What is a Self-Directed IRA?
Many people hear the term “Self-Directed” IRA and think that it is a special type of IRA. However, in reality, the IRS does not recognize a “Self-Directed” IRA as a type of IRA. Any IRA, whether it be a Traditional, Roth, SEP, or SIMPLE IRA can be “Self-Directed”. We use the term “Self-Directed” because our clients are making 100% of the investment decisions. Midland does not sell any investment products. The client directs Midland IRA (custodian) to make legal investments on behalf of their IRA.
Why do you need Midland’s services to invest in LLCs or Private Placements?
The advantages of investing with IRA funds
There are three primary reasons people put money in an IRA:
Building for Retirement
According to CNN Money (5/2006), Social Security will run out of money by 2040. Regardless of whether or not you believe that, I think it is safe to assume that most Americans do not want to rely on Social Security as their only income in retirement. Boomers only have $35,000 in median retirement savings and 69% will rely on at least working part-time for income in retirement. Hope is not a strategy.
All Earnings Grow Tax Free (Time Value of Money)
For you non-economists out there, the Time Value of Money simply states that at the present time, money is worth more than the same amount in the future. So why would you want to pay the IRS capital gain taxes after each investment sale, when you have the ability, through an IRA, to pay them later? The money you save in taxes can be invested to create even higher wealth. This is the primary reason clients use IRA accounts.
Tax Deductions for Contributions
Most IRA accounts give individuals the ability to write-off any contributions as a tax deduction. So in essence, Uncle Sam is funding part of your retirement savings. For example, if an individual is in the 25% income tax bracket, and contributes $4,000 to their IRA they save $1,000 in income taxes, meaning that they really only contributed $3,000 to their IRA and Uncle Sam contributed $1,000.
What IRA Plans are available for Self-Direction?
A traditional IRA is a tax-deferred retirement savings plan for individuals. Once the individual starts making withdrawals, the contributions and earnings are taxed.
A Roth IRA is a retirement savings plan for individuals but it isn’t tax-deferred. Once the individual starts making withdrawals, the earnings are tax free.
A provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee’s name, instead of to a pension fund account in the company’s name.
A simplified employee pension plan that allows both employer and employee contributions, similar to a 401(k) plan, but with lower contribution limits and simpler (and thus less costly) admin
What other Savings plans are available for Self-Direction?
Qualified plans, such as employer 401(k), 403(b), profit sharing plans or Individual 401 (k)’s for the self employed can also be self-directed in many cases.
HSA (Health Savings Account)
A HSA is the ONLY type of savings plan that has three tax advantages; A deduction for contributions, tax-free earnings, and tax-free withdrawals (assuming the withdrawals are used for qualified medical expenses).
ESA (Educational Savings Account)
ESAs are savings accounts for your child’s higher education. The money you put into this IRA is taxed but the earnings are not taxed as long as the student withdraws the money to pay for qualified education expenses.
2014 Contribution Limits
Under age 50: $5,500
Over ago 50: $6,000
25% of Employee Salary; Max of $52,000
$12,000; $14,500 if over age 50
Elective Deferrals $17,500; $23,000 if over age 50 plus 25% of earnings
Max of $52,000; $57,500 if over age 50
Over age 55, add $1,000 catch-up
$2,000 per child
So What Next? Steps for a Self-Directed IRA Transaction
To invest in an LLC or Private Placement company with a Midland IRA, clients must follow specific steps to ensure the investment is purchased correctly and safely.
Step 1: Open and fund Midland IRA (funding can be done via Transfer, Rollover, or Contribution).
Step 2: (Newly Formed LLC’s) Provide Midland with the LLC Operating Agreement with proper vesting: Midland IRA FBO Client Name IRA ##, Articles of Incorporation, and Funding Instructions (Pre-Existing LLC’s) Provide Midland with LLC Subscription Agreement or Assignment of Interest with Proper vesting.
Step 3: Provide Midland IRA with Buy Direction Letter and Private Placement Disclaimer and Indemnity Agreement form (both forms provided by Midland)
Step 4: Provide Midland IRA with LLC or Private Placement Check Writing or Bank Wire instructions.
Frequently Asked Questions
- How quickly can Midland fund my investment? Most of our clients have to transfer funds from their current IRA custodian, which generally takes about 2 weeks. If it is a newly established IRA, a transfer might not be necessary as the client is simply writing a check to Midland as an IRA contribution. As long as Midland has cleared funds, there is no delay.
- What are my fees? Midland has a one-time IRA set-up fee of $50, a one-time $95 fee to purchase the asset, and annual administration fees of $295 (see application fee disclosure for determination).
- How much can be invested? Midland has a required minimum balance of $250 to be left in the client’s money market account. All other funds may be invested.
Feel free to contact us with any questions.