Crypto is blowing up. And traditional retirement accounts simply aren't equipped to handle the excitement.
Cryptocurrencies (like Bitcoin, Litecoin and Ethereum) are a popular alternative to government-backed currency—especially if you want to conduct transactions quickly and anonymously.
The global crypto market cap has been more than $2 trillion for much of 2021 so far. The market cap of Bitcoin (crypto’s biggest star) hit $1.2 trillion in April.
Looking to get in on the action? The Self-Directed IRA (SDIRA) is the best tool for leveraging your retirement savings to invest in digital currencies.
The SDIRA also offers major tax advantages, leaving you with more capital to invest in cryptocurrencies and other non-traditional assets.
Since Bitcoin and other digital currencies are intangible, they can be difficult for many traditional real estate investors to wrap their heads around.
However, investors who fully grasp how cryptocurrency works and wish to invest in this alternative asset through their retirement plans may do so with accounts that give them "checkbook control."
Steps To Take
Here are the steps you'll follow to invest in crypto using your SDIRA:
Establish and fund an SDIRA (Start with our investor quiz if you need help getting started and we'll take it from there.).
Register an LLC that is 100% owned by the IRA. This gives you the same tax-advantaged status as the IRA. The income and expenses related to the assets will flow through the IRA LLC in accordance with Internal Revenue Service requirements. Note: Cryptocurrency is considered property for federal tax purposes, but because the assets are owned by a retirement account, gains are tax advantaged.
Open a business checking account. You'll do this using funds from the IRA. An IRA LLC is also referred to as a “checkbook IRA.” The checkbook puts the account owner in full control of the transaction (checkbook control). The funds in the IRA LLC’s business checking account are solely for investing in the digital assets (or any other alternative assets allowed with self-directed accounts).
Open an account on a cryptocurrency exchange. You'll do this using the name (and tax number) of the IRA LLC. In addition to being purchased or traded on exchange platforms, digital assets may also be purchased through brokers or by investing in a fund that holds various digital currencies through private placement. In effect, the IRA purchases shares or directly invests as a limited partner.
Family Office Can Keep You Compliant
It's important that you get the right structure in place before you make a move in crypto or any other non-traditional asset. Royal Legal Solutions helps investors use an LLC (limited liability company) to incorporate cryptocurrency into their retirement accounts. If you don't have a LLC and a Self-Directed IRA for real estate investors structure set up already, let's talk about it.
We'll review your real estate investment options and business structures to ensure they are up-to-date, compliant, and bulletproof against whatever the future holds.
Once you're set up, you can become a Family Office member to ensure ongoing compliance with your state and local laws and tax requirements. We meet with our Family Office members every quarter to give them actionable steps to take, making sure their asset protection plans are up-to-date.
How Does A Reverse Mortgage Work?
Actor Tom Selleck (Magnum, P.I.) is the latest celebrity shilling for them on television.
Maybe you have an older family member or neighbor who has gotten a phone call from a financial institution offering them.
But what are reverse mortgages and how do they work?
If you are a senior homeowner with most of your net worth tied up in your home, these loans can sound pretty appealing. If you're a real estate investor, you may be wondering if you can use a reverse mortgage to your advantage.
In this article, we'll explain what a reverse mortgage is, the pros and cons this cashflow option can offer to some older Americans, and how you can decide if it's right for your financial strategy now or in the future.
WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a type of federally insured loan available to Americans age 62 and over. It gets its name because it works in the opposite way as a standard home loan.
With a regular mortgage, the bank gives you a lump sum that you pay back with interest over a set period of time.
With a reverse mortgage, the lender makes payments to YOU based on the equity you have built in your home. You have the option of receiving monthly payments, a lump sum, a line of credit, or a combination of the different options.
Over time, the amount you owe in interest and fees on the loan grows while your home equity declines. You retain the title to your home, and the balance isn't due until you or your heirs sell your home.
WHO QUALIFIES FOR A REVERSE MORTGAGE?
Reverse mortgages are only available to a specific set of homeowners. In order to qualify for a reverse mortgage, you must:
be at least 62 years old
own the home outright or have built up a considerable amount of equity in the home
live in the home as your principal residence
not be delinquent on any federal debt
be current on property taxes, insurance, and any homeowners' association fees
pass a credit check
complete counseling session about reverse mortgages from an approved counselor
Reverse mortgage loan values may be influenced by the home's value, how much equity is in the house, and other factors. And older borrowers are eligible for greater total loan amounts because age directly correlates with limits.
