Will Investment Advisors Soon Be Held to the Same Standards as Banks?

registered investment advisor policies

Hedge fund manager and registered investment advisor policies may be subject to a new set of rules aimed at reporting suspicious activity related to money laundering and other forms of financial fraud. This push, which started six years ago, was dormant during the last US administration but is now gathering new momentum.

Investment Advisors Who Might Be Affected

In 2015, a proposal was put forward by then-President Obama’s administration to widen the scope of money laundering and fraud detection by US financial entities. The draft of this proposal from August 2015 would have required certain investment advisors to adhere to the same money-laundering oversight policies as banks.

Per the 2015 draft, this “would apply to investment advisers that are required to be registered with the US Securities and Exchange Commission (SEC), including advisers to certain hedge funds, private equity funds, and other private funds.”

This policy was proposed back then but was not implemented, and it was not put into play under the Trump administration. There are now rumblings that it may be revived.

Why Are People Talking About This Now?

The transition in power has prompted some new attention to anti-laundering efforts, and it looks to have support across the aisle.

One source of support on record for this effort comes from the international, non-partisan Financial Accountability and Corporate Transparency (FACT) Coalition, an organization whose stated goal is “to address the challenges of a global economy and promoting policies to combat the harmful impacts of corrupt financial practices.”

In “The First 100 Days,” the FACT Coalition proposes that the Biden administration should “complete work on the proposed 2015 FinCEN rule to impose AML program and suspicious activity reporting requirements on registered investment advisers, including private equity funds and hedge funds.”

What This Means For You

FinCEN is the government’s enforcement agency. They would be responsible for the enforcement of these regulations.

Some of the possible requirements that could be asked of advisors include the following:

  • Establishing anti-money laundering (AML) programs
  • Reporting suspicious activity to FinCEN pursuant to the Bank Secrecy Act (BSA). This BSA quick guide is the current standard institutions follow to stay in compliance.
  • Filing Currency Transaction Reports (CTRs) and keep records relating to the transmittal of funds
  • Complying with the recordkeeping requirements of the BSA
  • Promptly producing documents related to investors

What Can You Do?

While there is no word of action being taken immediately, this is one issue to watch. We will continue to post any updates we find.

If you have insight into this issue, please drop me a line. We are looking to put together a roundtable discussion of how RIAs can stay in the loop on this issue. We welcome your input.

Midland Trust can execute your investment paperwork and transactions, bringing alternative investment expertise without the cost of hiring additional talent. As a qualified custodian, Midland Trust can be engaged to help Advisors comply with the Custody Rule and offer document safekeeping services as well. Learn more here.

Author: Adam Sypniewski, Sales Director at Midland IRA, Inc.

Self-Directed IRA Investments Guide – New Year, New Investment

self-directed ira investment

Happy New Year! We are all hoping to start fresh this year. As a result, we put some self-directed IRA investment information together that may help bring you financial success as we ring in 2021. If you are not self-directing at least a portion of your retirement funds into alternative assets, you could be missing out on a huge opportunity!

Advantages of Self-Directed IRA Investments

Self-directed retirement plans have many advantages for building retirement wealth. Below, we discuss four main benefits of self-direction rather than traditional investments with your retirement account.

Tax Advantages

Self-directed IRA investments have the same tax advantages as traditional investments through banks and brokerage firms such as Charles Schwab or Fidelity. Any retirement account can be self-directed.

Investment Options

With banks and brokerage firms, your investment options are limited to the products those entities sell. At Midland, you choose your investments. You can invest in hard assets, private stock, real estate, and much more! The only two limitations set by the IRS on self-directed retirement plans are collectibles and life insurance.

Administrative Fees

Many financial institutions that manage retirement accounts charge built-in, hidden fees to investors without the investor realizing it or being made aware. At Midland, there are no hidden fees. You select the fee schedule that works best for your account. Midland offers both an asset-based and value-based fee schedule for plans that hold multiple assets or high-value assets.

True Diversification

With banks and brokerage firms, you may feel that your investment portfolio is diversified. However, your investments are limited to assets such as stocks, bonds, mutual funds, and money markets, specifically the assets that the investment firm sells. With a self-directed retirement plan, your investments are your choice. Our clients enjoy the freedom to choose their investment to diversify their retirement account investments.

Investment Choices

As stated previously, Midland is not a fiduciary. Midland’s role as the custodian and/or administrator of self-directed retirement accounts is non-discretionary and/or administrative in nature. Here, we hope to provide you with some insight into some of the advantages and rules with more popular assets that our clients invest in with their retirement accounts.

Real Estate

All types of real estate qualify as a viable investment with a self-directed retirement plan. You can invest in properties such as single-family homes, multi-unit homes, apartment and condo buildings, commercial properties, improved or unimproved land, Trust Deeds, and Tenant in Common (TIC) Interests.

The IRA is the buyer of the property. Your IRA may not take ownership of a property that you already own.

Real estate owned by a retirement account must be for investment purposes only. You and disqualified parties may not use or benefit from the property personally. You nor disqualified parties can have sweat equity in the property, including maintenance. Learn more about prohibited parties in our Prohibited Transactions Guide.

