InSight

Asset Borrowing in Self Directed IRA and Roth’s

Financial Planning Dentist
Like getting a mortgage on a home, borrowing inside of a Self Directed IRA (SDRIA) can help add leverage, expand the upside of an investment and pose undue risks. It should only be used as part of a greater investment strategy coordinated by a CFP® or CPA®. Most borrowing in a SDIRA is for the purchase of real estate or a business inside of a tax advantaged account. Borrowing can make some assets more accessible to investors, and the upside and cash flow is often a fantastic endowment for any retirement strategy. An important note: interest payments made from a SDIRA are not tax deductible and you should note that in your investment calculations. Finding an working with a lender is also as important as vetting the investment and any other partner involved in the investment. We prefer using banks and other institutional lenders to limit risk and provide continuity. Please consult the InSight property acquisition process for more details on both borrowing and buying real estate. Asset Borrowing in Self Directed IRAThere are restrictions that you should be aware of from the outset that will help make having debt in the Self Directed IRA or Roth’s easier. 
  • You cannot borrow money from yourself
  • Understand prohibited counterparties
  • The loan must be in your IRA’s name
  • You can’t sign a personal guarantee
  • You can’t pay off the loan with personal funds
  • The debt must be non-recourse
  • The debt service should be covered by monthly income at a rate of +1x (ideally, +1.15x)
  • Be aware of any other conditions that are required by the lender
If the above conditions do not compromise the investment strategy in the account, then borrowing inside of a Self Directed IRA might be the right fit for you. How using debt in your InSight-Full® financial plan is up to you and your CFP®

More related articles:

Boulder Colorado investment advisor and certified financial planners
Articles
Kevin Taylor

The Anatomy of a Bank Run: Unveiling the Mechanics Behind Financial Panic

In the realm of finance, few events are as unsettling as a bank run. The mere mention of this term sends shivers down the spines of economists and bankers alike. A bank run is a phenomenon characterized by a sudden and widespread withdrawal of deposits from a financial institution, driven by a loss of confidence in its stability. This blog post aims to dissect the anatomy of a bank run, shedding light on its causes, consequences, and potential remedies. The Spark: A bank run often begins with a spark—an event that triggers fear and prompts depositors to question the safety of their funds. This spark can take various forms, such as rumors of insolvency, high-profile fraud cases, economic downturns, or a series of bank failures. Whatever the cause, it creates an atmosphere of doubt that undermines trust in the banking system. In runs in the past, the spark could have taken weeks, a slow-moving sentiment gaining some critical mass – but as the recent “runs” shows us, the entire cycle especially eh spark can happen far more quickly. Fear and Panic: Once the spark ignites, fear spreads like wildfire among depositors. Worried about losing their hard-earned money, individuals rush to the bank to withdraw their funds. The first few depositors may have genuine concerns, but their actions set off a domino effect as others join the queue, driven by the fear of being left empty-handed. Some amount of fear and panic is normal, but the runs on banks are actually self-fulfilling the fear causes the failure. Liquidity Crunch: A sudden influx of withdrawal requests places immense strain on the bank’s liquidity. Banks operate on the principle of fractional reserve banking, which means they only keep a fraction of depositors’ funds in reserve while lending out the rest. When too many depositors demand their money simultaneously, the bank struggles to meet the demand, leading to a liquidity crunch. Contagion Effect: Bank runs rarely remain confined to a single institution. As news of a bank run spreads, it instills a sense of panic in depositors of other banks as well. People start questioning the stability of other financial institutions, even if there is no concrete evidence to support their concerns. This contagion effect can quickly escalate the crisis and trigger a systemic risk to the entire banking sector. Destructive Feedback Loop: Bank runs create a destructive feedback loop. As depositors withdraw their funds, the bank’s ability to meet their demands diminishes further. This, in turn, erodes public confidence, leading to more withdrawals. The cycle continues until the bank’s reserves are depleted, and it becomes insolvent, potentially resulting in its collapse. Economic Consequences: The consequences of a bank run extend beyond the affected institution. They can have severe ramifications for the broader economy. When banks face a liquidity crunch, they curtail lending activities, causing a credit crunch. This, in turn, stifles economic growth, as individuals and businesses find it increasingly difficult to access funds for investment or day-to-day operations. Government Intervention: To mitigate the fallout of a bank run, governments often step in to restore confidence and stabilize the financial system. They may employ various measures, such as guaranteeing deposits, injecting liquidity into banks, or even bailing out troubled institutions. Government intervention aims to restore trust, prevent further runs, and minimize the potential systemic risks. A bank run is a powerful manifestation of the fragility inherent in the banking system. It demonstrates the critical role trust plays in maintaining the stability of financial institutions. Understanding the anatomy of a bank run equips us with the knowledge to identify early warning signs, implement effective regulatory measures, and establish robust safeguards to prevent such crises in the future. By nurturing trust and confidence in the banking system, we can help maintain a strong and resilient financial foundation for economies worldwide.

