If you’re reading this now and it is NOT April 17th, 2012 – Congratulations!

The official deadline for 2011 contributions to Roth and Traditional IRAs, and also HSAs, is Tuesday, April 17th, 2012.

For our purposes here at New Direction IRA, 2011 contribution checks for last year must be dated by 4/17, and we will accept postmarks up to 4/17 as far as our receipt of the contribution checks. Please make sure to clearly indicate either on the check or on a deposit coupon which year you want the contribution to be applied to. If it is not indicated, we will apply it to the current year (2012).

Click Here to download a PDF version of our deposit coupon and make your way down to the Post Office today!

The IRS, which governs IRAs, allows two basic tax arrangements for retirement accounts:

1)  With a Traditional IRA, the IRA holder contributes money to the account “pre-tax”.  While that money is in the account, it performs tax-deferred, meaning that the increase or decrease in its value does not have an effect on the IRA holder’s personal annual taxes.  The only time that the IRA holder’s personal taxes are affected are when they make a contribution or take a distribution.  A contribution will decrease the amount of earned income that the account holder declares for a tax year.  And when a distribution is taken, the amount of the distribution is then added to the person’s annual income for that tax year and taxed accordingly.

2)  In a Roth IRA, contributions by the IRA holder are “post-tax”; the investments in the account perform without tax consequence; and then can be distributed tax free to the IRA holder after the age of 59.5.  These two basic  arrangements, along with the associated rules for contributions and distributions, are the same for all IRAs, alternative or not, self-directed or not.  For example, if a person opens a traditional IRA that is self-directed with a provider like New Direction IRA, which handles a wide array  of alternative asset types, that account holder could have that IRA invested in a couple of rental houses and some gold bars.  The rental income and appreciation of the real estate  and the appreciation of the gold would constitute the performance of the assets.  Regardless of what the assets were, the IRA holder could continue to make contributions per IRS regulations.

With any IRA, there are two dynamics occurring that affect the account’s balance.  The first is the pattern of contributions and distributions.  These are governed by IRS rules and the IRA holder’s strategy.  The second is the performance of the money/assets that are in the IRA.  This is governed by the economic factors associated with each particular asset.  In other words, was it a profitable investment or not.  The two dynamics are only related in that they are functions of the same account and are guided by the IRA holder.   These dynamics are not affected by whether an IRA is self directed or not and whether the assets are publicly traded securities or  alternative.

In the case of IRA terminology, it may be that marketing attempts to make the consumers’ options more understandable have back-fired and actually created less understanding.  It can be helpful to remember 3 categories of terms:

1)  IRS designations are account types (Traditional, Roth, or an employer plan).  These account types have rules associated with them about taxation and contributions/distributions.

2)  Asset terms are simply that, the type of asset in which the IRA is invested: real estate, gold, loans, stock (public or private), etc.

3)  Descriptive terms  are used to help lead the consumer to the service that they desire (i.e. an IRA that has gold or real estate or an IRA that results from a 401(k) rollover) and do not affect tax status.

All of the current conversation regarding “Alternative” and “Self Directed” IRAs, may seem confusing unless one is familiar with the terminology.    Whether it is the success of Mitt Romney’s IRA or the Jean Chatzky report on the Today Show that is fueling interest in retirement investing, what is certain is that IRA account holders are becoming more and more aware of the choices that they have when it comes to their retirement funds.

Stocks, bonds and mutual funds are words that are commonly associated with IRA investing, but a lot of us don’t know what they actually mean. Not only that, these terms are often represented as one’s only options, and that is not the case.

In an effort to generate a baseline of knowledge, here is a short rundown of traditional investment vocabulary. Mutual funds are made up of many investors who pool funds together to purchase stocks, bonds and other securities. Stocks are shares of a particular company or corporation that represents a claim on part of the corporation’s assets and earnings. ETF (exchange-traded fund) is a security that tracks an index, a commodity or a set of assets like an index fund, but trades like a stock on an exchange. Bonds are a debt investment in which you loan money to an entity (governments, government agencies, and corporations) looking to raise capital and in return, they repay you at a fixed interest rate by a specified date or maturity. A CD (certificate of deposit) is a savings certificate where you deposit money with a CD issuer (bank, thrift institution or credit union) for a set time and the issuer promises to repay you at a specified interest rate.