All rental income and expenses related to the property flow through the IRA, allowing the IRA to maintain its tax-advantaged status.

Ways that you can purchase real estate include cash, partnership, checkbook control LLC, and borrowing money via a non-recourse loan. Learn more about funding a real estate investment in your self-directed IRA.

There is a 7-day right of rescission from the date you open your account at Midland. We can prepare documentation in that timeframe but cannot send any funds out within the recission period.

Learn more about real estate IRAs.

Promissory Notes

Your retirement account can lend money via a promissory note as an investment. IRAs can invest in both secured and unsecured notes. Secured notes are a safer option for your IRA because collateral secures the note if your borrower defaults.

One advantage that investors enjoy with promissory note investments is that they select or negotiate the note’s terms, including the length, interest rate, and payment structure.

Typically, secured notes are secured by first or second position mortgages. Ideally, you aren’t using a secured loan as a sweetheart deal. The lender sets interest rates. However, it is suggested that at a minimum, it is at a prime interest rate plus an additional percentage or so. At a maximum, please ensure you comply with the state usury laws.

Learn more about investing in promissory notes with an IRA.

Single-Member LLCs/Checkbook IRA

In this asset class, an IRA is the 100% sole owner of the LLC. Advantages with single-member LLCs include more control over the retirement funds. This structure gives the investor the ability to do quick turnarounds for investments. If you are a real estate investor that attends auctions for tax-deeds or properties, a single-member LLC is for you!

If you have multiple assets within your retirement account, it may be administratively easier to utilize a single-member LLC. Depending on your situation, it may also cost less in fees.

With single-member LLCs, the client, or a third-party of their choice, is the manager of the LLC. A bank account must be established in the name of the LLC. This structure means the IRA holder has additional responsibilities, so please ensure this is the right direction for you.

As the LLC manager, you can sell and liquidate the property at your discretion. The sale proceeds will flow back to the LLC. If it is a multi-member model, the funds will be split accordingly. For a single-member LLC, the total amount will flow back to the IRA.

Learn more about single-member LLCs/checkbook IRAs.

Private Placements and Private Stock

This asset class covers a wide range of self-directed IRA investments. Investments in LLCs, C-Corporations, Limited Partnerships, and other entities are included within this asset class. With these assets, the IRA is investing in private equity. The company offers shares or is raising capital, and the IRA can be a subscriber or limited partner in the deal. The IRA is listed on those documents and returns flow back to the IRA.

Some private placements are exempt from Securities and Exchange Commission (SEC) registration and reporting requirements. For this reason, in most cases, the IRA holder must be an accredited investor. Because private placements are not offered on the open market, they are not offered through traditional custodians and brokerages.

Private placements can include stock in your local community bank, hedge funds, venture capital in a start-up tech or medical firm, or even a group of private investors pooling capital in an LLC to make a larger real estate purchase. With a self-directed IRA, the options are limitless!

Learn more about private placements and private stock investments in an IRA.

Precious Metals

Through Midland, you can hold precious metals in your retirement account. Applicable metals include gold, platinum, and silver that meet specific fineness requirements.

There are different ways in which you can invest in precious metals. You can invest via a commodity exchange, providing liquidity for investors, as well as through precious metal dealers. You can also directly hold physical gold in your retirement account, stored in a third-party depository.

Learn more about investing in precious metals with an IRA.

Foreign Currency Exchange and Futures Trading

There are a few ways you can trade futures and forex in an IRA. You can use a self-directed trading model in which you trade futures or currencies independently with your self-directed IRA. You can also have a broker-assisted trading account where you work with a professional broker assisting in your decisions. A money manager account may do the trading for you. Or, you can utilize automated trading robots that provide buy/sell signals.

The IRS requires a third-party, such as Midland, to handle the IRA administration and cash flow of the account.

Contributions and deposits must be sent directly to Midland, and we will redirect those funds to your FCM/broker.

Learn more about futures trading in an IRA.

Learn more about foreign currency exchange (forex) in an IRA.

And More!

You are not limited to the self-directed IRA investments listed in this article. Other permissible assets in an IRA include Bitcoin (cryptocurrency), oil and gas rights, tax certificates, structured settlements, commercial paper, convertible notes, commodities, livestock, timberland, rights or warrants, accounts receivable factoring, equipment leasing, and much much more!

How to Get Started

If you do not already have a self-directed IRA account, opening one is easy!

STEP 1: Open a Self-Directed IRA

First, fill out a Midland account application online at apply.midlandtrust.com.

STEP 2: Fund Your Self-Directed IRA

Next, fund your account. To do this, you may transfer funds from an existing IRA account or rollover funds from a former employer plan. If eligible, you may also contribute annually to your IRA.

STEP 3: Choose Your Investment

Lastly, choose your investment! Once you identify an investment, Midland will determine if the investment is administratively feasible and will work with you to properly custody the asset.

Alternatively, if you already hold a self-directed IRA account at another financial institution, you can transfer those funds to a Midland account. Learn how Midland sets itself apart.

