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Self-Directed Accounts: No Longer A One Size Fits All

July 1, 2019

Planning for a successful retirement can be an intimidating task, to say the least. While many people are saving for retirement through employer-sponsored plans like 401(k)s or 403(b)s, there are additional options that can make all the difference between getting by and continuing to build wealth into your golden years. IRAs have been around since 1975, and while most people are somewhat familiar with them, very few people are aware of the full scope of opportunity offered by these accounts. There are several major considerations when choosing which strategy is right for you.

The first component is determining whether you would benefit more from a pre-tax or a post-tax plan. In a pre-tax plan, such as a Traditional, SEP, or Simple IRA, you’re able to make tax-deductible contributions to an IRA where the funds can be invested as you choose. All investments grow tax-deferred. Upon distribution, all withdrawals are added to your taxable income. Pre-tax plans make sense for someone who would benefit from an immediate deduction—especially if they anticipate being in a lower tax bracket in retirement. If you aren’t as concerned with an immediate tax deduction and would prefer to make investments in an account that can grow tax-free in perpetuity, choosing a post-tax plan, known as a Roth IRA, might be more compelling. The key takeaway here is that both IRAs offer significant tax advantages. For example: consider hypothetically investing one dollar that doubles 20 times over the years as you advance towards retirement. If you’ve made these investments outside of a retirement account and fall into an effective tax bracket of 25%, you’re left with $72,000. If the same series of investments are made inside an IRA, whether pre-tax or Roth, they avoid the 25% tax each time your dollar doubles. In this case, you will have roughly $1.2 million dollars. The difference is staggering.

Be warned, saving more by paying less in taxes can be addictive. In addition to IRAs there are several other special purpose accounts that offer significant tax advantages. For those interested in saving for higher education costs, you may elect to open and contribute to an Educational Savings Account. Unlike a 529 plan, distributions from an ESA can be used to pay for a much broader scope of educational costs. While contributions aren’t tax deductible, your investments grow tax free, meaning there’s no tax consequence when investments are bought or sold, or when funds are distributed to cover qualified educational expenses.

Many people with high deductible health insurance plans are excited to learn about their eligibility to contribute to a Health Savings Account. Many people confuse this type of plan with a Flex Spending Account. Unlike an FSA, the HSA isn’t a “use it or lose it” plan. All contributions made to a Health Savings Account are tax-deductible and distributions are tax free – provided the funds are used to pay for a qualifying medical expense. Account owners often elect to pay medical expenses out of pocket and file receipts away that enable them to take a tax-free distribution when needed. One of the great advantages of the HSA is that you don’t have to incur medical expenses to benefit. Once you turn 65 years old, distributions can be taken for non-medical purposes and they are treated the same as distributions from a traditional IRA.

Once you have selected the best plan(s) to meet your savings objectives, it’s time to consider what investments you will choose inside of your IRA. It’s important to note that your investment options aren’t limited by the type of IRA that you choose. Most IRA investors aren’t aware of the full scope of investments permitted by the IRS. Everyone is familiar with stocks, bonds, mutual funds, and other publicly traded investments. Fewer people are aware that almost any sort of investment, other than life insurance and collectibles, can be held inside an IRA. Most IRA custodians only permit publicly traded securities. Our slogan at NuView is More Choices, More Control and that’s precisely what we offer our clients. Instead of relying on an advisor, our clients elect to leverage their industry-specific knowledge in an effort to drive higher returns in their retirement accounts.

All of these types of plans may partner with each other or even with other investors to greatly increase purchasing power for real estate or almost any other alternative investment. It’s likely that there’s a particular combination of these wealth building tools that would be tailored to your particular set of circumstances. Review the specific plan information below and contact NuView Trust to learn how these wealth building tools may fast-track your retirement.

 TRADITIONAL IRA:

The Traditional IRA was designed to provide individuals an opportunity for pre-tax contributions to a retirement account – generally for those not covered under an employer sponsored plan, such as a 401k. Today, many individuals use traditional IRAs as a repository for their 401k plan rollovers and for an additional savings tool alongside their employer sponsored plan.

