Starting a Fix and Flip Business Part 2

Last week we outlined the difference between using a Self Directed IRA and a Self Directed IRA LLC to start a fix and flip business.

We saw the advantages and disadvantages of each strategy. But what if we wanted to actually do some the work on the property ourselves?

Can we do it? Can we get paid for it? How would we do this?

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Starting a Fix and Flip Business Part 1

Many of our clients are interested in buying fixer properties for their IRA’s to fix and flip with the profits going to their IRA accounts tax deferred (or tax-free in the case of a Roth IRA).

While this is certainly possible with a self directed IRA or Self Directed IRA LLC…is it the best or only way to accomplish your investment objective?

Not necessarily, let me explain….

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Roth IRA Conversions Under New Tax Law

Roth IRAs have two big tax advantages

The two most-important Roth IRA tax advantages are:

Tax-Free withdrawals

Unlike traditional IRA withdrawals, qualified Roth IRA withdrawals are federal-income-tax-free and usually state-income-tax-free too. What is a qualified withdrawal? It’s one that is taken after you, as the Roth account owner, have met both of the following requirements:

1. You’ve had at least one Roth IRA open for over five years.

2. You’ve reached age 59½ or become disabled or dead.

For purposes of meeting the five-year requirement, the clock starts ticking on the first day of the tax year for which you make your initial contribution to your first Roth account. That initial contribution can be a regular annual contribution, or it can be a conversion contribution. For example, say your initial Roth pay-in was an annual contribution made on 4/1/14 for your 2013 tax year. The five-year clock started ticking on 1/1/13 (the beginning of the tax year for which the contribution was made), and you met the five-year requirement on 1/1/18.

Exempt from required minimum distribution rules

Unlike with a traditional IRA, you don’t have to start taking annual required minimum distributions (RMDs) from Roth accounts after reaching age 70½. Instead, you can leave your Roth account(s) untouched for as long as you live if you wish. This important privilege makes your Roth IRA a great asset to leave to your heirs (to the extent you don’t need the Roth money to help finance your own retirement).

Making annual Roth IRA contributions

Annual Roth contributions make the most sense for those who believe they will pay the same or higher tax rates during retirement. Higher future taxes can be avoided on Roth account earnings, because qualified Roth withdrawals are federal-income-tax-free (and usually state-income-tax-free too).

The downside is you get no deductions for making Roth contributions.

So if you expect to pay lower tax rates during retirement (good luck with that), you might be better off making deductible traditional IRA contributions (assuming your income permits), because the current deductions may be worth more to you than tax-free withdrawals later on.

The other best-case scenario for annual Roth contributions is when you have maxed out on deductible retirement plan contributions. For example, you’ve contributed the maximum possible amount to your 401(k) plan at work. In that case, making Roth contributions is basically a no-brainer.

Annual contributions are limited and earned income is required

The absolute maximum amount you can contribute to a Roth account for any tax year is the lesser of: (1) your earned income for the year or (2) the annual contribution limit for the year. Basically, earned income means wage and salary income (including bonuses), self-employment income, and alimony received that is included in your gross income (believe it or not). If you are married, you can add your spouse’s earned income to the total.

For 2018, the annual Roth contribution limit is $5,500 or $6,500 if you will be age 50 or older as of year-end.

Annual contribution privilege is phased out at higher incomes

For 2018, eligibility to make annual Roth contributions is phased out between modified adjusted gross income (MAGI) of $120,000 and $135,000 for unmarried individuals.

For married joint filers, the 2018 phase-out range is between MAGI of $189,000 and $199,000.

Annual contribution deadline

The deadline for making annual Roth contributions is the same as the deadline for annual traditional IRA contributions, i.e., the original due date of your return. For example, the contribution deadline for the 2018 tax year is 4/15/19. However, you can make a 2018 contribution anytime between now and then. The sooner you contribute, the sooner you can start earning tax-free income.

Well-seasoned individuals can still make annual Roth contributions

After reaching age 70½, you can still make annual Roth IRA contributions — assuming there are no problems with the earned income limitation or the income-based phase-out rule. In contrast, you cannot make any more contributions to traditional IRAs after you reach age 70½.