There are many advantages and investment options with self-directed IRAs. We understand that it is a lot of information to absorb, and you may have a unique situation that was not covered within this article. Don’t worry! We’re here to help!

Midland’s Senior Business Development Associate, Matt Calhoun, recently hosted a Midland University webinar which covered this article’s content in more depth. During the webinar, Matt answered questions that live guests had. If you need more information or have specific questions, please watch the recording below, or contact Matt Calhoun directly at (239) 333-4461 or [email protected].

MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account, and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

Midland Found Ways to Serve Its Communities in the Hardest Year Yet

2020 Midland Serves Charitable Donations

Where to start? 2020 certainly threw everyone for an unexpected loop. In March of last year, it became apparent that our communities would begin to face new challenges. While Midland and our employees faced difficulties of our own, we felt fortunate enough to give back.

Serving All Three Midland Locations

Fort Myers, Florida

Our Fort Myers, Florida office unanimously agreed to donate $1,000.00 to a trusted local food bank.

In August, we were contacted by Valerie’s House of Southwest Florida, a center for grieving children and youth that saw an even greater need in light of the unfolding events. Our Charitable Committee arranged a donation of $1,500.00 made directly to the center.

In September, the Harry Chapin Food Bank invited our staff to volunteer in the warehouse to put together meal-kits for families in need. We were glad to pitch in to meet record-high requests for services.

A long-time favorite group is the Southwest Florida Senior Friendship Center, an outreach program for local senior citizens. Staff from our Fort Myers office geared up and loaded vehicles with bags of non-perishable foods to safely deliver door-to-door at various times throughout the year.

In November, we donated hot cocoa mugs to a local senior housing facility, Hearts and Homes for Veterans, and a local Fort Myers fire station hub to spread a little holiday cheer.

Sioux Falls, South Dakota

Our Sioux Falls office also unanimously agreed to donate $1,000.00 to a trusted local food bank in their community.

Sioux Falls regularly participates in the ReLeaf Project, an essential environmental community project. In October, Sioux Falls staff volunteered with Feeding South Dakota and in December donated $4,500.00 to Active Generations, a senior-wellness program.

Chicago, Illinois

Our Chicago office followed suit with our Fort Myers and Sioux Falls offices and agreed to donate $1,000.00 to a trusted local food bank.

The Chicago staff faced especially challenging conditions being at the center of a largely populated area and yet continued to meet and exceed Midland’s service standards.

Our team would like to thank our clients and supporters for sharing your business, time, and trust with us. Each charitable donation is a direct contribution from our employees, and we are grateful to be able to do so. The Midland Serves team wishes everyone a Happy New Year and we look forward to more opportunities to give back in 2021.

Sarasota Real Estate Is Booming for Investors

Sarasota Real Estate

Sarasota has developed as Florida’s cultural hub, long known for its vibrant arts community, tasty restaurants, unique shopping, and stunning beaches. But why is everyone flocking to the West Coast of Florida? Florida’s number one asset is real estate. Sarasota is cashing-in with beautiful homes and ample commercial properties.

Midland Trust has been working with residents and Sarasota real estate investors since 1997. The population has doubled, and the demand for real estate continues to go up. Where are investors making money in Sarasota? Investors in that part of the state are smart and patient. Two strategies Sarasota real estate investors use are 1031 exchanges and self-directed IRAs. Both are tax-deferral strategies that help investors build wealth.

1031 Exchanges

If you own investment real estate, “1031 exchange” should be in your vocabulary. A 1031 exchange allows investors to defer the taxes (capital gain, depreciation recapture, state, NIIT) when they sell investment or business-use real estate provided that they purchase new investment or business-use real estate within 180 days. 1031 is a tax code section that has been around since the 1920s and is a valuable strategy for real estate investors. The regulations require that you use a Qualified Intermediary to facilitate the exchange. Exchanges are easy and efficient to perform. Typically, real estate used in a 1031 exchange includes rental homes, rental condominiums, business real estate, farmland, and other deeded real estate. You must identify the replacement property 45 days after the sale of the relinquished property. For more 1031 exchange rules and regulations, read our 1031 exchange guide.

Self-Directed IRAs

The other great tax tool that investors use is a self-directed IRA. With a self-directed IRA, you can diversify your retirement account by having the opportunity to invest in alternative assets in addition to stocks and bonds. If you are an expert in real estate investing, a self-directed IRA allows you to use your expertise inside your IRA account. For more information on a Midland self-directed IRA, go to www.midlandtrust.com and get started today.

It is interesting that John Ringling moved the winter home of Ringling Bros. and Barnum & Bailey Circus to Sarasota from Connecticut in 1909. Today, residents of New York, New Jersey, and Connecticut continue to move to Florida. They move because of Florida’s beautiful weather and low taxes. Smart investors who sell an investment property in the Northern states can avoid federal and high state taxes with a 1031 exchange. A little planning with a 1031 exchange can go a long way.

If you want to learn more about self-directed IRAs, please contact Midland at (239) 333-1032. Or, head to our website at www.midlandtrust.com. For information regarding 1031 exchanges, contact Midland 1031 at (239) 333-1031 or visit www.midland1031.com. Happy real estate investing.

