Using a Qualified Retirement Plan or IRA to Buy Real Estate

Thinking of using a Qualified Retirement Plan or IRA to invest in a rental property?  It may not be the best option.  If you borrow to finance the property, you’ll run into the unrelated business taxable income rule, which could require you to pay hefty taxes on your rental income on profits as they are earned inside the Plan/IRA.  And you’ll be prohibited from claiming landlord-friendly tax breaks for depreciation, property taxes, and other expenses.  Instead, consider investing in a real estate investment trust (REIT) in your Plan/IRA.  REITs are required to return at least 90% of taxable income to shareholders, so dividends are typically generous.


SOURCE: Kiplinger’s Personal Finance Advisor, November 2016

Money Purchase Plan Loan Questioned by EBSA

According to EBSA, the SeaBoard Management money purchase plan trustees breached their fiduciary duties by failing to take action to recover funds owed to the plan, which were loaned in violation of ERISA.

SeaBoard Management Inc., a company based in Stevenson, Maryland, is facing a court challenge from the Department of Labor’s (DOL) Employee Benefit Security Administration (EBSA) for breaching the Employee Retirement Income Security Act (ERISA).

According to EBSA, the SeaBoard Management money purchase plan trustees Larry Porter and Susan Porter breached their fiduciary duties to the plan by failing to take action to recover funds owed to the plan, which were loaned in violation of ERISA. To date, principal and interest owed to the plan on this loan is approximately $332,544, according to EBSA.

“The trustees failed to take action to recover funds owed to the plan that were loaned to Waskey Investments, a real estate partnership in which Larry Porter owned a 50% share, in violation of the Employee Retirement Income Security Act,” the complaint states. “To date, principal and interest owed to the plan on this loan is approximately $423,486.”

EBSA is asking the U.S. District Court for the District of Maryland to restore all related losses, including interest or lost opportunity costs to the plan, which occurred as a result of the defendants’ breach of their fiduciary obligations. Further, EBSA wants to permanently enjoin Larry Porter and Susan Porter from serving as a fiduciary, administrator, officer, trustee, custodian, agent, employee, representative, or having control over the assets of any employee benefit plan subject to the ERISA—and to appoint an independent fiduciary at the Porters’ expense.


IRS has Opened Up an Employee Plan Compliance Project on SIMPLE IRAs

The IRS has opened up an employee plan compliance project on SIMPLE IRAs; it’s eyeing whether employer with SIMPLE IRAs are eligible small businesses…those with 100 or fewer employees.  The agency is mailing questionnaires to firms that both sponsor SIMPLE IRAs and filed over 100 W-2s for at least two consecutive years between 2012 and 2014.  Failing to respond to the letters could lead to an audit.

Source: The Kiplinger Letter, November 18, 2016

Big Changes to the IRS’s Determination Letter Process

Big changes are coming to the IRS’s employee plans ruling program next year.  Under current procedures, sponsors of individually designed employee plans can seek a determination letter from the IRS every five years to ensure the plan is in compliance with all current laws and regulations.  This helps give sponsors certainty that their plans are up-to-date and continue to meet the rules from employee plan qualification.

The IRS will generally stop ruling on amendments to individually designed plans beginning in 2017, absent special circumstances such as significant law changes and new approaches to plan design.  Sponsors will only be allowed to request determination letters from the IRS on the plan’s initial qualification and upon termination.  After these restrictions were first announced last year, retirement plan professionals pleaded with the IRS to backtrack on the changes, but to no avail.

Source: The Kiplinger Tax Letter, July 29, 2016

Wonder What IRS Agents Look for When They Audit Retirement Plans?

Large participant loans are a key examination issue.  During an audit, IRS checks how plans handle loans, such as the time they allow for repayment, and what happens upon default.  Agents ask for copies of signed loan agreements and promissory notes, as well as documentation to substantiate residential loans.  Generally, plan loans are tax-free if the total doesn’t exceed the smaller of $50,000 or 50% of the account balance.  Excess loans are treated as taxable distributions.  Among the most common plan loan failures: loans over $50,000; Nonresidential loans in which repayment exceeds five years; and loan defaults, in which the participant fails to make the payment.