WHAT ARE THE ADVANTAGES OF A REVERSE MORTGAGE?
With life expectancy in the U.S. growing closer to 80 years, many Americans are outliving their personal retirement savings. As a result, they may be unprepared for the rising cost of living and the mounting medical expenses that often accompany aging.
Reverse mortgages are ideal for older homeowners who may not have much in the way of savings or investments but who have built up wealth in their homes. In other words, this type of loan allows you to turn an otherwise illiquid asset into a liquid asset without having to move out of your home.
Whether they're living with the results of an investment gone awry or the difficulties of a fixed income, any senior with cash flow issues may want to consider a reverse mortgage.
Here are some of the other attractive features of these home loans.
FLEXIBLE LENDING OPTIONS
This type of loan offers flexible disbursement options, meaning you can borrow only the amount you need. Investors may choose to accept the loan as a single lump sum, in monthly installments, or even as a line of credit. This amount of control the borrower has in this regard is greater than most loans.
If your need is more about your long-term budget, try to put a number on what you need for, say, one year. This amount will help you and anyone helping with your financial planning determine what a conservative loan amount for you might be.
MORE CASH ON HAND
For some cash-strapped retirees, a reverse mortgage allows them to remain in their long-time homes without having to downsize. Some borrowers even use the proceeds of a reverse mortgage to pay off their existing home loan.
You can use the money from your reverse mortgage for any purpose, including:
Paying off other debts
Investing in mortgage notes
Taking a bucket list trip
Investing in assisted living facilities
Acquiring investment property
Starting a charitable trust
We'll discuss below why you'll need to account for reverse mortgages in your estate plan. However, if you just want to live out your golden years comfortably, you can do so and even plan to pay off your mortgage at the same time.
Lock In the Value Of Your Home
If we've learned anything about the economy in recent years, it's that anything can happen. If for whatever reason, the value of your home ends up being less than the amount owed on the reverse mortgage, you are protected. In practical terms, that means, if home prices fall in your area, you or your heirs won't have to worry about paying the balance.
The reverse mortgage has an interesting set of rules regarding interest. On the plus side, you're not charged interest while you continue to live in the reverse-mortgaged home as your primary residence. Interest is also capped on the first $100,000 worth of debt.
NO TAX LIABILITY
The IRS considers the funds you receive from a reverse mortgage as a loan advance rather than income. That distinction means the money is not taxed, unlike other retirement income from distributions from a 401(k) or an IRA.
WHAT ARE THE DISADVANTAGES OF REVERSE MORTGAGES?
A reverse mortgage isn't for everyone. There are some risks to this type of loan that you should carefully consider.
Here are some of the potential downsides of taking out a reverse mortgage.
DECEPTIVE OR INFLEXIBLE TERMS
Although we have come a long way since the unscrupulous practices by some lenders in the 1990s and early 2000s, not all reverse mortgage providers are ethical. Some will assume you won't do your due diligence and will take advantage of you.
Carefully vet a financial company before considering a loan, and have someone you trust to read the fine print. This person could be a CPA, financial planner, family member working in the industry, or even another investor you know who's successfully used a reverse mortgage and knows what to look for in a loan agreement.
You're examining the documents for any terms that the sales reps haven't disclosed. Any added terms should serve as red flags that you need to shop around with other lenders.
Also, be on the lookout for inflexibilities. For instance, reverse mortgages are often challenging to refinance. Ask your salesperson about your refinancing options, and then be sure to see how these claims compare with the written agreement. Any time a salesperson's word vastly differs from a written offer, it may be time to walk away.
Do not respond to unsolicited ads for reverse mortgages.
Be wary of anyone claiming that you can own a home with no down payment.
Do not sign any agreement that includes terms that you do not understand.
Do not accept any payment for a house you do not own.
Get advice from a reverse mortgage counselor of your own choosing.
REVERSE MORTGAGES ARE NOT FREE
Some of the unscrupulous ads of the past have promoted reverse mortgages as a means to get free access to your own money. These loans do have the following costs associated with them:
Counseling fee. Before getting the loan, you must participate in a counseling session with a nonprofit housing counseling agency. The typical counseling fee is around $125.
Lender fee. You'll pay an origination fee of either 2% of the first $200,000 of your home's value or $2,500 or (whichever amount is higher) plus 1% of your home's value above $200,000. (There's a cap of $6,000).
Closing costs. You'll need to pay for a home appraisal, home inspection, and title search. In some cases, you may also have charges for a credit check, escrow services, land survey, flood certification, and pest inspection.