Individual 401(k) Plans – Investment Benefits and Qualifications

Individual 401(k) Plans - Investment Benefits and Qualifications

As an experienced custodian, we have seen over 10,000 clients purchase real estate in their IRAs. Whether you are new to self-direction or an old hand at investing, you may know that most IRA deals utilize cash.

Cash purchases are quick and easy, regardless of whether they are in an IRA or owned personally. 95% of our clients buy real estate with cash, not just for ease, but to avoid tax. Leveraged IRAs are subject to an additional tax called Unrelated Debt-Financed Income (UDFI).

What is UDFI?

If you use debt to acquire an asset within a tax-advantaged account (such as a self-directed IRA), you have to pay UDFI on a portion of your net income from that asset. UDFI applies to rental income and capital gains from debt-financed property. If you want to avoid it, you cannot finance your property purchase with debt. The percentage of income derived from the debt is subject to UDFI. UDFI tax rates are the same as the tax rates for Unrelated Business Income Tax (UDFI is a type of UBIT), which for 2020 can be as high as 37%.

How do I avoid UDFI?

While UDFI can’t be avoided if you use leverage to finance an asset, Individual 401(k)s are exempt from UDFI given their status as tax-exempt trusts. This exemption means that you can use leverage in your 401(k) and avoid this tax altogether by utilizing this type of account. For years, the SEP IRA was the go-to choice for self-employed individuals. However, if you are looking to use leverage to finance an asset, you can’t avoid UDFI in a SEP. Over the last decade, as investors have become more sophisticated and hands-on, Individual 401(k)s have become the new gold standard.

Do I qualify for an Individual 401(k)?

To qualify for an Individual 401(k), you need to be self-employed with no full-time employees. If your spouse works for the company, they are eligible to participate in the plan as well.

If you are looking to invest in alternatives, an Individual 401(k) offers you high contribution limits, making it pretty attractive. You can contribute up to $57,000 in 2020 and $58,000 in 2021. If you’re 50 or older, there is an additional $6,500 catch-up contribution allowing total contributions of $63,500 in 2020 ($64,500 in 2021).

Individual 401(k)s also have many other unique benefits that apply. The most notable benefits are:

Highest contribution limits (and accelerated contributions for lower-income participants)

Ability to take a loan for up to 50% of your plan with a maximum of $50,000

As the Trustee of your plan, you can have checkbook control of your funds, so you have control of your money when you need it

Avoid UBIT and UDFI taxes

For more information regarding Individual 401(k) plans, please visit our website. If you have additional questions or want to talk through your specific scenario, please call our 401(k) specialist, Matt Calhoun, at (239) 333-4461.

Fair Market Valuation for Alternative IRA Assets

Fair Market Valuation for Alternative IRA Assets

Every year, the IRS requires a report of the value of your IRA assets. Fair market valuation (FMV) is not only a requirement for self directed IRAs, but for all IRAs. But, the process of ascertaining the value of non-liquid investments differs from reporting the value of more traditional assets like stocks, bonds, and mutual funds.

This reporting is simpler for a brokerage in which stocks, bonds, and mutual funds have a daily closing price. That is why you never hear your brokerage asking for an FMV. For self-directed IRAs with alternative investments, gathering this information is a little more complicated. IRA custodians do not typically perform the valuations of alternative assets themselves. They require the IRA owner to engage a qualified third party to provide the valuation.

So, how do you calculate the required minimum distribution for illiquid assets? How does the IRS know what amount to tax you on an in-kind distribution or an in-kind Roth conversion? To track potential taxable income, federal law requires IRA custodians to obtain and report the FMV of IRA assets yearly.

What the IRS Requires:

The IRS requires Midland Trust to report the values of clients’ accounts as of December 31st of each year. Separate from the IRS’ requirement, this valuation is important because the value determines the Required Minimum Distribution (RMD) for clients over 72. Whether your account has an RMD or not, your IRA’s activity is still reported annually to the IRS. IRA custodians are required to report your account’s information on tax form 5498 each year in May.

Why Is an FMV Important?

The value of an IRA’s asset is needed to perform a variety of custodial functions:

  • Annual reporting to the IRS on the year-end value of everything held in the IRA
  • In-kind transfers – ensures each IRA custodian has the same value recorded at the time of transfer
  • In-kind distributions and in-kind Roth conversions – since these create taxable events, the IRS needs to know the value of the asset at the time of distribution or conversion
  • Calculating required minimum distributions (RMDs) and beneficiary distributions

How Do I Properly Report the FMV of an Asset?

You will need to complete a Midland FMV Form or update the asset value in your Midland360 Online Portal.

  • As a self‐directed account holder, you are responsible for ensuring this form is complete
  • You nor any disqualified parties may determine the asset value
  • An independent, neutral, and qualified third party must value the asset
  • You must attach supporting documentation

What Can I Use for Supporting Documentation?

Real Estate

You may use a certified appraisal or a valuation from a real estate website (such as Trulia, Zillow, or Realtor.com). You may also use the tax assessor’s “estimated market value” provided by the county in which the real estate is located.

