What’s Changing with Self Directed IRAs?

While the Tax Cuts and Jobs Act threatened to make big changes with regard to retirement accounts, there were only a few small changes that actually made the final cut. Most of the investment rules and penalties stayed the same for the 2018 year. The changes that were made dealt with recharacterization rules, Roth account income limits, 401(k) contribution limits, Saver’s Credit income limits, and uses for 529 accounts.

 

Roth Recharacterizations

 

The biggest change in the Act was the limiting of plan recharacterizations. In the past, plan owners could convert their Traditional IRA to a Roth IRA as long as they qualified, and then revert back before the end of the year if they changed their mind. Sometimes assets lost value or the tax burden for the conversion ended up too much for the owner to bear, so they would convert their accounts back before the effects took place.

 

Plan owners will no longer be able to take advantage of this loophole starting with any Roth conversions made on or after January 1, 2018. For conversions that occurred prior to that date, plan owners may choose to recharacterize them back to a Traditional IRA on or before October 15, 2018.

 

Income Limits for Roth IRA

 

Income limits for Roth IRAs raised slightly for the 2018 year. New contribution limits are as follows:

 

To contribute toward a Roth IRA, you must earn less than the maximum income limit for your category. Single filers must earn below $135,000 to qualify, and maximum contribution levels phase out starting at $120,000 (these limits increased by $2,000). Couples filing jointly must earn less than $199,000 to qualify, and their maximum contribution amounts start phasing out at $189,000 (these limits increased by $3,000). Married filing separately must earn less than $10,000 to contribute anything, although phase out starts at $1 (there was no change in these limits).

 

Plan Contribution Limits

 

Annual contribution limits for 401(k), 403(b), and 457 plans increased by $500 for the 2018 year. So, savers can contribute up to $18,500 or $24,500 if they are 50-years-old or older. For Traditional and Roth IRAs, contribution limits stayed the same at $5,500 per year, or $6,500 for those 50 or older.

 

Saver’s Credit Income Limits

 

The Saver’s Credit applies to Traditional IRA contributions for savers earning less than the income limits imposed. You may claim a tax deduction on these contributions if you earned less than $73,000 as a single person (starts to phase out at $63,000), $121,000 for married couples filing jointly where the IRA contributor is covered by a work-related plan (starts to phase out at $101,000), $199,000 for married couples filing jointly where the IRA contributor is not covered by a work-related plan but the spouse is (starts to phase out at $189,000), or $10,000 for married taxpayer filing separately and covered by a work-related plan (starts to phase out at $1). You can also learn more about Bitcoin IRA Rollover at this website.

 

New Uses for 529 Plans

Parents and grandparents will be pleased that 529 plan funds, which traditionally have been set aside for college expenses, can now be used for K-12 expenses related to private, public, or religious schooling. There is a caveat, however. Plan owners can only use these funds for up to $10,000 in school-related expenses per year. Note that Coverdell ESAs had always allowed plan owners to use funds for K-12 schooling and there are no withdrawal limits. There are many more differences between 529s and Coverdell ESAs, however, so study these thoroughly before deciding on one or the other.

Self-Directed IRA Contribution Due Dates

Tax Day is April 17th this year, which means you have until that date to file your taxes and contribute to most retirement accounts. Even though 2017 has ended, it’s not too late to meet your contribution goals. Keep in mind that distributions must be made by December 31st of the year reporting (2017) to qualify. Traditional IRAs require minimum distributions for anyone 70.5 or older, and inherited IRAs may require certain distribution amounts regardless of your age.

 

If you need an extension for filing your taxes, extension requests must be submitted by April 17th as well. We do recommend that you file your taxes or request an extension before April 17th to ensure that paperwork is submitted correctly and there are no errors that could cause a delay. Let’s take a look at the due dates and contribution limits for each type of self-directed IRA.

 

Traditional IRA

 

For the 2017 tax year, the contribution deadline is April 17, 2018. The contribution limit for a Traditional IRA is $5,500, or $6,500 if age 50 or older. If you met the contribution limit before you filed taxes but have contributed more since January 1st, you can count these extra funds for the 2018 tax year. If you aren’t covered by a retirement plan from work, you can deduct your 2017 Traditional IRA contributions from your 2017 taxes.