Insurance premiums. The Federal Housing Administration (FHA) charges an upfront mortgage insurance premium equal to 2% of your home's value. These loans also have annual mortgage insurance premiums equal to 0.5% of the outstanding loan amount.
You may have the option of rolling some or all of these fees into your loan balance, but, of course, if you choose to do that, you'll receive less money.
YOUR LOAN MAY BECOME YOUR FAMILY'S DEBT
If you fail to make an estate plan or somehow account for a way to pay your debt after your death, your reverse mortgage may be subject to probate. Probate can take time and cost money, and in the meantime, your heirs do not have access to your estate.
If you die with debt, the debt gets passed on, just like your assets and earnings do. You can offset this downside of a reverse mortgage in two ways:
By minimizing your loan to what you're confident you can pay directly from your estate
By updating your estate plan to account for the reverse mortgage
Our suggestion is to take care of this critical detail immediately after seeking the loan. You may pay it off during your lifetime or pre-arrange for your estate to make payments. However, interest is likely to increase if you delay, and your beneficiaries must pay off the debt.
ASSETS ENCUMBERED BY DEBT CAN'T PASS TO HEIRS
Let's say you take out a substantial loan against your home's equity. If you pass away before making payment or fail to update your estate plan, your heirs may be unable to inherit the home until the loan is paid off in full. If you lack the funds in your estate, that could mean one less asset for your heirs.
Also, it's important to remember that a reverse mortgage diminishes the equity you have in your home. By the time the loan needs to be paid off, there may much equity left for your heirs to inherit.
Difficulty SECURING OTHER LOANS
A reverse mortgage is relatively easy to obtain if you meet the qualifications, but it doesn't necessarily "look good" to traditional hard lenders. Some seniors who take out reverse mortgages may find it difficult to secure additional lending elsewhere. This factor can be problematic for investors who rely on good terms to make their deals profitable.
This type of loan also could limit your ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income (SSI).
SHOULD YOU GET A REVERSE MORTGAGE?
If, after weighing the pros and cons of a reverse mortgage, you're still unsure if it is right for you, here are some factors to consider. A reverse mortgage could be a good option for you if:
Your home is increasing in value. In this case, you may be able to take out a reverse mortgage and still have money left over for your estate.
You plan to live in your home for a long time. The longer you live there, the more the upfront costs associated with the loan are worth it.
You can cover the current cash expenses – including property tax, insurance, and maintenance -- of living in your home.
As with taking on any form of debt, you should take your time deciding on a reverse mortgage. Although it is a relatively easy way to boost your cash flow in the short term, it could put your finances at risk down the road.
Make sure you fully understand the pros and cons of reverse mortgages and enlist the help of professionals to help you make the judgment call. Even a close network of fellow homeowners and savvy borrowers with experience in reverse mortgages can be a valuable source of information.
Learn everything you can about these financial tools, shop smart for a lender, read the written loan terms carefully, and be sure to ask plenty of questions. If a reverse mortgage doesn't feel like it's for you, you can always explore other financial options.
Considering A Reverse Mortgage – A Unique Cash Flow Solution for Secure Seniors
Reverse mortgages have gotten more than their fair share of both good and overwhelmingly negative press coverage, so it’s no small wonder most investors and seniors are confused about what they even are. As retirees face longer life expectancies, many outlive their personal savings or Social Security plans, face mounting medical costs, and find life generally costs more than they’d planned for. A reverse mortgage may seem like an enticing way to solve many problems at once, but of course, you should never dive into any financial “solution” without understanding it well.
Today, let’s clear up some of the misunderstandings that make the world of reverse mortgages seem more mysterious than it is. We’ll talk about what a reverse mortgage really is, how this cashflow option can help certain secure seniors, which drawbacks to consider, and what to keep in mind when deciding if you’d personally like to exploit the reverse mortgage in your own real estate investing strategy. Making the best decision will require you to have lots of information. Let’s start with the basics and work our way out to the kinds of details you’ll want to ask about down the road.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan specifically available to seniors over age 62 and federally insured. It gets its name from its unique ability to allow you to borrow against the equity stored within a home already. Those of you who own outright or are close to doing so may have even gotten marketing calls from institutions that issue reverse mortgages, particularly after your 62nd birthday. Some of the basics to know about reverse mortgages include these rules:
Loans or debts may not be outstanding on the home.
You must occupy the property as your primary residence--sorry, no investment properties allowed.