Closely-Held LLC or LP

The value of each asset in the LLC is required. If your LLC owns real estate, the same standards as listed above apply. If you have other assets, such as bank or brokerage accounts, submit the statement for that account that correlates with your valuation date. A K‐1 is not acceptable as it represents a historical value.

Private Placement

Contact the manager of the private placement and ask how you can obtain a value for your investment. A periodic statement or letter from the manager on the company letterhead will suffice. The manager cannot be yourself or a disqualified person to your IRA.

Futures, Forex, and Brokerage Accounts

A year-end statement of each account should be provided to the IRA owner by the futures, forex, and brokerage company. The statement for your trading account may also be available online through the company’s website or client portal.

Notes and Mortgages

Typically, the value of a note is equal to the outstanding principal balance. You only need to provide an updated valuation for notes if the current value differs from our records. It is essential that you closely review your account statements to ensure the records appear correct. This includes the proper allocation of principal and interest payments received.

Assets You Consider Worthless or Are in Bankruptcy/Litigation

Provide any documentation you may have at this time. We may contact you regarding additional requirements for updating your account.

FAQs About Fair Market Valuations

  • Will a K1 suffice for valuation?

Unfortunately, no. A K-1 is not an assessment of value because the K-1 provides the value of the asset as of the end of the previous tax year and is a ‘snapshot in time’ value.

  • What does the sponsor need to submit for values?

The investment sponsor needs to submit a letter or spreadsheet of values (along with the value date). As long as the document includes the asset name, price/units, price date, and is sent by the asset manager, this will be sufficient to update Midland’s records.

  • What if the value has not changed?

If the annual value has not changed, we still need substantiation for our records to reflect that the value has remained the same. As Custodian on the account, we are required to have this on file at least once per year for every asset that we custody.

  • Our annual audit isn’t completed until after 12/31, can I submit the values then?

Yes. If your annual audit has not been completed by the time you receive our request, please call our office and let us know when we can expect the updated value. We understand that valuations take time, so we give clients and investment sponsors until the end of the first quarter to send these to us prior to assessing late valuation fees.

  • Why can’t the investment entity fill this out?

The investment entity can fill in the Fair Market Valuation. However, the client will need to sign and date it in Section 4 confirming the information being submitted to Midland.

  • Where do I submit the FMV form?

You can send this paperwork to

Fax: (239) 466-5496

Email: [email protected]

Mail: P.O. Box 07520 Fort Myers, FL 33919

You can update your fair market valuations on our Midland 360 portal.

Providing FMVs as an Investment Sponsor/Manager

Not all clients will receive a request for updated fair market valuations. If the asset the client is invested in provides a frequent update, whether it be monthly, quarterly or annually, these satisfy the FMV requirement. To update the asset’s value, statements can be sent to: [email protected].

For assets that have multiple clients in one holding, the investment sponsor/manager may send a spreadsheet of client investment amounts and any known change in value, along with a current price date.

If you have any questions regarding completing your fair market valuation, please call our office at (239) 333.1032 or email us at [email protected]. You can access FMV and other account forms here.

2021 IRA Contributions – Start Planning Now

2021 IRA Contributions

Good news about 2021 IRA contribution limits? Not exactly…

I wish I could jump up and down and tell you that IRA contribution limits for 2021 have gone up tremendously and that you should be sure to take advantage of them. However, I cannot. Because inflation has been so low this year, there are not many changes. But that does not mean there are not opportunities for smart investors who act on this information quickly.

2020 to 2021 IRA Contribution Limit Changes

Compared to 2020, most retirement contributions are not changing in 2021. Maximum IRA contributions remain at $6,000, and 401(k) deferrals remain at $19,500.00. View all of the 2021 contribution limits.

One thing that has not changed is the intricacy of IRA deductions.

Factors that can dramatically affect deductions include:

  • Income limits
  • Marital status
  • Your employment status, specifically whether you have in an employer retirement plan or are self-employed

You can read more about IRA deductions on the IRS’s website.

Is a Roth IRA or Traditional IRA Better?

The one question that always comes up is, should I contribute to a Roth IRA or a Traditional IRA? While many factors contribute to making that decision, more likely than not, a Roth IRA will be the better long-term option if you are eligible. (I am writing this from years of experience and speaking to “most people,” so please make sure you consult with your tax advisor).

How Long Do I Have to Make a Contribution to My IRA for 2020?

This is where a little planning can go a long way. A majority of individuals wait until April 15th of the following year to make their IRA contributions. This has become the norm, but it is not the best financial planning move.

If you have the money, fund your IRA as soon as the new year begins. If you do not have the full contribution amount at the beginning of the year, start by making bi-weekly or monthly contributions. A few years ago, I wrote an article that is still true, showing the tremendous benefits of making an IRA contribution early vs. waiting until April 15th of the following year. Ed Slott, one of the nation’s IRA experts, has a quote I would like to share. He says, “Most people treat IRA Contributions like they’re paying a bill, [but] they should think about it as paying themselves.”

I always like the financial rule of paying yourself first. By making your IRA contribution as early as possible, you are setting yourself up for financial success.

