Author: Dr. Daniel Levine

Wish Your 401(k) Was Bigger?

The secret is consistent saving. By starting your savings early and regularly adding to your investment, your results will be spectacular. The Data Is In Based on data from Fidelity Investment, the 547,000 401(k) account holders who maintained their 401(k) with the same employer since 2001 presently have an average account balance of just over $331,000, up from an average of $43,900 fifteen years ago. Now, compare their success with the investment results of the entire group of Fidelity Investment’s 14.5 million 401(k) account holders whose average account is only $90,600. Clearly, this $240,400 difference makes the case for early and steady retirement investment. “The lesson is to get in when you start your career and save over time,” says Jeanne Thompson, one of Fidelity Investment’s senior VPs who tracks 401(k) trends. “The market and your contributions together will drive the growth.”   Even More Data The Investment Company Institute and the Employee Benefit Research Institute reported similar findings in their study, What Does Consistent Participation in 401(k) Plans Generate? (EBRI Issue Brief #426, September 2016.) Their results concluded that consistent contributions are the essential key to building a large 401(k). Their study researched 3.5 million 401(k) account holders who held 401(k) accounts for a seven-year period, from the end of 2007 through the end of 2014. The group that consistently contributed to their account achieved much higher results...

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Buy-Sell Agreement: Calamity or Certainty?

Is there a way to protect your business from the effects of the death, disability, or divorce of a co-owner? When you went into business with a co-owner or co-owners, you entered into a legal arrangement that combined your resources and skill sets…and also, to some degree, your fortunes and misfortunes. We can’t always plan for the surprises that lie on our life’s path, but there is a brilliant legal tool which can help your business avoid disruption when calamity strikes your life, or the life of one of your co-owners. A buy-sell agreement performs three essential functions with efficiency when disaster strikes: Identifies how the departing co-owner’s interest in the business will be reassigned; Converts the ownership interest into a liquid asset for easy transference; Resolves legal inquiry about the true dollar value of your business. Let’s consider each: Reassignment of a co-owner’s interest: When a co-owner leaves the business for whatever reason, a decision must be made about the redistribution of the co-owner’s share. The interest may be divided equitably or by percentage among the remaining co-owners, or it may be transferred to the co-owner’s heirs, or it could be offered for purchase to a third-party. Unless you like thrills and chills, knowing what will happen to the co-owner’s interest will go a long way toward relieving anxieties! Establishing the liquidity of the business interest: When the...

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Synergy: Holding Real Estate in Your IRA: Limited Liability Companies, Part 4 of 4

The limited liability company is another flexible option if your IRA does not provide sufficient funds for the purchase, and neither loans nor tenancy-in-common ownership provides a solution for which you are looking. I am going to skip the long version of what an LLC is and leave that to your attorney, but, briefly defined, an LLC is a form of business entity that offers both limited liability for its owners and certain tax benefits. When using LLCs, it is similar to investing in a real estate investment trust (REIT) in that your IRA may be invested in limited interests which is kind of like investing in shares of stock. The difference here is that LLCs are private, and there are usually only a few investors that are limited members and a developer that is the managing member. Here is one way an LLC may be used. You know a developer who is getting ready to start a new project in your local area. He has used $1,000,000 of his own money to purchase the land and now is trying to raise capital to develop the property. Once the project is finished and the condos are sold, he expects to realize a large profit. He is willing to give up some of his profit in exchange for the needed capital. The name of his company is ABC Construction Company,...

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Synergy: Holding Real Estate in Your IRA: Tenancy-In-Common (TIC), Part 3 of 4

For people who identify an attractive property that costs more money than they have in their IRA or more than they can (or are comfortable) borrowing, tenancy-in-common may be a solution. Tenancy-in-common is a form of concurrent ownership in which two or more persons each have an undivided interest in the entire property, but no right of survivorship. Because each person’s interest, or share, is undivided, each can sell his share at any time without the consent or agreement of the others. So, how does this help you? Let’s go through an example: Let’s say you and two of your friends find a good property in which to invest, and the purchase price is $100,000. With a tenancy-in-common arrangement, you can buy the property together, with each person putting in the amount of money he or she has available. Each will own a certain percentage of the property, the income generated from its operation, and, eventually, a percentage of the profits when the property is sold. Owners                      Contribution Amount                    % Ownership You                                      $60,000                                               60% Tom                                      $20,000                                              20% Rob                                       $20,000                                              20% Total                                  $100,000                                             100% A tenancy-in-common arrangement also allows use of both IRA funds and non-IRA discretionary funds to buy a single investment. It is not a requirement that each of the owners use the same type...

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Synergy: Holding Real Estate in Your IRA, Part 2 of 4

Yes, you can use debt financing to purchase real estate in a self directed IRA. However, to do so legally, you must use the IRA-purchased property, not the IRA itself, as security for the loan. This type of permitted borrowing is called non-recourse lending. A non-recourse loan is not like the loan on your personal residence. In fact, it is very different. Here, unlike your home loan, if the loan isn’t paid back as promised, the lender may take the IRA-owned property used to secure the debt, but may not take recourse against any of your other assets. Because of its unique nature, not very many banks or lending institution offer these types of loans, but they do exist, and your self-directed IRA custodian may be able to point you in the right direction. Like other loans, non-recourse loans do have a monthly payment and some type of amortization schedule which will need to be followed. Therefore, your IRA property will need to be able to make the loan payments from its cash flow, its annual IRA contributions (within the 2016 limits – $5,500 or $6,500 if 50 or over), or some combination of the two. Simply put, you need to have more money coming into your IRA than is going out. This also means you need to have sufficient liquidity in your IRA for other real estate related...

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