Understanding market terms and dynamics can be confusing as well. Is it a bear market or bull market? If there is a boom in the market, will a bust soon follow? How do I assess a stock or fund? What is my risk? There are endless combinations for investing. Understanding investment jargon and knowing how much to invest into which assets can be frustrating. Paying for the advice may seem hard to justify when your account size is small and guessing often times puts your funds at risk. Fortunately investing in the common asset choices with sketchy information is not the only way to go. With a self-directed IRA, you have the option to invest in assets you understand.

Contrary to what most believe, your IRA can invest in anything with the exception of life insurance and collectables (e.g. antiques, certain coins, rare bottles of wine, etc.). Physical assets like gold, silver, real estate, and land are possible along with many others. These assets are popular investments because you can see what your retirement owns instead of watching a ticker and hoping the market closes higher than yesterday. Lending your retirement funds to individuals, businesses, or non-profit associations is another popular option. Your IRA can act as a bank, and you choose the borrower, interest rate, the length of the term, payment frequency and amount. Self-directed IRAs make it possible to invest your retirement funds in assets that you actually know about.

New Direction clients are able to capitalize on their own expertise when they invest in what they know and understand. If you’re not comfortable handing over your retirement funds to a manager who puts your money in investments you don’t understand, self-direction of your retirement funds may be for you.

By: Samantha Kenyon

Joshua Dorkin, CEO of BiggerPockets, has spent months planning his 2012 REI Conference in Denver, CO. The event is scheduled to take place March 23rd & 24th at the Colorado Convention Center in downtown Denver. We’re excited to announce this event because it operates under the same “no sales” mentality that we employ here at New Direction and centers around good educational opportunities. Joshua has successfully scheduled more than 30 speakers to present on a variety of real estate related topics over two days full days .

Topics to be discussed at the event include:

• How to invest in real estate while working a full-time job
• Building Systems for your Real Estate Business
• Investing with a Purposeful Plan for Retirement
• How to Systematically Flip and Rehab Houses
• Investing in Real Estate Long Distance
• Using the Best Financing Options Available for Your Investments
• Transitioning to Multi-Family Investments
• Finding and Analyzing Deals
• And much more!

Joshua has been generous enough to offer all New Direction IRA clients a $50 discount off the event registration. Simply enter the promotional coupon code “NewDirectionIRA” when purchasing your tickets online and receive an instant $50 discount.

New Direction IRA will not have a booth this year but will be present as attendees and Media Sponsors. We look forward to seeing you there and sharing the chance to learn more.

Visit the event website and see the full line-up of event speakers and schedules:

Real Estate Invest Summit and Expo 2012

New Direction’s staff is available for telephone inquiries, live and remote classes, webinars, and, as of 2012, local classes nationwide. After experiencing phenomenal growth in the past three years and seeing steadily increasing demand in the future, New Direction, in late 2011, began implementing internal and system changes to allow a more national approach.

New Direction, which sets itself apart from other plan providers with its deep knowledge base and commitment to client education, believes that knowledge comes first. The founders started out as Self Directed IRA investors themselves. When they discovered a general lack of understanding with regard to such things as Unrelated Business Income Tax, (another popular topic related to the Romney IRA), debt financing for IRA purchases, prohibited transaction rules, and more, they started studying themselves.

Now recognized as experts in the area of self-directed IRAs, they teach CPAs and Tax Attorneys via their classes at the nationally recognized University of Denver School of Law School, continuing education courses for real estate professionals, and classes for all knowledge levels. New Direction IRA founders insist that retirement investors have access to education in order be comfortable with the rules for IRA asset acquisitions prior to making investment decisions.

Investments such as real estate (including debt financed real estate), gold, silver and other precious metals, private equity, private lending, to name just a few are available to your Self-Directed retirement plan with New Direction IRA, Inc.

New Direction IRA, Inc., a self-directed IRA plan administrator with half a billion dollars in assets, also offers self-directed Health Savings Accounts and can be reached at 303-546-7930 or toll free at 877-742-1270. New Direction IRA teaches hundreds of free webinars and classes to educate new and experienced real estate investors and real estate professionals, so even a person with a small IRA fund can make big money for their IRA. Visit their website at NewDirectionIRA.com.

