Here at New Direction Trust Company, one of the most frequently asked questions by prospective clients is which Individual Retirement Plan will suit them best. The fact of the matter is, there is no easy answer to this question. Our role at New Direction Trust Company is to be a trusted provider of administrative services for individual retirement plans and HSAs; we specialize in the bookkeeping and reporting for unique and alternative assets. As such, we do not provide investment advice or endorse any products. However, one of our primary functions is to provide educational services for our clients so they may be empowered to make educated decisions about which IRA they would like to self-direct.
Each retirement plan yields different benefits and involves different restrictions, and the equation for which arrangement is the most advantageous depends on many present and future factors in a client’s life. Below are highlights of the various features of each IRA to illustrate which arrangement could be the most beneficial to your individual investment goals.
A Traditional IRA may be opened by any individual who has earned income. With a Traditional IRA, cash is contributed "pre-tax", meaning the contribution is taken as a tax deduction from earned income for that tax year. This cash can then buys assets (stocks, real estate, gold, etc.) on a tax deferred basis. In general, assets can be bought, sold, or traded within the IRA without incurring capital gains tax, and without affecting the IRA holder's personal taxes. There are a few exceptions to this advantage, such as the occurrence of UBIT (Unrelated Business Income Tax), which can result when your self-directed IRA makes a debt-financed purchase, or when you operate a business with your IRA.
The main incentive behind opening a Traditional IRA is the projection that you will be in a lower tax bracket when you retire, and that your initial contribution will have grown on a tax deferred basis. Most 401(k)s, 403(b)s, Thrift Savings plans, and 457s are within the same tax status as a Traditional IRA. The rollover from any of these accounts into a Traditional self-directed IRA incurs no penalty fees or taxes. When you reach 59.5 years of age, you can begin to withdraw from the account (take a distribution) without penalty. You then pay taxes on the amount withdrawn.
The Roth IRA is a powerful way to save for retirement because earnings on your investments are free from federal income tax, providing certain conditions are met. With a Roth IRA, cash is contributed "post-tax", meaning the contribution is made with taxable earnings for that year. This cash then buys assets (stocks, real estate, gold, etc.) on a tax advantaged basis. In other words, assets can be bought, sold, or traded within the IRA without incurring capital gains tax, and without affecting the IRA holder's personal taxes.
Keep in mind, a Roth IRA holder may withdraw the principal amounts (i.e. your contributions) at any time without penalty or tax liability. Once you reach 59.5 years of age, you can begin to take a distribution of the earnings from the account without penalty and without taxes, as long as the account has been open for 5 years.
Unlike a Traditional IRA, contributions may be made into a Roth IRA even after you are 70½, and you are not required to take distributions at any age. The Roth IRA is popular with clients who anticipate a large return on their assets, or for clients who invest in real estate and may have taken a loss for that specific year.
Self employed? The Simplified Employee Pension (SEP IRA) is a popular employer plan for self-employed individuals. SEPs offer significantly higher contribution limits than individual plans such as Traditional and Roth IRAs. Any SEP IRA can acquire alternative assets, as long as the account is with a provider like New Direction Trust Company that services those assets. SEP IRAs accrue the same tax advantages as a Traditional IRA.
A SEP IRA account holder has the ability to fund a SEP IRA with annual contributions, transfers from other IRAs, and Employer Plan Rollovers. With a SEP IRA, you can choose the percentage of contribution for any given year (0-25% of earned income) for yourself and your staff. The only requirement is that the contribution percentage, in any year, must be the same for each employee.
NOTE: New Direction Trust Company provides SEP IRAs for any account holder that already has a SEP IRA, or self-employed persons who would like to establish a new SEP IRA.
A Solo 401(k) plan is simply a 401(k) plan for companies with no employees. Solo 401(k) plans have the same options available to them as larger 401(k) plans. However, with an Solo 401(k), the employer, trustee, and participant are usually the same person.
For self-employed persons or companies with no qualifying employees, an Solo 401(k) plan allows the employer/participant high annual contribution limits as well as a high degree of flexibility and convenience when it comes to acquiring assets.
Any of these Individual Retirement Arrangements can be part of a generational wealth plan. Although NDTCO cannot provide investment or legal advice concerning which retirement plan will be the best fit for our clients, we hope you use this information to your advantage to make well-informed decisions about which IRA will be the best option for you. Please don't hesitate to send us an e-mail at firstname.lastname@example.org or give us a call at 877-742-1270 if you have questions or concerns.