock ownership plans (ESOPs)

The IRS has allowed these exceptions as both a means of relief and encouragement. The relief comes for the dead, divorced and disabled, while those who are trying to better themselves through education or trying to purchase a home can receive encouragement in the form of penalty-free distributions. Of course, these exceptions fall into a different category than other more common penalty-free transactions, such as rollovers or transfers between accounts or plans.

If you are currently strapped for funds and would like to know if you are eligible to take a penalty-free distribution from your IRA or qualified plan, call us. We can review your situation and show you how to minimize or eliminate the penalties from your retirement plan withdrawals.

Article written and provided by Javelin Marketing

2010 IRA Contributions and Deductions

Tax laws are forever changing. You need to stay on top of them to optimize your retirement planning. Let’s review where 2010 Individual Retirement Account (IRA) tax law leaves us.

IRA Contributions

The three IRA types are the Traditional IRA, the nondeductible IRA and the Roth IRA (see second page). Your annual total contribution to any or all of them is $5,000 in 2010. Married couples filing jointly can contribute a total of $10,000, even if only one spouse has income. And for catch-up contributions, you can contribute an additional $1,000 if you are aged 50 or over. After 2010, contributions will be adjusted for inflation.

Deductibility of Traditional IRA Contributions

All of your contribution is deductible if neither spouse has an employer-sponsored retirement plan at work.

Deductibility phases out if you or your wife (or both) do have a plan at work. The phase-out range depends on your Modified Adjusted Gross Income as shown in the table below. Your deduction is full below this range and nondeductible above it.

If you are contributing to a non-Roth IRA, you may want to segregate your deductible and nondeductible contributions to a traditional IRA and a nondeductible IRA, respectively, for ease of keeping track of what contributions were and were not deducted.

Roth IRA

Of course the Roth IRA contributions are never deductible. So, it is your ability to contribute to one that is limited by your Adjusted Gross Income. The range over which your contribution is phased out to zero is also given in the table below.

Earnings

The major advantage of an IRA is that your earnings are not taxed yearly. This allows greater growth than conventionally taxed investments. The traditional and non-deductible IRA earnings grow tax-deferred, whereas the Roth IRA earning grows tax free.

Withdrawals

For traditional IRAs, both your deductible contributions and their earnings are taxed as ordinary income. Only earnings are taxed on any non-deductible IRA contributions you make.

Roth IRA earnings or contributions are never taxed on withdrawal … but beware of early withdrawals made before you turn 59½. Those will be taxed and subject to a 10% penalty.

IRA type	Who’s eligible to contribute in 2010?	Annual contribution for 2010	Withdrawals
Deductible IRA(traditional)	If spouses’ employers have a employer-sponsored retirement plan then deduction phases out for: Individuals with modified adjusted gross income (MAGI) between $56,001 and $66,000. Married couples between $89,001 and $109,000. Married filing separately: $0 - $10,000. If only one spouse participates in an employer-sponsored plan, deduction phases out: Between MAGI of $167,001 and $177,00 for uncovered spouse, between $89,001 and $109,000 for covered spouse. If single or either of married couple cannot participate in plan: No income restriction for IRA deduction.	$5,000 ($6,000 if you are age 50 or older at year-end)	Withdrawals are taxed as ordinary income. Penalty-free withdrawals permitted before age 59 ½ for first-time home purchase up to $10,000, higher education expenses or in event of disability or death. Must begin withdrawals at 70½ with minimum required distribution
Nondeductible IRA	Everyone who has earned income.	As above	As above
Roth IRA	Eligibility to contribute phases out between MAGI of $105,000 and $120,000 for singles, and $167,000 and $177,000 for married couples. Married filing single’s range is $0 to $10,000	As above	Withdrawals are tax-free and penalty-free after five years if you are 59½, or in the following circumstances: death, disability or for first-time home purchase up to $10,000. Penalty-free, but not tax-free withdrawals permitted before age 59 ½, for higher education expenses. No minimum withdrawal at any age.

Articles wrriten and provided by Javelin Marketing.

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[1] Information comes from IRS www.irs.gov

Will Your Children Ever Receive Social Security?

The three pillars supporting retirement have traditionally been your pension, social security, and other savings. These days, most companies can’t afford to guarantee pensions (defined benefit plans). But now, your children may not be able to count on social security either when they retire.

The Employee Benefit Research Institute (EBRI) just reported on future problems with social security. In light of this, you may want to consider helping your children prepare for their retirement. Let’s see what’s up.

Social security is funded through our taxes. We and our employer pay a social security tax (also called FICA – federal insurance contributions act). This money pays for the well known benefits of retirement - and benefits to the disabled and their dependents. Also, we both pay a Medicare Tax for medical benefits at age 65.

Employees in 2010 pay a FICA tax of 6.2% on income up to about $106,800 and a Medicare tax of 1.45% at all income levels. These together are called payroll taxes and our employers match these taxes. That’s a total of 15.3% of income going to FICA and Medicare Funds per year.

For the latest full year compiled, the expenditure of the Social Security and Disability fund (FICA monies) in 2008 amounted to 4.2% of our Gross Domestic Product (GDP). For reference purposes, Medicare expenditures for 2008 were 3.2% of GDP. They’re expected to exceed Social Security funds by 2028.

With the oldest baby boomers (born in 1944 and later) reaching 65 in 2009, a growing retirement population will be seeking Social Security and Medicare Benefits. And that’s where the problem begins. The social security trust fund can’t keep up paying for more expenses forever.