Source: The Kiplinger Tax Letter, June 17, 2016

One of the Best Retirement Deals 9 Out of 10 People Ignore

By Carla Fried

There are some easy decisions around 401(k)s. Contributing enough to trigger the highest possible matching contribution from your employer, for example, is one of them.

Contributing to a Roth 401(k) should be another. But it’s not. Eight years after retirement savings plans were allowed to offer the option, which can help many people boost their retirement funds, more than half added it. Yet just 11 percent of savers with access to the account use it, according to benefits consultant Aon Hewitt.

Roth 401(k)s are much like your garden variety 401(k). The big difference is that you contribute after-tax money, not pre-tax dollars like with the standard 401(k). Later in life when you want to tap that Roth money you won’t pay income tax on it — not a penny, as long as you’ve held the account for five years and are 59 ½.

The conventional wisdom is that the Roth 401(k) makes the most sense if your current income tax rate is lower than what you expect to pay in retirement. Opting for the Roth 401(k) essentially prepays your tax bill. Granted, deciding if the Roth route makes sense for you is tougher than deciding whether to contribute enough to get the company match. But the lack of broad buy-in suggests many 401(k) savers are missing out on an important way to build retirement security.


With a traditional 401(k) you delay the tax bill and your money compounds over time. You get an upfront break that reduces taxable income. The tradeoff: Your later withdrawals get taxed as ordinary income. Stands to reason that prepaying — as you do with a Roth account — makes sense when you’re in a low tax bracket, especially for younger workers yet to reach peak earnings.

An analysis by T. Rowe Price found that a 30-year-old saving in a Roth 401(k) would have 17 percent more spendable income in retirement even if his pre- and post-retirement tax rates were the same. If his retirement tax rate is 5 percentage points higher, the Roth 401(k) will generate 25 percent more income than the after-tax money from a traditional 401(k). A future tax rate 10 percentage points higher will generate nearly 35 percent more spendable income in retirement compared to the traditional, courtesy of the time factor of tax-free (not tax-deferred) compounding.

While the young get the greatest benefit, even middle-agers who anticipate a lower tax rate in retirement would likely be better off saving via a Roth 401(k). “Unless you’re planning for a steep lifestyle change in retirement, what’s likely is that at best you might drop into a tax rate a few percentage points lower,” said Stuart Ritter, a senior financial planner at T. Rowe Price.

For example, the tax bracket for a 45-year old married couple with taxable income of $200,000 is 28 percent. If they retired today, that income would have to drop below $74,000 to fall into the 15 percent tax bracket. More likely, they’d be in the 25 percent bracket, which tops out at $148,500 for married couples filing jointly. T. Rowe Price estimates that even if they pay a tax rate in retirement just three percentage points lower, the Roth 401(k) will leave them with 8 percent more spendable income in retirement than a traditional 401(k).

Only if the future tax rate is more than 10 percentage points lower than the initial tax rate does the traditional 401(k) becomes a better deal for the 45-year-old couple. That would be a large lifestyle haircut even if federal tax rates merely stay steady.


For 55-year-olds the traditional 401(k) becomes the smarter choice when the future tax rate is at least 8 percentage points lower. A married couple in the 35 percent federal tax bracket today (so income between $405,101 and $457,600) would need to get by on income of no more than $226,850 (the top of the 28 percent federal tax bracket) to pull that off.

Higher-income earners need to carefully navigate potential short-term tradeoffs. For example, two fifty-somethings can each defer up to $23,000 this year in a traditional 401(k). That’s a lovely $46,000 reduction in taxable income. Put that in the Roth 401(k) and you lose that upfront tax break, which could wreak alternative minimum tax havoc.

And remember, if you opt for the traditional 401(k), the IRS will come knocking at age 70 ½, expecting you to start taking annual required minimum distribution (RMDs) — forced taxable withdrawals — from your savings. RMDs are taxable income and make it harder to generate a steeply lower tax rate.