Humphrey warns clients and potential clients not to overlook the HSA for retirement expenses of the medical variety. Creative investors are discovering the investment potential of HSA funds and some clients feel that the tax shelter of an HSA can be better than either a Roth or Traditional IRA. New Direction includes Self Directed Health Savings Accounts in the available plans, Humphrey explained, because many employers are now offering plans in conjunction with HSA contributions.

Most investors look at an IRA as a long term investment, and recently, according to New Direction, more HSA investors are doing the same thing. As mentioned in the WSJ article, investors in hardwood trees are looking for a long term return. Humphrey said, “Our clients mention the low initial amount required as one of their reasons for making the investment aiming that the trees will ‘grow’ in value between now and retirement.”

A New Direction HSA can purchase Hawaiian Koa trees or whatever investment they choose, and harvest future profits. Those profits are never subject to tax, provided distributions are used for qualified medical expenses. And HSA contributions are not subject to tax either. Thus, HSAs offer tax free contributions and distributions as well. Account holders generally defer distributions from HSAs to retirement years while allowing the account to grow in the meantime.

Given the lower typical balances in HSAs, the focus is often on lower priced investments. Small plan balances don’t necessarily limit the client to small investments. HSAs and IRAs with low balances may also, as mentioned in the WSJ article, make purchases with other investors or using debt leverage.

Since 2003, New Direction has focused on education of investors on the details of the process and rules. They teach hundreds of free webinars and classes to educate both new and experienced investors how the take advantage of a self directed plan. Through their professional training classes for CPA and others, the details of tax treatment of profits of the plan and any UBIT (unrelated business income tax) are also addressed.

New Direction IRA, Inc., a self-directed IRA plan provider and record-keeper, offers only self-directed IRAs, HSAs, Coverdell educational savings accounts, plus company sponsored SEP, SIMPLEs, 401k plans and recordkeeping for qualified plans and defined benefit plans. They can be reached at 303-546-7930 or toll free at 877-742-1270. Visit their website at NewDirectionIRA.com. New Direction does not offer investment advice nor do they sell any investments.

I went back to the internet and started researching LLCs and Checkbook Control IRAs. After filtering through the companies that offered to help setup an LLC IRA, I finally found a website that had more comprehensive information about the pros and cons of checkbook control. I soon learned I didn’t need an LLC or a checkbook to control my IRA. The good news is there are companies like New Direction IRA that let you open completely self-directed IRAs without the hassle of LLCs or checkbooks. My IRA can own the assets directly. The better news is, when my IRA owns the investment directly, my IRA administrator takes care of the books and IRS reporting for me.

When researching Checkbook Control IRA, it is a good idea to look into the drawbacks as well as the benefits before moving forward.  There are responsibilities for the IRA holder that are important to know about from the outset. You might want to ask yourself, “Do I really want this much control of my retirement funds?” The answer for me was a big NO. I want control of my retirement funds, but I do not want the responsibilities of checkbook control. My advice to someone considering this type of set-up for an IRA is, ask the following questions before proceeding:

Q1: An LLC/Checkbook Control IRA sounds appealing, what are the drawbacks of this type of investment?

There are a couple of drawbacks and some out-right dangers.  For Checkbook Control, you must have an entity created. In most cases, that entity is an LLC.  The LLC is a company for which someone must be responsible. In order to manage the entity, you must know all the rules of both running an entity and all the IRS rules about the IRA itself.   Educating yourself on both sets of rules can take a fair amount of time to grasp.   Although many of them are not hard, if you don’t stay current, you may forget or miss something important. Remember, IRS rules regarding prohibited transactions don’t always make sense.   Applying logic doesn’t always get you to the right answer.  And the consequences for the IRA of breaking IRS rules can be significant taxes and penalties.

Q2: What are my responsibilities as the owner of an LLC and Checkbook Control IRA?

The Checkbook Control IRA-LLC is a company.  The company is authorized by whatever state you worked with originally.  The things you will be responsible for can vary widely.  Following is a list of some items suggested by the state of Colorado.  Of course this is only a partial list, and due to the limited activity in most Checkbook IRA-LLCs, some of these might not apply.  The important thing to remember is – The LLC is a business and needs to be treated as such.

