When planning for retirement, the earlier you start saving and investing, the better off you are. Even if you start saving later, you are still contributing to a financial life vest that is going to keep you afloat when you face times of hardship or financial uncertainty. These times are often unpredictable, but just because we don’t know when they’re coming doesn’t mean we shouldn’t prepare for them. Like everything else, preventative action is always better than mitigation action. What we should be doing, what is always the goal, is to bolster our financial security as much as we are able to so that in times of hardship, we have something we can fall back on. Keep reading to learn more about how to bolster funds in your IRA or solo 401(k) and maintain liquidity, and for more information about the advantages of IRA funds, speak with one of our non-recourse lenders today.
Before we begin, we would like to clarify a couple of terms for full comprehension.
- Liquidity – Liquidity refers to how easily assets can be converted into cash — how quickly you can get your money whenever you need it. It could be your emergency savings account, or simply the cash that you can access in case of unforeseen happenings or financial setbacks.
- Self-Directed IRA – A self-directed IRA is a type of traditional or Roth IRA, allowing you to save for retirement on a tax-advantaged basis, but has the same IRA contribution limits.
- 401(k) – This is a retirement savings plan that is sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes on your 401(k) aren’t paid until the money is withdrawn from the account.
Bolstering Your IRA and 401(k) Funds
For self-directed IRA investors, now is the time, if there ever was a time, to have some extra liquidity and available funds in those accounts. Whether that is for present and future RMD’s, funds for repairs on those rental properties that need work, or money for non-recourse loan payments when tenants have little to pay, it is critical to have liquidity in the retirement accounts. As a non-recourse lender, we require liquid reserves to be there for just such times. In addition to being one of our requirements, we also recommend available funds as a part of your long-term investment strategy, as well as your short-term strategy. Having liquidity and available funds to sustain whatever you are facing next is paramount to surviving the coming months/years. So just how can you bolster your retirement accounts liquidity? Here are a few ideas:
Make Annual Contributions
The tax code allows for annual contribution to IRAs and Solo 401(k)’s up to the current limits. According to the IRS, for 2019 and 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000, and if you are aged 50 or older, then the limit is $7,000. Further, your annual contribution cannot be more than your taxable compensation for the year, if your compensation was less than this dollar limit. Each type of account has its own limits, from a base of $6,000 per year in Traditional IRAs up to a much greater amount in Solo 401(k)’s. You can, up until April 15th on a normal year, make contributions for 2019, and in 2020 if you have earned income this year that qualifies. Speak with your advisor or your custodian if you need to further understand what your limits are.
Keep Cash or Liquid Assets In Your IRA or 401(k) Instead of Investing Them Further or Liquidating Them
If you own rental property inside the IRA or 401(k) and have a good tenant(s) that pay on time, keep extra cash or liquid assets in that account rather than investing that money in other illiquid assets. This keeps you safe in times of financial hardship or uncertainty at least until there is some clarity in the economy or in your personal finances. If it is all in one place, you can keep track of it, use it if you need to, and continue growing it. Your 401(k) is designed to hold your money until you retire.While liquidating these funds prior to retirement is completely feasible, some Internal Revenue Service penalties will reduce the value of your asset. The IRS considers 59 ½ the minimum retirement age for liquidating your assets, and should you liquidate your assets before then, you may be hit with a 10 percent early withdrawal penalty.
There are exceptions, however, in choosing to withdraw assets from your 401(k). In the case that you are leaving your job, and are 55 or older, you will not be assessed with the 10 percent early withdrawal penalty. IF you are facing financial hardship, you are also able to withdraw money from your 401(k). However, this is a loan, and you will need to pay this money back via payroll dedication.
Transfer From Other Retirement Accounts
Before moving forward with moving assets from other retirement accounts, check with your current self-directed custodian. If you have another IRA elsewhere besides your self-directed account, there is a possibility that you will be able to transfer funds from another IRA to your self-directed IRA or 401(k) — as long as the account qualifies to do so. Typically, this is not a taxable event. There are three ways you can move assets from one eligible retirement plan to another:
- Transfer – During a transfer, you can move your assets directly from one eligible retirement plan to another without ever taking control of the assets. However, transfers are limited to the same type of retirement plan, like IRA to IRA, or 401(k) to a 401(k).
- Direct Rollover – A direct rollover is a trustee-to-trustee transaction, and does not have the same kind of restrictions as a transfer, as you can rollover assets from a 401(k) to an IRA. The transaction is tax-free, but for each direct rollover, the IRA or plan provider will report the transaction to the IRS.
- Indirect Rollover – In an indirect rollover, you withdraw the money, taking control of assets and then deposit the money into another eligible retirement plan. An Indirect rollover is tax-free, but only if the assets are transferred to another plan within 60 days.
Make Excess Contributions
There is a provision in the IRS Tax Code under Publication 590 that allows for, under certain circumstances, excess contributions over and above the regular limits set by the IRS. There are tax penalties for doing so, but you should check with your accountant or financial advisor to see what the implications are for contributing more than the normal annual limits.
Loan the Self-Directed IRA Funds
There is a provision in the Department of Labor (DOL) Bulletin #80-26 that allows the IRA owner to lend his or her IRA funds when liquidity problems arise within the IRA, which could contribute to a foreclosure on a non-recourse loan if loan payments are not made timely. As stressed before, it is recommended to refer to DOL Bulletin #80-26 as well as your custodian for advice on this matter before making any decisions.
These are some common strategies that can help your individual retirement account weather times of uncertainty. Just like you personally should have a buffer of liquid funds for emergencies and unexpected expenses, your IRA should have a liquid buffer as well. Speak with your advisor or custodian about how to bolster your accounts liquidity. If you are interested in a non-recourse loan, then speak with a lender today.