Retirement | Jeff Nabers Blog

Penalty Free Early Distributions

May 23, 2008 By Jeff Nabers Leave a Comment

Probably one of the must unknown facets of retirement planning is that you can distribute before age 59 ½ for any reason without paying the extra 10% early distribution tax. How?

Substantially Equal Periodic Payments

Set a distribution schedule calculated using IRS tables
The schedule must have regular payments of a certain consistent amount.
You must make receive these distributions from your retirement account either until you reach age 59 ½ or for a 5 year period… whichever is longer.

Internal Revenue Code Section 72(t) is where the extra 10% tax for “early distributions” (before age 59 ½) is imposed. However, if you read on to IRC 72(t)(2)(A)(iv) it is explained that the 10% tax is not applicable to any distribution that is part of a series of Substantially Equal Periodic Payments – or SEPP for short.

To give you an idea of how this works using calculations from IRS life expectancy tables, let’s examine a fictional case study with round numbers for simplicity:

Jared is considering early retirement at age 45, and over the years he has grown his IRA to an asset value of $2,000,000. He isn’t sure whether he wants to completely retire, work part time, pursue a career change, or start a new business. Let’s take a look at his options… [Read more...]

Filed Under: Money, Personal Enjoyment, Self Directed IRA Solo 401k Tagged With: 10%, 1099, 1099-R, 401k, administrator, custodian, distribution, early, investment, ira, penalty, retirement, self directed, tax

The Roth Assumption

May 15, 2008 By Jeff Nabers Leave a Comment

We all have that friend who is financially irresponsible. You know, they have a new cell phone every time one comes out. They lease a brand new car every 2 years. Their credit cards are maxed out. And they don’t really have a game plan on how to pay for the stuff they have. The best I can tell is that our government is kind of like that. If you look at the timeline, all major tax changes result in increased taxation. Let’s just look at what happened with Social Security:

In 1935, the Social Security Act was passed, and the Social Security benefits systems was created. Benefits were not to be taxed.
In 1937, FICA began payroll taxes of 2% in order to fund the payout of SS benefits.
In 1950, payroll taxes were raised to 3% in order to fund the payout of SS benefits.
In 1956, payroll taxes were raised to 4% in order to fund the payout of SS benefits.
In 1972, payroll taxes were raised to 9.2% in order to fund the payout of SS benefits.
In 1977, payroll taxes were raised to 9.9% in order to fund the payout of SS benefits.
In 1983, payroll taxes were raised to 10.8% in order to fund the payout of SS benefits.
Starting in 1984, up to 50% of an individual’s or couple’s Social Security benefits were [Read more...]

Filed Under: Money, Self Directed IRA Solo 401k Tagged With: 401k, account, benefits, dra, history, ira, retirement, roth, self directed, social security, solo, tax, tax deferred, tax free, taxation, traditional

Consumer confidence falling & the $600 checks to save the day

May 5, 2008 By Jeff Nabers Leave a Comment

Did you get your $600 check yet? What will you do with it? Surveys are saying that most Americans will use their “Economic Stimulus” check to deal with gas, food, and catching up on bills. This doesn’t stimulate the economy.

Consumer spending stimulates the economy. In other words, the Department of Treasury sent out checks to us all totaling $150 billion in hopes that we would buy clothes, jewelry, and electronics. Let’s take a step back for a moment and assess how our system works:

Two thirds of our nation’s economic activity is coming from people spending money. When our economy is “going good” it is because people are spending money – often more than they make or have. When our economy is “doing badly” it is because people are saving money or living within their means.

Finances 101

This is America and everyone wants to be rich. How does one become rich?

Make more money than you spend.

Or spend less than you make… in case that hits closer to home for you.

A person following those rules is becoming wealthy, while a person who practices opposite rules is becoming poorer. Here’s where things start to look funny. Our economic system is booming when people are becoming [Read more...]

Filed Under: Money, Personal Enjoyment, real estate, Self Directed IRA Solo 401k Tagged With: 401k, consumer, cycle, economic, economy, education, finance, invest, investing, ira, poor, retirement, rich, self directed, spending, stimulus, wealth, wealthy

Prohibited Transaction Basics

April 24, 2008 By Jeff Nabers 111 Comments

The most notable difference between endeavors down the path of using a self directed IRA versus traditional investing is the unique rules that apply to the former. The extremely simple rule is that an IRA (specifically) cannot buy life insurance or collectibles (such as rugs, works of art, alcohol, bullion).

The more involved rule is known as “no self dealing” and is described in Internal Revenue Code section 4975. This rule basically says that for each retirement plan/account, there is a list of “disqualified persons” with whom that plan cannot do business. These DQPs include:

The accountholder/participant and any other fiduciary (person who makes investment decisions for the plan)
Companies who provide services
A member of the family of #1 or #2 above (family defined as spouse [husband/wife], ancestor [parents, grandparents, etc], lineal descendants [children, grandchildren, etc], and spouses of lineal descents)
A corporation (or other entity) that is 50% or more owned (directly or indirectly) by #1, #2, or #3 above
An officer, director, 10% or more owner, or highly compensated employee of #4 above.
A 10% or more (in capital of profits) partner or joint venturer of #4 above

Every self directed IRA/401(k) investor should make this DQP list before making any investments.

Too many people seem to think of the list as only “the accountholder and his family”. As you can see it is a bit more involved than that. This doesn’t require calculus, but you should actually write out the list step by step to ensure that it is complete. This list can actually get quite extensive if you, your family member, or anyone who provides services to your plan has ownership in several companies.

So, what is a prohibited transaction?

In a nutshell, when a DQP transacts with a plan it is a prohibited transaction (abbr “PT”). The trick here is what is considered to be a “transaction”. This is generally defined in IRC 4975 as when one of the following happens between a plan and DQP directly or indirectly:

sale, exchange or lease of property
lending of money or extension of credit
furnishing of goods, services, or facilities

So I consider that to be the general rule. There are a couple of special rules and they [Read more...]

Filed Under: Self Directed IRA Solo 401k Tagged With: 401k, 4975, account, department of labor, disqualified person, dol, investing, investor, ira, irs, plan, plan asset, prohibited transaction, retirement, self directed

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Penalty Free Early Distributions

Consumer confidence falling & the $600 checks to save the day

Finances 101

Prohibited Transaction Basics

So, what is a prohibited transaction?

Was Madoff a Better Investment Than Your Mutual Fund?

Young investors can afford to play it safe when it comes to investing

Eliminating securities problems – Part 1

Where to Find Reliable Self Directed IRA & 401(k) Information

Saving vs. Investing vs. Surrendering

This stock market collapse started in 1999

Loaning money to your IRA/401(k)

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