• Establish a corporate bank account.
• What officers are authorized to sign checks?
• Trade name – Are you going to do business under a name other than corporate name? If so, contact the Office of the Secretary of State.
• Business plan, budget, cash flow projections, working capital needs – Can you cover payroll, operating expenses, taxes, etc. for a 6 month period? Books and accounts – Contact your accountant. Do you understand the tax implication of the entity you are using for your business?
• Obtain your federal tax identification number from the IRS.
• Obtain your state tax identification number from the Colorado Department of Revenue.
• Do you have all of the federal, state and local tax information and forms?

• Federal withholding
• Federal unemployment
• State withholding
• State Workmen’s Compensation
• State & Local Sales Tax – Contact City Hall

• Zoning – Is local zoning appropriate for your business use?
• City/County business licenses – Contact City Hall or County Offices.
• Special licenses for certain kinds of business – Contact City Hall.
• Liability
• Fire and Premises
• Business Interruption
• Crime
• Officer and Director liability

Again, this list is partial and specific to Colorado.  Be aware of the requirements of owning a company.

Q3: Fees for this service vary from a couple of hundred dollars to thousands of dollars. What services am I getting for the fee I pay?

The services vary widely based on the vendor you select to set up the LLC, but usually what you are buying is assistance in creating the entity itself.   Most companies charge you up-front to start-up then leave you alone.  For on-going running of the business and maintaining the viability of the entity, you will have to arrange for that yourself.

Q4: What happens to me and my IRA if I don’t follow the rules?

Entering into a prohibited transaction, such as providing goods or services to your IRA- owned LLC or making loans, advances or other transactions with your IRA-owned asset, will result in your IRA being distributed to you as of January 1^st of that year.  Distribution results in you having to pay income tax and/or penalties and interest on the amount distributed.  The penalties and interest can potentially go back multiple years.

Q5: Even if I am following the rules, can I still get in trouble with the IRS?

The rules and laws don’t specifically cover all details of these types of arrangements.  Some activities that the IRA-LLC promoters encourage have not been fully tested by the courts nor formally allowed by the Internal Revenue Code or Department of Labor.  In the future, the courts or federal authorities could declare that these activities are not allowed.   And that could easily put you in the position of having committed a prohibited transaction even though you thought you were following the rules.

How I Resolved my desire to get rid of my Checkbook IRA

Once I understood single-member LLC / Checkbook Control IRAs, I decided it wasn’t for me. I was able to move my account to New Direction IRA. I then distributed my investments back into the IRA (and dissolved the entity following the state rules), which still owns the investments as before, but without the risk.

What is the Five Year Roth Rule?

The five year Roth rule refers to a five year period that restricts tax-free distributions on the earnings/gains in a Roth IRA and distributions of converted funds in a Roth IRA. If a Roth IRA achieves gains in addition the contribution amount(s), distributions of those gains before the five year waiting period will be taxable. Similarly, funds that are converted from a “pre-tax” retirement plan to a Roth IRA must wait five years in order to be distributed tax-free.  The five year period begins when an IRA holder opens a Roth IRA and begins making contributions OR when a new Roth Conversion is performed. In either event, the actual effective date of the five year Roth rule is always backdated to January 1 of the tax year the event takes place. This can be important because if you time things right, your wait time can actually be reduced by more than 20%. Let’s take a look at some math below to get a clearer understanding.

How is the Five Year Roth Rule Calculated?

New Roth IRA Example: If I start a Roth IRA in April, 2012  (remember to backdate) and begin making annual contributions beginning in the tax year of 2011, my five year time clock will have ended on January 1, 2016. Notice that my effective wait time was less than four years, not five. My wait period begins January 1, 2011, not April, 2012.

Traditional to Roth Conversion Example: If I have an existing Traditional IRA , it’s possible for me to perform a Roth conversion.  To perform this process, I pay tax on the amount being converted in order to change my retirement funds from “pre-tax” to “post-tax”. I claim the converted amount on my tax return for the tax year in which I perform the conversion. Once I start this process, the five year rule begins. Just like before, the later in the year I perform my conversion, the more my five year rule becomes a four year wait.