Contribution Max:

2018: $5,500 (Under age 50); $6,500 (Over age 50)

2019: $6,000 (Under age 50); $7,000 (Over age 50)

Contribution Deadline: April 15th

 ROTH IRA:

In 1989 the Roth IRA was introduced to provide an after-tax approach for saving for retirement.  The Roth IRA provides individuals to pay taxes on an as contributed basis, providing for tax free growth and distributions.  Given its tax-free growth, individuals with lower tax brackets, longer investment periods or anticipated above average returns can reap the most benefit from a Roth IRA.

Contribution Max:

2018: $5,500 (Under age 50); $6,500 (Over age 50)

2019: $6,000 (Under age 50); $7,000 (Over age 50)

Contribution Deadline: April 15th

 SIMPLE IRA:

A Savings Incentive Match Plan for Employers (SIMPLE), can be established by employers, including self-employed individuals, for the benefit of eligible employees.  Employees are eligible to make pre-tax employee deferrals to the plan and employers add their matching contribution, up to 3%, to the plan.

Contribution Max: $12,500 with employer match up to 3%; $15,500 (Over age 50)

Contribution Deadline: Employee: End of Year; Employer October 15th

 SEP IRA:

Simplified Employee Pension (SEP) Accounts are adopted by business owners to provide retirement benefits to themselves and eligible employees.  Contributions to the plan are made exclusively by the employer through Employer Deferrals.  With increased contribution limits, the SEP is a very popular option for self-employed professionals.

Contribution Max:

2018: 25% of self-employed income up to $55,000

2019: 25% of self-employed income up to $56,000

Contribution Deadline: April 15th

 SOLO 401K:

The Solo 401k plan allows self-employed business owners and individual (sole proprietors and partnerships) to establish a 40k plan for themselves and eligible employees.  Typically, employees covered do not meet common law status, meaning they own more than 5% of the adopting business or they are a spouse of the business owner.  This plan offers an employee deferral (pre-tax or post-tax) along with an employer profit sharing deferral providing accelerated contributions.  Additionally, participant loans are permissible, and employees may elect to make after tax contributions as part of their employee deferral.  This plan is also not subject to Unrelated Debt Financed Income Tax on debt-leveraged investments.

Employee Max Contribution:

2018: $18,500 (Under age 50); $24,500 (Over age 50)

2019: $19,000 (Under age 50); $24,500 (Over age 50)

Employer Max Contribution:

2018: 25% of self-employed income up to $55,000 (Including Employee Contributions); $60,000 (Over age of 50)

2019: 25% of self-employed income up to $56,000 (Including Employee Contributions); $60,000 (Over age of 50)

Contribution Deadline: April 15th

 HSA:

Health Savings Accounts provide individuals covered under a High Deductible Heath Plan to save, in a tax advantaged manner, for future medical expenses.  Unlike all other plan types, the HSA is the only plan type with tax deductible contributions as well as tax free distributions – when used for qualified medical expenses.  Under a HSA individuals can opt to pay for qualifying medical expenses with their personal funds and be reimbursed at a later time – allowing for prolonged investment growth within the HSA.

Contribution Max:

2018: $3,450 (single) / $6,900 (family); $4,450 (single) / $7,900 (family) (Over age 55)

2019: $3,500 (single) / $7,000 (family); $4,500 (single) / $8,000 (family) (Over age 55)

Contribution Deadline: April 15th

 COVERDELL ESA:

The Coverdell Education Savings Account provides a savings vehicle to save for future educational expenses, usually for a minor. Contributions can be made by anyone on behalf of the minor, so long as the aggregate contribution does not exceed the annual contribution limit. Contributions are after-tax; however, distributions are tax free for qualifying educational expenses.  The CESA is also eligible to be passed down to other siblings and is not exclusive to post-secondary education, making it a more favorable educational savings vehicle compared to 529 or college pre-pay programs.

Contribution Max: $2000

Contribution Deadline: April 15th

The right combination of accounts can, and likely will, change based on your income, family, marital status and tax consequences. While NuView doesn’t provide investment advice or guidance, we do make owning alternative investments with tax advantages as seamless as possible.  If you’re not satisfied with a one size fits all approach to investing for retirement, give us a call at 407-871-6511 and let us introduce to a new universe of opportunities.

Jason DeBono, CISP is Vice President & COO of NuView Trust Company, which provides custodial services to over $1 Billion of self-directed accounts.  Jason can be reached at jdebono@nuviewira.com