There may be some good news and changes coming to retirement accounts. November 2020 saw a bipartisan bill introduced in the House to increase contributions and raise the age for required minimum distributions (RMD’s). The word bipartisan does not come up very often, so I think this may be good news. A summary of the bill is listed on CNBC’s website.

How Can Midland Help You Navigate IRA Contributions?

Midland is happy to help you with your IRA questions. We have many resources to share with you and many years of experience answering questions just like the ones you have right now. Please contact Midland by calling (239) 333-1032 or by visiting our website.

Author: Dave Owens, CPA, CES, is the President & CEO of Midland IRA. His comments act as guidance to help investors understand how to navigate and plan for IRA contributions.

MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account, and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct any due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

Required Minimum Distributions (RMD) in an IRA: The Basics

required minimum distributions in an ira - the basics

If you have a Traditional IRA and you are 72, you have a required minimum distribution or RMD. For every pre-tax retirement plan, you must take a taxable distribution on an annual basis. The amount you are required to withdraw is determined by the prior year-end balance, your age, and sometimes your beneficiary’s age (if the primary beneficiary is your spouse). Several websites offer easy-to-use RMD calculators, including the one found at www.MidlandTrust.com.

RMD Deadlines & Penalties

The deadline to withdraw any RMD is December 31. The penalty for not taking an RMD by the deadline is 50% of any amount not withdrawn.

For example, Mary, 73, has a Traditional IRA account. She is required to take an RMD of $6,000.00. Mary only withdraws $4,000.00. She is then taxed 50% on the $2,000.00 amount not withdrawn. She must pay the IRS a penalty of $1,000.00.

Important RMD Changes in 2020

In December 2019, the SECURE Act passed, which made several changes to tax laws, including RMDs. Beginning January 1, 2020, the RMD age was extended from 70.5 to 72. This change did not affect anyone who was already 70.5 or older and taking RMDs.

No Cash? No Problem!

If you have a self-directed IRA, then you may have investments that cannot be easily liquidated. A non-cash asset can be withdrawn from the IRA to satisfy the RMD. The account holder will need to provide a current and acceptable valuation and any necessary re-registration paperwork. For example, Fred is holding real estate in his IRA. His RMD is $30,000.00. Fred obtains a certified appraisal for one of his account properties, valued at $50,000.00. Fred can distribute all or a part of the property. He will need to have a Deed prepared to re-title all or a percentage of the asset.

Discuss Your RMD With a CPA

If you are already 72 or older and have not yet taken an RMD, you should speak with your CPA to discuss the best course of action. If you are turning 72 in 2020 or in the near future, you may want to meet with your CPA to discuss how taking taxable distributions will affect your income status. When faced with the 50% penalty, your CPA may be able to help you weigh the pros and cons of the payout versus the potential expenses associated with taking the RMD.

Review of RMD Quick Facts

Important RMD Dates

  • January 1, 2020 – those who turned 70.5 before this date and have a pre-tax retirement plan must take an RMD for 2019
  • January 1, 2021 – those who turn 72 before this date and have a pre-tax retirement plan must take an RMD for 2020
  • December 31 – deadline to withdraw your RMD for that calendar year

Important RMD Rules

  • 50% tax penalty for not taking an RMD
  • Each pre-tax retirement plan has a separate RMD amount

Important RMD Information

  • RMD can be satisfied by cash or non-cash withdrawals
  • Asset values should be updated annually to calculate an RMD accurately
  • A non-cash distribution will require a current validation for 1099 reporting
  • Speaking with a tax professional each year may help in avoiding penalties or additional taxes

For more information on Required Minimum Distributions (RMDs) in your self-directed retirement account, feel free to contact Midland.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or authorized representative must direct all investment transactions and choose the account’s investment(s). Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

Dealing With Student Loans

Dealing With Student Loans

We hear it over and over that student loans are at all-time highs. Student loans prohibit Millennials from getting ahead financially and prevent many from buying a house, saving for retirement, or even having emergency funds for life’s unexpected expenses. With this said, let’s take a look at some statistics to understand how concerning the problem is.

As of December 31, 2019, the average federal student loan debt was $35,397, and the total student loan debt has reached $1.64 trillion. Not only that, but it is not uncommon to have student loans upwards of $100,000 from prestigious universities or due to advanced degrees. With this in mind, let’s talk about student loans and how you can keep them at manageable levels, so it does not negatively affect your future.

Mindful Spending

If you are currently in college or are considering going back to school for an advanced degree, here are a few ideas on how to lower your costs of tuition:

  • Consider starting your first two years at a community college. These schools are often inexpensive compared to more prominent universities. Community college can be an excellent way to save money until you are ready to transfer to the university of your choice.
  • Utilize scholarships and grants. Once you are accepted, consider applying to as many scholarships and grants for which you qualify. These financial aid options can be a great way to make college more affordable.
  • Search for books and supplies using alternatives to your school’s bookstore. Consider searching for textbooks online or find a textbook rental option near your school. Often, you can find them used and much cheaper than what the university charges.
  • Only take out what you need in student loans to avoid more debt than is necessary.
  • Consider making payments towards the loans to save interest while you are still in school. Whether through a job or an internship, paying as much as possible towards your student loans can make a significant impact.