It’s important to note that I must perform my conversion before December 31st or the tax year will effective change. For example, if I’d like my conversion to represent the tax year of 2012, I must complete my 2012 conversion before December 31st, 2012. Conversions made between January 1 – April 15th cannot be backdated to represent conversions in the prior year even though filing deadlines take place in April.

How does the Five Year Roth Rule affect my distributions?

As I mentioned above, the five year rule dictates that distributions, over and above the amount contributed and/or the amount converted, that are taken prior to the five year wait period after the establishment/conversion of the account are not tax-free. See the examples below for a comparison of scenarios.

John, at 57 years of age, makes a maximum contribution of $6000 to his Roth IRA on April 15, 2007 for the tax year of 2006. On January 1st, 2011, John decided to withdraw $8000 from his Roth IRA. Of the $8,000 that John withdraws, $6,000 is principle contribution and $2,000 is profitable earnings.

Results: Since John is now over the age of 59.5 and his five year rule has expired (Jan 1, 2006 – Jan 1, 2011), the entire distribution is qualified for a tax-free distribution and isn’t included as taxable-income. In the example above, John made a profit of $2,000 over a period of almost four years but because his first contribution in the Roth IRA was dated back to January 1, 2006, his wait for tax-free distributions was considerably shorter than 5 years.

**Note that he was over the required age of 59.5 for tax-free distributions as well.

Now let’s look at the same example if John takes his distribution after only 3 years of participating in a Roth IRA:

John, at 57 years of age, makes a maximum contribution of $6000 to his Roth IRA on April 15, 2007 for the tax year of 2006. On January 1st, 2009, John decided to withdraw $8000 from his Roth IRA. Of the $8,000 that John withdraws, $6,000 is principle contribution and $2,000 is earnings. Even though John is now over the age of 59.5, his distribution on the earnings is being taken out of the account before the five year rule expires. $2,000 of his distribution must be claimed as taxable income on his tax return.

Results: After age 59 1/2 and once the five-tax-year holding period is met, any distribution from the Roth IRA will be considered a qualified distribution and be tax-free. Remember that each conversion from a pre-tax IRA will start its own individual five year waiting period. You may consider keeping any conversions and/or contribution accounts separated in different Roth IRAs for organization purposes.

If you would like further information regarding the basics of Roth IRAs, consider viewing our Self Directed Roth IRA account page.

Allowable Investments

There are four precious metals in which your IRA can invest: gold, silver, platinum and palladium. However,

There are, however, some restrictions when investing in these metals.

Minimum Fineness Required:

• Gold .995+
• Silver .999+
• Platinum .9995+
• Palladium .9995+

Allowable coins include US-Minted Eagles and coins meeting minimum fineness (purity) standards, provided that they are not collectable. The primary value of the coin should come from the gold itself, and not thanks to the scarcity of and demand for the minted coin among coin collectors.

Examples of coins you can own:

Gold

• American Eagle coins (proof and non-proof)
• American Gold Buffalo coins (non-proof)
• Austrian Gold Philharmonics coins
• Canadian Maple Leaf coins
• Australian Kangaroo/Nugget coins
• Bars and rounds by a refiner/assayer/manufacturer accredited by NYMEX/COMEX, NYSE/Liffe, LME, LBMA, ISO 9000, or national government mint and meeting minimum fineness requirements.

Silver

• American Eagle Coins (proof and non-proof)
• Austrian Philharmonic
• Mexican Libtertads
• Australian Kookaburras
• Canadian Silver Maple Leaf Coins

Platinum

• American Eagle Coins (proof and non-proof)
• Australian Koalas
• Isle of Man Noble Coins

Palladium

Bars and rounds by a refiner/assayer/manufacturer accredited by NYMEX/COMEX, NYSE/Liffe, LME, LBMA, ISO 9000, or national government mint and meeting minimum fineness requirements.

Disallowed Coins:

There are, however, some coins you cannot own within your IRA, because they are not minted with sufficient purity. Some common examples:

Italian Lira
Mexican Peso and Ounza
South African Krugerrand

Creating a Gold IRA with New Directions IRA is very easy.