Older borrowers are eligible for greater total loan amounts because age directly correlates with limits.
Loans aren’t due until the homeowner passes away or moves.
Loan values may be influenced by the value of the home, how much equity is in the home, and other factors.
Borrowers must continue paying property taxes, HOA fees, and maintenance costs.
Why Would Senior Real Estate Investors Be Interested in a Reverse Mortgage?
Well, first, only those over 62 get access to reverse mortgages at all. But beyond this, there are reasons certain seniors may want a reverse mortgage. There are still other reasons that are unique, or made all the more pressing, if the senior considering a reverse mortgage is also a real estate investor. Any senior experiencing cash flow issues, whether they’re as a result of an investment gone awry, out-living or under-projecting retirement savings, medical costs, the difficulty of living on fixed income, or any other reason, may consider a reverse mortgage if they’re eligible. If you have high amounts of equity in your home or own it outright, this loan option offers flexible disbursement options, meaning you don’t have to borrow the full value you can. Just take what you need. Many seniors find this solution helpful when they have a definite, short-term need that a definite amount of cash to fix. If your need is more about your long-term budget, try to put a number on what you need for say, one year. Coming up with this type of metric will help you and anyone assisting with your financial planning determine your exact cash need, thus helping figure out what a good conservative loan amount for you might be.
What Are the Biggest Benefits of Reverse Mortgages?
Nobody would be getting reverse mortgages if there weren’t very real benefits for some seniors. The biggest issue to keep in mind as you learn about this tool’s benefits is whether they outweigh the drawbacks discussed later in your own personal situation.
You may find that answering questions about your status and goals honestly saves you lots of time, and fees, on having to pay a lawyer to review the basics. They’re your advisor, not your teacher. Lawyers are all-too-happy happy to teach, just understand that you don’t need to pay for this service.
Flexible Lending Options
Investors may choose to accept the loan as one single lump sum, in monthly installments, or even as a line of credit. This amount of control the borrower has in this regard is greater than most loans. Borrowers may choose the most conservative option that will serve their needs, a luxury not typically afforded to those seeking loans.
Comfortable, Cash-Friendlier Lifestyle
No doubt, very little cash can be converted into a great degree of comfort if you’re smart about it. If you just want to live out your golden years comfortably, you can do so and even plan to pay your mortgage off while you’re still living. We’ll discuss below why to always account for reverse mortgages in your estate plan, but for now, if you want to live it up, a reverse mortgage is an option.
The reverse mortgage has an interesting set of rules regarding interest. On the plus side, you’re not charged interest while you continue to live in the reverse-mortgaged home as your primary residence. Interest is also capped on the first $100,000 worth of debt.
What Are the Drawbacks of Reverse Mortgages?
There isn’t a financial option we’re aware of that’s all “pros” and no “cons.” Let’s break down the downsides of reverse mortgages.
Deceptive or Inflexible Terms
Sadly, not all mortgage providers are ethical. Those targeting seniors may attempt to exploit their clients perceived lack of sharpness or assume you won’t do your due diligence. To this, we say prove them wrong. Vet your company before considering a loan, and have someone you really trust who understands every word read the fine print. This could be a CPA, financial planner, family member working in the industry, or even another investor you know who’s successfully used a reverse mortgage and knows what to look for. You’re looking for anything that sales reps haven’t disclosed,terms you don’t agree to, or red flags of any sort. These are immediate cues to shop around and look elsewhere. Not all lenders will offer good terms, even if you’re lucky enough to only ever deal with the ethical ones (and few of us are so fortunate). Be on the lookout for inflexibilities as well as poor terms. For instance, reverse mortgages are often difficult to refinance, a fact that makes them less than optimal choices for some. See if this will be the case with your loan, and even ask your salesperson to see how honest their answer is compared to what their literature states. Any time a salesperson’s word vastly differs from a written offer, be skeptical.
Your Loan May Become Your Family’s Debt
If you fail to make an estate plan or somehow account for a way to pay your debt immediately in the event of your death, your reverse mortgage may be subject to probate. Your heirs, which for most people are their family and loved ones, don’t get to touch an estate while it’s being probated by the courts. If you die with a debt, it gets passed on, just like your assets and earnings do. So your heirs will be able to pay debts from your estate, but let’s just say the worst-case scenarios around this issue are heartbreaking, lengthy, frankly exquisitely boring yet brutally legalistic affairs.
