THE Distribution Plan for your retirement
We open the brokerage account(s) for your IRA(s) with qualified tax status, low-custodial and management fees, and immediate access to the greatest number of preferred investment offerings at the lowest prices.Rollover Chart
What is an IRA
Individual Retirement Arrangements (IRAs) are personal savings accounts that working people and their spouses can establish for the purpose of saving and investing for retirement. IRAs have significant tax advantages, enabling savings to potentially grow at a faster rate than it would in a comparable taxable account.
What an IRA can invest in
Many financial institutions claim that they allow you to self-direct your securities investments, but then turn around and restrict what securities you can invest in. An IRA through Brice Financial Services, allows you unrestricted decision-making when it comes to securities. Allowed investments include all international and domestic stocks, bonds, options, mutual funds, and exchange-traded funds.
What an IRA cannot invest in
It is very important to speak with your financial adviser or tax professional regarding Prohibited investments and Disqualified persons. The following five investments cannot ever be housed in your IRA:
Prohibited investment #1 - Life Insurance
As a general rule, no type of life insurance contract may be titled as an IRA or qualified plan, or be housed in such an account or plan. This includes whole life, universal, term and variable policies of any amount for IRAs, SEP and SIMPLE plans. Qualified plans contain one exception to this rule, known as the incidental benefit rule. This rule mandates that IRAs are allowed to purchase a small amount of life insurance for a given plan participant. However, since the primary purpose of the plan is to provide retirement benefits, the amount of the death benefit must qualify as "incidental" compared to the plan balance. This is usually limited to $50,000.
The type of test that the IRS uses to determine this amount depends upon the type of insurance that is purchased in the plan. Defined contribution plans such as IRAs that purchase whole life insurance must meet the 50% test, which mandates that the amount of premium purchased in the plan per employee cannot exceed 50% of the employer's total contribution (plus any plan forfeitures) to each employee's account. For term and universal policies, the limit is 25% of employer contributions, plus forfeitures. So life insurance is out.
Prohibited investment #2 - Derivative Positions of Unlimited Risk
Any type of derivative trade that has unlimited or undefined risk, such as naked call writing or ratio spreads, is prohibited by the IRS. This is because IRAs are designed to provide retirement security, so the use of speculative instruments such as derivatives is often disallowed. Many IRA custodians will allow for covered call writing because there is a defined risk. Those who wish to trade futures or options contracts inside their IRAs should look to more liberal custodians that permit the use of other types of alternative investments, such as hedge funds or oil and gas leases. But most custodians of major banks and brokerages will not allow this.
Prohibited investment #3 - Antiques or Collectibles
An IRA owner who discovers a collectible or antique worth thousands of dollars on sale at a garage sale will not be able to shield the tax on the gain from the sale of this asset inside an IRA or other retirement plan. Stamps, furniture, porcelain, antique silverware, baseball cards, comics, works of art, gems and jewelry, fine wine, electric trains and other toys cannot be held in these accounts under any circumstances.
Prohibited investment #4 - Real Estate
Contrary to what many believe, it is possible to hold real estate directly inside an IRA. However, the IRA owner cannot benefit directly from the property in any sense, such as by receiving rental income or living in the property. It is therefore not possible to purchase one's house with IRA or retirement plan money. Many IRA custodians cannot facilitate the direct ownership of real estate or oil and gas interests, and those that do often charge annual administration fees that are much higher than normal (more than $4000.00 annually).
Prohibited investment #5 - Coins
As with all other types of collectibles, most coins made of gold or any other precious metal are disallowed except for the following five exceptions:
- American Eagle coins (proof and non-proof)
- American Gold Buffalo coins (non-proof)
- American Silver Eagle (proof and non-proof)
- Austrian Gold Philharmonics coins
- Canadian Maple Leaf coins
In order to be allowed to be held inside an IRA, coins must be very pure in their mineral content and not seen as a collector's coin. Krugerrands and the old Double Eagle gold coins are disallowed because they do not meet this standard. But gold coins that the IRS determines to have more actual currency value than collection value may be permissible.
Disqualified persons include the following:
- The IRA owner and his or her spouse;
- The IRA owner’s lineal ascendants and descendants, including their spouses;
- Anyone providing services to the IRA, such the custodians and investment advisers;
- Any corporation, partnership, trust or estate in which the IRA owner has a 50% or greater interest;
Investing your IRA in passively-managed securities
We always recommend passively managed exchange traded funds and index funds when funding an IRA for the long term. The main reasons we do so include the following:
- Passively managed funds or ETFs usually have lower expenses over the long term.
- Vanguard ETFs display inherent diversification benefits over actively managed funds and ETFs.
- Passively managed funds or ETFs don't exhibit "style drift." They stay consistent over the long term.
- Passively managed funds or ETFs have lower turnover, lower transaction costs, and greater tax-efficiency than actively managed funds.
- Principally due to their lower fees, passively managed funds' long-term performance always exceeds that of actively managed funds or ETFs investing in similar securities.
Portfolio Selection Criteria
Generally, we use the following criteria to select individual mutual funds/ETFs because these criteria have been shown to have the most significant correlation with future performance:
- No Load. The sales commissions on any mutual funds or ETFs we recommend are the lowest in the industry.
- Low Expense Ratios. Lower is better. We usually recommend the funds or ETFs with the lowest expense ratio in an asset class unless we have a compelling reason not to.
- Value funds should be as "valuey" as possible. A value mutual fund or ETF should have as high as possible a "book to market" ratio (a.k.a., "book to price" ratio). "Book to market" ratio is simply the inverse of the more often used "price to book" ratio.
- Small cap funds should be as small as possible. The stocks in a small cap mutual fund or ETF should have as small a market capitalization as possible.
- Diversification. More is better. The more companies a fund or ETF invests in, the less unsystematic risk it has . On average, investors aren't rewarded for taking unsystematic risk, so it is more beneficial to be exposed to less risk.
- Less Turnover is generally better. Lower turnover means the mutual fund or ETF pays fewer commissions to execute trades. It also causes the fund or ETF to be more tax-efficient.
- Tax Efficiency. For taxable accounts, it is beneficial to minimize both dividend and capital gains distributions if possible. The reason is to avoid receiving a 1099-DIV and having to pay taxes to the IRS. Have your advisor employ dividend-based rebalancing and tax- loss harvesting to fully optimize your account’s potential for maximum growth.
Funding Methods for a Roth IRA
You must declare and pay tax on your contributions when you file your annual tax return, but gains are tax-free and you must roll over your Roth 401(k) to a Roth IRA by age 70½.
Declare your personal contributions as Roth or “after tax” meaning the contribution has already
been taxed and not tax-deductible as in a traditional plan. You simply write or type “Roth” on the
memo line of your contribution transfer.
- Rollover funds from other qualified plans and IRAs within 60 days. You can only do this once every 12 months and must report it to the IRS on Form 5498. Traditional rollovers to Roth arrangements are taxable, but not Roth to Roth rollovers.
- Declare your personal contributions as Roth or “after tax” meaning the contribution has already been taxed and not tax-deductible as in a traditional plan. You simply write or type “Roth” on the memo line of your contribution transfer.
Opening the correct account type for your IRA is very important. Your advisor will be the best person to properly advise you on what type of account(s) you can fund for the long term, based on your investment objectives.
Understanding Brokerage Account Fees.
Whether you have trading experience or not, it is essential that you know what annual custodial fees you have to pay in order to maintain a sound retirement portfolio. We break it down for you here.