Create a Payment Plan

Creating a payment plan is a great way to get started on the journey of paying off student loans as fast as possible. Here are a few ideas to create an effective payment plan:

  • The first thing to do is evaluate all of your loans and review your payment options. Learn about and understand your interest rate, minimum monthly payment, and payment plan.
  • Next, write down your goals on when you would like to have your loans fully paid off. Consider using SMART goals, which are: Specific, Measurable, Attainable, Relevant, and Time-Bound. By utilizing these parameters, paying off student loans can be worked into your budget easily. Then, write out your monthly budget and work your payments into it.
  • There are also options you can use to discount your student loan interest, such as setting up automatic payments through your debit account. Find out which options are available to you.
  • Once you set your goals and budget, the next step is to stick to it and reevaluate it every month. Reviewing where your money went will allow you to see where things went well and which areas need work.
  • Apply additional income towards your student loans to pay them off even faster. You could achieve this by getting a raise at work or a part-time job.

Utilizing these methods will ensure that you are mindful while you are in college and stick to a payment plan and budget once you graduate. Student loans do not need to be a massive burden on your life, and by being proactive, it can make a big difference in the long run.

Budgeting Tools That Millennials Love

Use an app such as Mint, Simplifi, or Dave Ramsey’s Every Dollar. These apps can consolidate your accounts and break down your expenses into categories, making things easier to view. They can also send you alerts when your balance is low, or you have upcoming bills. We have found www.studentloanplanner.com to be an excellent resource for managing student debt.

Eliminating student debts allows for more freedom to save and invest for retirement. If you are looking for information on self-directed IRAs, www.midlandtrust.com is an excellent resource to start. Or, call us at (239) 333-1032. We would be happy to discuss our services with you and how you could incorporate self-directed IRAs into your investment portfolio.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or authorized representative must direct all investment transactions and choose the account’s investment(s). Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

Credit Card Debt Management Tips

Credit Card Debt Management Tips

Many of us did not learn how to budget in college or from our parents. This vital life lesson is a rude awakening, and some Millennials may never fully be able to do it without professional help. It involves discipline and, for some, the retraining of your brain, a proper attitude towards money, and good habits. We are shaped by our upbringing. Our parents most likely play the most prominent role in how we treat money throughout our lives. These lessons can be learned directly by parents helping to manage money, or indirectly by seeing how your parents handle money firsthand while growing up. To change, you need to recognize and acknowledge where you currently stand and where you want to be. Take a moment to truly reflect on this before continuing. Once you’re ready, read on to learn about credit card debt management tips.

LEARNING ABOUT CREDIT CARDS AS A YOUNG ADULT

I owned a credit card in high school. The credit card was strictly for gas and food, and my dad watched the card like a hawk. If I ever purchased outside of those two approved needs, I had to pay using my cash savings. I earned my cash savings from mowing lawns, shoveling snow, and birthdays. My father always paid the credit card on time, leading to me building a credit score for myself. At the time, I did not care or realize the significance of a credit score.

On the flip side, I have an uncle who racked up credit card debt. It was always mind-boggling to me knowing he had credit card debt, yet he never seemed eager to pay it off on time. My uncle’s flawed approach lasted for years and continues today. He doesn’t seem to mind or care as he always wants the newest and best technology, splurging on gifts for himself or others. My parents would talk about his reckless habits with me, and I am glad they did. I was able to learn and understand the importance of managing debt.

Seeing how my parents and uncle treated credit cards, I concluded that I never wanted to be in credit card debt. Having the latest and greatest gadget and spending money I could not afford was not the route I wanted to take. The amount of interest being paid on my uncle’s credit and his continuous use of the card kept him in credit card debt. By being in debt, you pay someone else hundreds to thousands of dollars over time to buy something you cannot afford. This money you pay in interest is money you could spend on yourself or savings/retirement. This strategy could shed years off how long you have to work to retire comfortably. Whether he likes it or not, the best thing for my uncle is to shred the credit card and create a monthly budget around eliminating the credit card debt.

USING CREDIT CARDS TODAY

In college, I had income from a summer job. My father passed the responsibility of making credit card payments to me, but still had full access to view my spending habits. You would think I would use the credit card for everything, but this was in 2008 before digital payments took off. I only used the credit card for paying for gas at the pump because it was convenient. Otherwise, cash was king for me. When I ran out of funds at the end of my freshman year, I said goodbye to splurging on entertainment and snacks.

Fast forward nearly a decade later, and smartphones, online banking, and digital payments are the new way of life. People can now make credit card payments using Venmo, PayPal, and Apple Pay. When I was young, my father only used his credit card for gas and occasionally to pay for meals at restaurants. My father now uses his credit card for nearly everything! However, unlike my uncle, he never spends more than he can afford.

Credit cards also offer great perks with money-back incentives for use on every purchase. Using my credit card for everyday purchases, I gather hundreds of dollars in cash back rewards each year. Like my father, I use my credit card as if it were a debit card. I pay the balance off nearly every day from my banking application. Making daily payments allows me to view my cash balance, which is my budget for the month.