Roth conversions

The quickest way to get a significant sum into a Roth IRA is by converting a traditional IRA to Roth status. The conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account with the money then going into the new Roth account. So doing a conversion before year-end will trigger a bigger federal income tax bill for this year (and maybe a bigger state income tax bill too).

However, today’s federal income tax rates might be the lowest you’ll see for the rest of your life. Thanks to the TCJA, the rates shown below apply for 2018. These brackets will be adjusted for inflation for 2019-2025. In 2026, the pre-TCJA rates and brackets are scheduled to come back into force.

Single Joint HOH*

10% tax bracket $ 0-9,525 0-19,050 0-13,600

Beginning of 12% bracket 9,526 19,051 13,601

Beginning of 22 bracket 38,701 77,401 51,801

Beginning of 24% bracket 82,501 165,001 82,501

Beginning of 32% bracket 157,501 315,001 157,501

Beginning of 35% bracket 200,001 400,001 200,001

Beginning of 37% bracket 500,001 600,001 500,001

* Head of household

So if you convert in 2018, you’ll pay today’s low tax rates on the extra income triggered by the conversion and completely avoid the potential for higher future rates on all the post-conversion income that will be earned in your Roth account. That’s because Roth withdrawals taken after age 59½ are totally federal-income-tax-free, as long as you’ve had at least one Roth account open for over five years.

To be clear, the best candidates for the Roth conversion strategy are people who believe that their tax rates during retirement will be the same or higher than their current tax rates. If you fit into that category, please keep reading.

Consider multi-year conversion strategy

Converting a traditional IRA with a relatively big balance could push you into a higher tax bracket. For example, if you’re single and expect your 2018 taxable income to be about $110,000, your marginal federal income tax rate is 24%. Converting a $100,000 traditional IRA into a Roth account in 2018 would cause about half of the extra income from the conversion to be taxed at 32%. But if you spread the $100,000 conversion 50/50 over 2018 and 2019 (which you are allowed to do), almost all of the extra income from converting would be taxed at 24%.

Ill-advised conversions in 2018 and beyond cannot be reversed

For 2018 and beyond, you cannot reverse the conversion of a traditional IRA into a Roth account. Under prior law, you had until October 15 of the year after an ill-advised conversion to reverse it and thereby avoid the conversion tax hit.

2017 Conversions can still be reversed as late as Oct. 15, 2018

The IRS has clarified that if you converted a traditional IRA into a Roth account in 2017, you can reverse the conversion as long as you get it done by 10/15/18. That 10/15/18 deadline applies whether or not you extend your 2017 Form 1040.

You accomplish a Roth conversion reversal by “re-characterizing” (weird word chosen by the IRS) the Roth account back to traditional IRA status. That is done by turning in the proper form to your Roth IRA trustee or custodian.

Conclusion on conversions

Low current tax cost for converting + avoidance of possibly higher tax rates in future years on income that will accumulate in your Roth account = continuing perfect storm for the Roth conversion strategy. However, talk to your tax adviser before pulling the trigger on a conversion — just to make sure you’ve considered all the relevant factors.

The Bottom Line

Even with the new law’s dis-allowance of the Roth conversion reversal privilege, Roth IRAs are still a tax-smart retirement savings alternative for many folks. Maybe now more than ever.

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How to Make a Million After Age 70

Bankrate.com article by Chris Kissell

Just about all of us imagine the thrill of getting rich someday.

There is an almost universal appeal to the notion of having enough money to sit on a beach and sip tropical drinks, or to travel the world while leisurely crossing items on your “bucket list.”

Unfortunately, some of us dream a little too long. Then, we wake up one day to find we are 70, wondering where all that time — and money — has gone.

If you are entering your 70s and have scant savings, you probably have packed up fantasies of great wealth. But is the dream really over?

Andy Tilp, founder of Trillium Valley Financial Planning in Sherwood, Ore., says it is still possible to get rich late in life, “but not without a lot of work and sacrifice of time.”

Following are a few ideas for how to make a million after age 70.