1. Open the IRA. You can start this process just by calling New Direction IRA at 877-742-1270.
2. Fund the account, via a direct contribution, transfer or rollover.
3. Find a precious metals dealer of your choice.
4. Find a precious metals depository. This is the facility or agent that will actually take possession of the gold or precious metal. IRS rules prohibit you from taking personal possession of the assets themselves. Your dealer may be able to recommend a depository that meets your needs.
5. Direct New Direction IRA to send funds to your dealer from your newly-funded IRA account, with specific direction as to what you want us to purchase (or sell) on behalf of your IRA.
6. New Direction IRA will handle the transaction for you, taking care to ensure the assets are held in the name of the IRA, in accordance with IRS rules. This is important because failure to ensure the proper titling of the assets could cause the IRS to determine that you have made a distribution – and result in unwanted penalties and taxes.
7. Your dealer will then ship the gold or other precious metal to the depository.

Considerations:

Expertise

Self-direction is a specialized field within the financial services industry. It’s important to work with an administrator experienced in handling these kinds of accounts. Many traditional brokerages and other financial advisory firms have very limited knowledge of the rules and regulations that specifically affect self-directed accounts.

Liquidity

Keep in mind that your depository will charge an ongoing fee for storing and securing your precious metals. Be sure to keep sufficient cash or other liquidity on hand within your IRA so that New Directions IRA can pay this fee on your IRA’s behalf.

Valuation Procedure

The valuations used for the IRA assets are estimated bid values. New Direction IRA will update the value of the investments weekly. Please note that the asset value reflected on the IRA statement does not include any dealer mark-ups or commissions. Price spreads can be significantly higher for proof coins than for precious metal bullion.

New Direction IRA does not determine where you buy your metals. You are free to work with your dealer of choice for your IRA’s purchase. Not all dealers operate the same way, so be sure to talk to them about their process. Also, remember that with a self-directed IRA, you are responsible for performing any due diligence needed prior to the purchase.

New Direction IRA – Your Third Party Administrator

New Direction IRA is a third-party administrator of self-directed retirement investments, including real estate IRAs, gold and precious metals IRAs, Solo 401(k) plans, SEP IRAs, SIMPLE IRAs and medical savings accounts. We work in tandem with your existing team of investment, legal and tax advisors to ensure the process goes smoothly, transactions are accounted for, and administration is done in compliance with IRS rules. You should do your own due diligence, in concert with your existing team of advisors, before you invest. However, once you make the decision, our role as the administrator is to carry out your instructions as faithfully as the law allows.  For more information, or to schedule a free consultation with one of our experts, please call us at 877-742-1270.

I was tired of my financial adviser not giving me enough information and not being available when I wanted help.  I was tired of the stock market; tired of not knowing what was really happening with my retirement funds.  I wanted to take control. After some internet searching, I found a company that promised the control I wanted.  They claimed I could invest quickly and limit fees. I called the company, and they explained all the benefits of a single-member LLC to create Checkbook Controlled IRA (I forgot to ask about, and they didn’t mention, the drawbacks of this type of investment).

The company was very eager to help me set up the account and answer my preliminary questions. I set up the account, moved over retirement money, and received the checkbook in the mail. I purchased my first real estate asset directly from my checkbook and was happy because I had control over my retirement.

What I had purchased was a cabin in at a well-known vacation destination. I was able to rent the cabin out to new vacationers weekly. It was booked solid for months. The more vacationers, the more money for my retirement. Seeing the property cash flow was an investor’s dream.

I woke up from that dream in late September when the pipes burst, and the basement flooded.

I called the checkbook control company with questions about handling the gains and expenses. I was told, “It’s your responsibility to track all monies coming into and being disbursed from the IRA.”   They didn’t tell me that when I opened the checkbook control IRA.  I have never been a business owner and have little experience keeping “the books” straight. But I kept up with them the best I could.

Then the IRS came out with an article stating, “The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contributions limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.”

I called back the company that helped me set up the checkbook control IRA. They explained to me that I needed to call my custodian. I called another number and asked if they could answer my questions about my IRA’s books and if the statement from the IRS pertains to me. They had little education on the subject. The checkbook control structure sounded so easy in the beginning. I soon realized I had gotten in over my head.

The happy feeling of having control was replaced by anxiety.

I started to think about that IRS article: how little I knew about tax laws. Is there a target on my back? If the IRS is looking into LLC IRAs, will I get audited? Is my retirement safe? Where can I go for help?