Read More »
Investing 101
Articles
Peter Locke

Investing 101

If you’re lucky enough to have previously started investing in your teens consider yourself way ahead of the curve. For the majority of people Investing 101 is for you. Most of us start investing in our mid to late 20s, but for those that start as early as possible can set themselves up for an incredibly lucrative future. Where should you start for Investing 101? There are a couple of places that will have the largest impact on your net worth. If, let’s say you have a summer job and you’re making $5,000-$10,000 a summer or you’re working throughout the year then opening an investment account is a great place to start.  For us, saving anyway in any type of account is great. While we like all accounts for different reasons, we like the Roth IRA the most when you’re young. A Roth IRA is like a bank account with different advantages. It enables you to save money that you’ve already paid taxes on and those savings grow tax free until you turn age 59.5 penalty free. Now we love the Roth IRA because typically when you’re young your income is fairly low so taking advantage of low tax rates is a great strategy.  Since you’ll be in the lowest tax bracket in 2020 (things may change in 2021) then paying taxes now for your money to grow tax free for multiple decades can have a profound impact on your wealth. The reason is called compounding growth. Let’s say you make it very easy on yourself and just buy into the SP500. It’s an index that tracks the 500 largest companies and you can invest in all of them using one investment vehicle. Let’s break Investing 101 down. A stock is a way to own a part of a company. An Exchange Traded Fund (ETF) is a basket of stocks that give investors exposure to typically hundreds of companies. Since you cannot buy an index like the Dow Jones, SP500, or Nasdaq (different indices) directly, you have to buy a vehicle that gives you exposure to them. That vehicle can be a ETF, which is usually a less expensive and passively managed investing vehicle when compared to a Mutual Fund. A Mutual Fund (MF) is a basket of stocks just like an ETF that is more actively managed and usually more expensive way to gain exposure to the same stocks. The difference being whether or not you think someone can actively outperform the index (MF) or you just want general exposure to the index (ETF). You can argue both sides so do what makes you feel comfortable. ETFs and MFs have different tax obligations but this isn’t as big of a concern until you’re in higher tax brackets.  If picking stocks is difficult, you aren’t interested in it, or you just want things to be more simple, investing in ETFs is an incredible way to bring you long term wealth.  ETFs and MFs typically pay what’s called a dividend. This dividend is like a thank you from the company for investing in that company. It’s a cash payment to you, typically quarterly, that you can use to reinvest back into your ETF or MF, a new stock, or whatever else.  Think about your investment portfolio like a business. This is the core to Investing 101. Your business takes money and hopefully makes you money. When you make more money you either spend it on yourself or put it back into the company. When you put it back into the company the company grows and makes you more and more money over time. This is a great way to think about investing in an ETF or MF. Every quarter, without you having to work at all, your fund is paying you and you can reinvest that money to grow your portfolio more and more.  Wealth isn’t created overnight. The secret to wealth is long term saving and investing. Hence, those that have time on their side have the greatest ability to accumulate wealth. So what else should you be thinking about?  After investing in yourself first, think about where else you spend your money. We wrote an article on the difference between erosive and accretive debt. If you find yourself buying lots of clothes, expensive shoes, fancy gadgets, and new cars then you’re not investing in your “portfolio business”. When you stop investing in your business you stop growing. Each time you do this the effect is compounded.  For example, if you invested $1,000 and $100 monthly for 40 years at 9% interest rate (average gain of the SP500) you would have ~$436,000 at the end. But let’s say you invested $1,000 upfront and only $50 monthly over the same time period and same interest rate, you’d have ~$234,000! That is a massive difference for only $50. That could be one meal out for you and your significant other, one new shirt you liked that you didn’t need, a car payment on a new car because you didn’t want a used car.

Read More »
Boulder Financial Planning Experts
Articles
Kevin Taylor

Why InSight invented the Relationship Balance Sheet

Financial Planning is something that we should all do in order to make sure that we are ready and prepared for the future. The earlier you start, the easier it will be to get there. Along the way, there will be several milestones and headwinds. So in anticipation of those moments, we document the decisions and behaviors we have helped clients change that put their financial plans in better soil. We call that document the Relationship Balance Sheet At InSight, we think it’s important to do two things as part of the financial planning process. First, we think that the efforts our clients are engaged in, like putting the needs of their future before the needs of the present and finding new and creative ways to get ahead of the game in planning. Secondly, we think having a documented record of our progress in our habits and behaviors is a valuable source of support when things get hard and markets get rough.  Knowing that we are doing the controllable parts of financial planning, the process of financial planning, we know that our futures are intact and the plans will unfold the way we anticipate.  Individuals and businesses are always looking for someone they can trust with their finances. As the number of people reaching retirement age rises, the skills required of financial planners need to become more sophisticated. This is why InSight has crafted the “Relationship Balance Sheet”, a method of taking stock of the efforts our clients make and reflecting them back on our clients. Partly as a way of showing clients the less tangible progress they have made in the prior year, and partly as a way of documenting the decades of positive decision-making that got clients to their goals.  We at InSight have yet to find a way to chart the long-term impact of every success we have been able to coach into the habits of our clients, so we developed the Relationship Balance Sheet to enshrine and celebrate

Read More »

Pin It on Pinterest