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Risky Form of Reverse Mortgage Clamped Down on by HUD

OnWallStreet article by Bonnie Sinnock

The Federal Housing Administration clamped down further on reverse mortgages, saying it will no longer insure a variant of the product featuring a fixed rate and a line of credit.

The agency cited the interest rate risk to lenders from such a combination, since it commits them to funding additional draws at a fixed rate even if their own borrowing costs rise. If a lender failed to honor that commitment, the responsibility would then fall on the federal government, the FHA noted in a June 18 letter to originators. Lenders could hedge the risk, but doing so may be so expensive that some would just choose to live with the exposure, the agency fears.

Similar concerns led Ginnie Mae this year to ban fixed-rate, line of credit reverse mortgages from its securitizations, a move that made these loans harder to sell in the secondary market. The FHA and Ginnie are both part of the Department of Housing and Urban Development.

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Restructuring Assets by Creating LLCs

WSJ Wealth Adviser article by Alex Coppola

The middle-aged couple was in sound financial shape.

They had $10 million saved in bank and brokerage accounts, and the wife also had a $10 million ownership stake in a successful business.

When they came to adviser Jeff Camarda, chairman of Camarda Wealth Advisory Group in Fleming Island, Fla., their most pressing concern was protecting those assets from potential lawsuits.

“Today, the threat of losing wealth to creditors and lawsuits is great,” says Mr. Camarda, whose firm manages $250 million for 500 clients. “In the case of any judgment against this client their business and personal assets were soft targets.”

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How Your Ex-Spouse Could Inherit Most of Your Money

Good Morning America news story by Laura Mattia

If you have a will — and you should have one — you may have executed it after years of putting it off. You’ve paid your attorney a lot of money and given serious consideration to make the right choices and ensure that the will is air-tight. Finally your will is finished, and you can sleep soundly knowing that your heirs will receive the assets that you intend. Right?

Not necessarily. Most people aren’t aware that their wills don’t have the final say concerning assets held in retirement accounts — 401(k) plans and individual retirement accounts (IRAs). The beneficiary provisions of these accounts supersede those of wills. So clear is the law on this point that some financial people call retirement-account beneficiary designations “substitute wills.” Continue Reading →

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IRS Nets Offshore Data From 77,000 Banks, 70 Countries In FATCA Push

Forbes article by Robert W. Wood

An astounding 77,000 banks and financial institutions—even some in Russia—have registered under FATCA—the Foreign Account Tax Compliance Act.

America’s global tax law requires foreign banks to reveal American accounts holding over $50,000. Non-compliant institutions could be frozen out of U.S. markets, so everyone is complying. The fact that 77,000 banks have registered and some 70 countries are providing government help to the IRS means almost no foreign account is secret.

And as the scramble of U.S. persons with accounts gets into high gear, the IRS has published a searchable list of financial institutions. See FFI List Search and Download Tool; plus a User Guide. Countries on board are at FATCA – Archive. With Swiss bank deals, prosecutions, summonses, and now FATCA, the IRS has quicker, better and more complete information than ever. Continue Reading →

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New Customer Support System

We are excited to announce our new online 24/7/365 Customer Support System.

This platform will allow our SDIRA Insider members to get support when and where they need it.

If you have questions about your Self Directed IRA or Business Funding plan just enter a new ticket from the Customer Support page.

Your question will be answered quickly by one of our Customer Support representatives or you can search our knowledgebase of frequently asked questions.

Please let us know about your experience using this new system and we welcome your comments.

 

 

 

 

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SEC Charges Utah-Based Retirement Fund With Fraud, Freezes Assets

Reuters news by Avik Das and Suzanne Barlyn

U.S. securities regulators have charged a Utah-based retirement fund and its CEO with defrauding investors of millions of dollars and froze the fund’s assets.

The U.S. Securities and Exchange Commission said American Pension Services Inc and its founder and CEO Curtis DeYoung lost more than $22 million of investor funds on high-risk investments.

“This misconduct jeopardized retirement security for thousands of APS customers,” said Karen Martinez, director of the SEC’s Salt Lake Regional Office.

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