If you don’t think you’ll rely heavily on your 401(k) savings in retirement, a Roth 401(k) looks even better. Roll it into a Roth IRA before age 70 ½ and you won’t suffer forced withdrawals. That can help manage taxable income in retirement and give you the latitude to keep more of your retirement funds growing tax-free for heirs.


What to Expect Now That Britain Has Voted to Leave the E.U.

It’s troubling news for investors and savers, but traveling abroad may suddenly cost less

The surprise vote by Britons to exit the European Union — nicknamed Brexit — has roiled financial markets across the globe and could have an impact on the retirement and finances of Americans.

Here’s what you can expect:


Stock markets across the globe have taken a dive, concerned that the United Kingdom may be headed now for a recession that in turn will drag down the economies of the rest of Europe and the United States. The U.S. market, which rallied a day ago on expectations that Britain would remain in the European Union, forfeited about 3 percent early Friday based on the S&P 500 index.

More than half of Americans are invested in the stock market, largely through retirement plans at work. And many workers have been encouraged in recent years to diversify their portfolios and invest overseas. These investors will likely see their balances drop — at least for the next few months, experts predict. That’s bad news for retirees and others who must pull money out of the stock market at this time.

Financial firms are advising clients that there is no reason to panic.

Even if Britain eventually pulls out of the European Union, it will be a gradual process that will take at least a couple of years, says Tim Steffen, director of financial planning at Robert W. Baird & Co.

“If it looks like this will have a longer impact on people’s finances, you will have plenty of time to react to it,” he says.

Investment firms have been reaching out to clients with a similar message.

“Given that it may take several years for the specifics of Brexit to play out, and markets may be rattled as plans take shape, investors’ best protection is to hold a portfolio that is diversified across asset classes and regions,” the Vanguard Group wrote to its investors.

Nevertheless, some financial professionals see some positives from the stock sell-off.

“This is a good buying opportunity,” said Greg McBride, chief financial analyst with He favors investing in broad-based, low-cost index funds.

“Overall, I would recommend that investors think more about buying than bailing,” said Sam Stovall of S&P Global Market Intelligence in a statement. He sees long-term buying opportunities in mid- and small-cap stocks that have low international exposure as well as high-quality stocks with lower volatility.


Good news if you are shopping for a mortgage now. Interest rates on these loans have dipped slightly on the news of the vote, said Keith Gumbinger, vice president at mortgage research firm

“How far they can go down and stay down is really unclear at this point,” he said.

Investors fleeing stocks are seeking safety in U.S. Treasuries, and the rush of money flowing into these securities pushed their yields lower, Gumbinger explained. Mortgage rates closely track U.S. Treasury yields.

Credit cards, loans and savings rates

Before the Brexit vote, Federal Reserve policymakers were expected to raise short-term interest rates at least once this year, most likely after the November election, says David Payne, staff economist at the Kiplinger Letter. Now policymakers may not do so even then as they wait to see the economic fallout of Brexit here and abroad.

These short-term rates influence the interest rates consumers pay on credit cards and home equity lines of credit. So consumers can expect a reprieve from higher rates for many months to come.

On the other hand, those short-term rates also affect interest rates on bank CDs, savings accounts and money market mutual funds. So savers will remain stuck with today’s low rates for now.


The dollar already has appreciated against the euro and the British pound. “That will make traveling overseas less expensive,” Payne says. “It will be a good time for summer travel to Europe or England.”

George Hobica, president of the travel site Airefarewatchdog, agrees.

With the euro and pound weaker, fewer Brits and Europeans will visit the United States, causing the airlines to try to attract more customers by lowering the price for Americans traveling to Europe, he said.

“The day after the Brexit vote, we saw airfares to London on Virgin Atlantic and other airlines for fall travel reduced to $500 round-trip,” Hobica said in a statement.

He also advises travelers who have already made hotel and other land arrangements in Europe to see if they can rebook at a better price now that the exchange rates have fallen.

By Eileen Ambrose, AARP