When a trust fund goes into negative cash flow (i.e. benefit payments exceed the income from payroll taxes and taxation of benefits) it marks the point at which the government must provide cash from general revenues to these programs – such as social security or Medicare. Government has been taking surplus cash from these programs to fund other current spending instead!

Based on intermediate projected expenses, the social security program expenses are expected to exceed income from taxes by 2017 and be depleted by 2041. A high cost projection put these dates at 2014 and 2031 respectively.

You should recognize, too, that present trust fund surpluses are simply bookkeeping entries showing how much the social security and Medicare programs have lent to the treasury! So when the fund goes into negative cash flow, government must supply this money from other programs.

These negative cash flow dates are not far off. Please contact us so we can help you choose how you may want to provide help for your children’s retirement.

These negative cash flow dates are not far off. Give us a call at (480) 987-9951 or visit us at http://www.wealthguardiangroup.com/ so we can help you choose how you may want to provide help for your children’s retirement.

Article written and provided by Javelin Marketing.

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[1] EBRI www.ebri.org and A SUMMARY OF THE 2009 ANNUAL REPORTS
Social Security and Medicare Boards of Trustees http://www.ssa.gov/OACT/TRSUM/index.html

[2] Social Security Administration News Release (October 15, 2009)

Consider Rolling Your 401(k) into an IRA for Investment Options

You have accumulated a lot of money in your 401(k) at work, but want to take charge of it now as you begin retirement. What strategy could you use for the benefit of you and your spouse?

Purposes for your money include paying for everyday living expense now and later. With retirement just beginning, you have many years to enjoy. So you need to consider preserving the value of that money in addition to withdrawing some to live on.

You preserve its value against inflation by investing at least a portion of you money into growth stocks for the long term. Inflation over the long run has been 3.1%. This will halve the value of money in just over 20 years.

At the same time you want to have another portion of your money not subject to the ups and downs of the equity markets. Your income needs mean you want to rely on investments that produce income first, such as income funds.

Lastly if you want to change your mind later about where to put your money or leave it for a legacy, you need to have control over it too.

Begin by rolling your 401(k) into an IRA. An IRA gives a wide variety of investment choices for your money. Within it you can easily invest a portion in equity-based mutual funds, as well as income-based mutual funds. Earnings in an IRA are tax-deferred, which will allow faster compounding of any earnings than if you held your investment outside tax-deferred investment.

What you withdraw will be taxed at your ordinary income rate, since all your original contributions to your 401(k) at work were tax deductible. You are required to make minimum distributions from your IRA beginning after you reach 70½, but you are planning to take withdrawals anyway.

By making a direct rollover from your 401(k) to your IRA, you will avoid losing a large chunk of it through the ordinary income tax. You would be pushed into a higher bracket too.

Be sure to set the beneficiary designations for the IRA. You can assign your spouse as the beneficiary, and one or all of your children as secondary beneficiaries. This will take care of some estate planning issues for this money.

Be sure to open a new IRA for the rollover so as not to mix your 401(k) money with any other IRA money you may have. This preserves the credit protection that federal law now allows for the full value of your IRA investment when it all comes from a 401(k) plan.

Give us a call or visit www.WealthGuardianGroup.com so we can show you the best way to do the rollover and recommend an IRA family of funds suitable to your needs.

Note: If you are considering an investment in any type of mutual fund, please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about any mutual fund investment, always obtain a prospectus and read it carefully before you invest. Funds in a qualified employer plan have ERISA creditor protection, while funds rolled over to an IRA do not.

*Article written and provided by Javelin Marketing

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[1] IRS Pub 590.

[2] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

When is Permanent Insurance Really Necessary?

For millions of Americans, the choice between term and permanent insurance can be a confusing one. A number of variables factor in to whether one is more appropriate than the other for most consumers, such as debt level, health and longevity, and the size of one’s estate. There are a number of arguments on both sides stating why one is better than the other, but in virtually all cases, there are a couple of situations where permanent insurance is usually the best choice.

One situation where permanent, or cash value, insurance may be best is when there is a real chance that the insured or potential insured may become uninsurable in his or her later years due to health conditions. This is particularly true for those with estate tax issues that generally require life insurance to rectify. For example, high net-worth individuals or couples may need to establish life insurance trusts in order to provide needed liquidity and relief from estate taxes. But this strategy is, of course, predicated on the ability of the insured(s) to pass initial underwriting requirements. And this ability can diminish with age for many consumers, who may have family histories of health problems that have surfaced for other members in their later years. Because term insurance requires the insured party to submit to new underwriting requirements at the end of each term, those in this category may no longer qualify for adequate (or even any) protection that may be vitally necessary to preserve the estate.

Another somewhat similar situation involves business buy-sell agreements. These agreements generally require that each partner in a business to purchase life insurance coverage on each of the other partners, so that when one partner dies, the death benefit from the insurance will be sufficient to buy out the deceased partner’s share of the business for the surviving owners. But again, it is absolutely necessary that the coverage be in force upon death, which may not be possible with term insurance. Therefore, some form of permanent coverage is generally used for this purpose.

If you fall into either of these categories, or else have other needs that can only be met with life insurance, contact us for appropriate recommendations.

To find low cost alternatives for life insurance contact the Wealth Guardian Group at (480) 987-9951 or visit www.WealthGuardianGroup.com

*Article written and provided by Javelin Marketing

The purchase of life insurance involves costs, fees, expenses and potential surrender charges and depends on the health of the applicant. Not all applicants are insurable. If a policy is structured as a modified endowment contract, withdrawals will be subject to tax as ordinary income and withdrawals prior to age 59½ are subject to a 10% penalty.