PROS & CONS OF USING A CREDIT CARD

Pros of Using a Credit Card

  • Cashback rewards
  • No need to carry cash (stolen cash is easier for a thief to get away with opposed to a credit card or smartphone, which may not even be accessible)
  • Temporary emergency-use for essentials, if needed
  • Can help you build your credit score if used properly

Cons of Using a Credit Card

  • Very high-interest payments if not paid on time
  • If not disciplined with money, it can easily lead to you spending money you do not have, leading to credit card debt
  • Need to be on high alert for credit card fraud
  • Can ruin your credit score if not appropriately treated and payments are not made on time

4 Tips For Handling Your Credit Card

I am by no means an expert on credit cards, but I can assure you that I have never taken on credit card debt, nor do I plan to. The interest charged is astronomical, and I never want to put myself in that position. Here are some tips for managing your credit card:

1. TREAT YOUR CREDIT CARD AS A DEBIT/CHECKING ACCOUNT

Only spend what you have in your bank account, and no more. This approach also means setting and knowing your budget.

2. KNOW YOUR ESSENTIAL COSTS

Know your essential costs for the month and put this into a separate account. As earnings come into your bank account, know what your essential costs are. Essential costs can include loans, insurance, rent, or mortgage. These costs can also include transportation, utilities, real estate tax (if you own a home), and more. Calculate what these costs come out to monthly. Set this amount aside each month into a separate account. Do not use this set-aside money.

3. PAY OFF YOUR CREDIT CARD REGULARLY

I log onto my bank account every morning and pay off my credit card balance every day. Doing this allows me to see my bank account’s cash balance and gives me an idea of how much money I have remaining. I use the remaining funds for food, fun, and entertainment. With daily credit checks, I am constantly aware of my cash balance and dramatically lower my risk of fraud. I would potentially catch any sign of fraud instantly and begin working with my bank to freeze the card or issue a new one.

4. FOR EMERGENCIES, DEVELOP A PAYMENT PLAN OR “MONEY-CRUNCH”

If you need a credit card for an emergency, try to either work on a payment plan or go into a “money-crunch” mode. If there is an outstanding balance on your credit card that will take a while to pay off, you should also go into a “money-crunch” mode. Stop eating out, find free entertainment options, or temporarily reduce your 401(k) contribution. Try to crunch your budget until you’re back in the black or green. Reduce and avoid credit card debt at all costs. I view any interest paid on my credit card as money thrown away or burned.

6 Tips For Managing Your Credit Card Debt

Being free of credit card debt means the freedom to do more with your hard-earned money. Credit cards are not for everyone, and that is okay. If you find yourself unable to get your head above water with credit card debt, you may need to stop using your credit card altogether. Adding to existing credit card debt with an astronomical interest rate will make it more challenging to get out of that debt. Credit cards charge a very high interest when not paid off on time, between 15% to 29%! Here are some tips for managing your credit card debt:

1. SHRED THE CREDIT CARD

Click here to learn about the safe way to cancel a credit card.

2. PAY MORE THAN THE MINIMUM

Option 1: Snowball Effect

Pay the minimum balance on all credit cards/debts and eliminate the smallest credit card balance first. Psychologically, this reduces the number of credit cards you have to worry about and allows for progress to be easily seen!

Option 2: Avalanche Effect

The other option is to pay the minimum balance on all credit cards. Find out which credit cards have the highest interest rates and pay those off first. While you will not receive the satisfaction of eliminating one of the credit cards in its entirety quickly, it will save you the most money in the end.

3. CREATE A BUDGET

Begin creating a monthly budget and list your credit card payments (more than the minimum) as one of the essentials you need to pay off every month.

4. USE CASH

Using cash in your wallet will keep you more honest with your budget. If you don’t have cash for the purchase, it is time to go into starvation mode and either cut costs or find a side hustle.

5. LIVE BELOW YOUR MEANS

Live below your means until the credit card debt is eliminated. This means no eating out and no unnecessary purchases. Reduce credit card debt at all costs. I cannot stress this enough. Money paid in interest on a credit card is money burned, thrown away, and gone forever.

6. FIND A PARTNER TO KEEP YOU ON TRACK

In the early days, my father kept me on track. Have someone assist as a coach or mentor. A coach or mentor can provide many benefits. You may not want to let them down. They can also be someone you celebrate with when you reach a set goal or milestone in eliminating your credit card debt.

Credit cards can provide great perks and rewards; however, they need to be used very carefully! Credit cards are not for everyone and, at most, should be a last resort. Learning to manage money better and setting a budget for yourself is one of the best things you can teach yourself. No excuses. You are never too old to learn and try something new. Motivate yourself to take action now and secure your financial well-being.

If you have any questions regarding your investment options in regards to saving and building wealth for your future, please contact Midland Trust at (239) 333-1032 or visit www.midlandtrust.com. We would be happy to discuss our services with you and how you could incorporate self-directed IRAs into your investment portfolio.

Author: Andy Anger, Client Services Senior Associate at Midland IRA, Inc.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or authorized representative must direct all investment transactions and choose the account’s investment(s). Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.