If you decide to pursue a reverse mortgage, you can offset this downside by minimizing your loan to what you’re certain you can pay directly from your estate and updating your estate plan to account for the reverse mortgage. This way, your attorney’s already involved and can give additional personal advice on how to address your situation. Often, you can make plans to avoid estate planning surprises--simply remembering to is the most difficult part.
Our suggestion is to take care of this detail immediately if you end up seeking the loan. You may pay it off while alive or pre-arrange for your estate to make payments, but be advised interest will likely rise if you wait and let your beneficiaries pay off the debt.
Assets Encumbered by Debt Can’t Pass to Heirs
Suppose you take out a substantial loan against your home’s equity because of its perceived safety. If you’re unfortunate to pass away before making payment or fail to update your estate plan, your heirs may be unable to inherit the home with the reverse mortgage until the loan is paid off in full. If you lack the funds in your estate, that could mean one less asset for your heirs, or at least a substantial barrier to receiving their full inheritances.
Limits and Difficulties Securing Other Types of Loans
Some seniors who take out reverse mortgages later find it difficult to secure additional lending elsewhere. A reverse mortgage is fairly easy to obtain if you meet the qualifications, but it doesn’t necessarily “look good” to traditional hard lenders. This can be problematic for investors who rely on good terms to make their deals profitable.
Stay Out of Trouble if You Choose to Use Reverse Mortgages
As long as you understand the deal you’re going to sign, you should be able to intelligently decide whether the reverse mortgage will help you, particularly if you’ve got pros to help you make the judgment call. Even a close network of fellow REIs, homeowners, and smart borrowers with experience in reverse mortgages can be a valuable source of information, as can educational resources like this very online article. Learn what you can, shop smart, be skeptical. Professional advice, planning ahead, and practicing due diligence can keep you from becoming a horror story.
Can I Buy Bitcoin within a Roth IRA?
Cryptocurrencies made their debut in2009 with the introduction of Bitcoin. Created by Satoshi Nakamoto, this form of digital currency is used as a means of trade medium in virtual exchanges.
Individual retirement account (IRA) holders who monitor trending investment options have asked us about the merits of Bitcoin. Below, we discuss the legality and options available when it comes to Bitcoin investments.
At present, the Internal Revenue Service (IRS) treats Bitcoins as a “property.” As such, it is an allowable investment option for those with a self-directed IRA (SDIRA). For tax purposes, the property aspect helps prevent Bitcoin investments from having to pay penalties or other special IRS tax fees.
In 2017, Bitcoin sawrecord high investment returns; a lucky few saw $1 billion returns on their Bitcoin investments. If you use your SDIRA to invest in Bitcoins, pay close attention to trends. Make sure your account custodian has years of experience and can spot potential investment bubbles. They should also be able to quickly identify trades that may violate IRS regulations and cause you to be penalized.
Most individuals opt for an SDIRA over a typical IRA for two reasons:
The potential for a much more diverse portfolio protected from economic fluctuations
The ability to see much higher potential returns.
As stated above, there are potentially high-returns that can be gained through Bitcoin investments making it an ideal SDIRA investment opportunity. SDIRAs exist as both Traditional or Roth IRAs. While a traditional SDIRA will allow you to invest in Bitcoins with pre-tax dollars, a Roth IRA may be the better choice. Roth IRAs use post-tax dollars for investments. This means the taxes have already been taken out and you are absolved of having to pay them again.
So what does this mean regarding Bitcoin investments? If you use these post-tax dollars to invest in Bitcoins, the capital gains taxes are completely eliminated. (By comparison, Traditional IRAs are only tax-deferred – meaning you will have to pay taxes on your gains once you begin to pull funds out upon your retirement.)
An IRA LLC may be your best means of Bitcoin investment. A qualified trusted custodian can assist you with setting up an LLC and explaining how it works for your account and meets your specific needs.
Use a Trusted Custodian
For an SDIRA, the custodian is simply an agent trusted to act solely on your directions. You are the account owner and the one who makes all decisions regarding your SDIRA account.
Not all SDIRA custodians allow for alternative investments in items like Bitcoins. As such, you need to make sure you look for a reputable, specialized firm, like Royal Legal Solutions, who will. If you need help, start with our investor quiz and we'll take it from there.
Your custodian cannot provide financial direction but can help you to understand the regulations and explain anything you have questions about. Bitcoin is relatively new to the investment scene with very little input from the IRS. Overtime, laws may change. If you are considering using your Roth IRA to invest in Bitcoins, hire a custodian who understand the nuances of IRS regulations and Bitcoin trends.