 

Roth IRA

 

Just like with Traditional IRAs, the contribution limit and deadline are the same for a Roth IRA. There are income limitations for contribution eligibility, however, and you won’t be able to deduct your Roth IRA contributions from your taxes.

 

SEP and SIMPLE IRA

 

The contribution deadline for a SEP IRA is April 17, 2018 and is December 31, 2017/April 15, 2017 for a SIMPLE IRA. Employers are the only ones eligible to make a SEP IRA contribution, and they can only contribute up to 25% of the employee’s income or $54,000, whichever one is lower. Employees can contribute up to $12,500 (or $15,500 if 50 or older) to their SIMPLE IRA. Employees must make their contributions by December 31st, and the employer who is matching must make the matching contributions by April 15th.

 

401(k) and Solo(k)

 

The deadline for 401(k) and Solo(k) contributions is December 31st of the reporting year (2017). Plan owners can contribute up to $18,000 for the 2017 year, or $24,000 if 50 or older.

 

Health Savings Account (HSA)

 

The deadline for a 2017 HSA is April 17, 2018. For individuals, the annual contribution limit for 2017 is $3,400 ($4,400 for ages 55-65). Families can contribute up to $6,750 ($7,750 for ages 55-65). Those older than 65 must meet certain qualifications in order to contribute to an HSA.

 

Coverdell Educational Savings Account (CESA)

 

The 2017 contribution deadline for a CESA is April 17, 2018. These accounts have a contribution limit of $2,000 and hold income requirements to qualify. Many savers use these accounts to help cover higher education expenses for children or grandchildren and save their retirement plan money strictly for retirement expenses.

Retiring on a Self-Directed IRA

Saving for retirement is one of the most important actions one can take to secure their future. Sadly, many Americans haven’t saved a single dollar, or are grossly behind in their yearly savings goals. If this describes you, don’t worry. There are ways to jumpstart your retirement savings and catch up to where you need to be to live comfortably in retirement. One way to do this is with a self-directed IRA.

 

What is a Self-Directed IRA?

 

These types of accounts are just like traditional retirement savings accounts but include many more options for the investment savvy. Usually, Traditional and Roth IRAs, as well as 401ks, offer a few investment options to choose from—mostly stocks, mutual funds, and bonds. These accounts rarely allow investors to invest outside of what the various plans offer. Self-directed IRAs allow open investing in real estate, gold, private placements, trust deeds, and single-member LLCs. This gives savers more flexibility with their investments, which can help increase their funds more rapidly depending on the type of investment.

 

Benefits of a Self-Directed IRA

 

Besides offering more investments for savers to choose from, self-directed IRAs are also great vehicles for people to invest in what they know. If a saver has experience in the tech field, or knows real estate trends, they can invest in these niches rather than whatever their traditional plan offers. Experts in their field, or even hobbyists, can take more calculated risk with a self-directed IRA, and be rewarded handsomely when their investments grow. Some types of self-directed investments are inherently riskier, and therefore should only counted on for retirement by a saver who knows the market well. After all, self-directed IRAs are the responsibility of the plan owner and the plan owner alone, and a risky investment can have a major impact on future funds, whether positive or negative.

 

Retirement Saving Tips

 

Whether you choose the self-directed route or stick with traditional investment options, there are a few guidelines to follow for ensuring you will have enough saved at retirement for your needs.

 

  • Save early, save often. The best way to save for retirement is to start saving as early as possible and to be consistent with it. If you didn’t start saving until later in life, you can contribute extra to your retirement accounts at age 50 with catch-up contributions. The easiest way to save is to use direct deposits from your paycheck, that way there is no temptation to use the money for other expenses while it’s sitting in your account.

 

  • Take earlier risks, play safe later. Younger savers can invest in riskier options that have a larger growth potential because they have more time to benefit from the growth and ride out the lows should the market take a dip. Savers closer to retirement should play it safe and focus on keeping the money they’ve already earned through their accounts. Typically, the closer to retirement you get, the more you will want to transfer your stock investments to mutual funds and bonds. You still want to see growth at this stage, but it may be slower than the riskier investments.  

 

  • Make short-term and long-term goals. What is it you plan on doing with your retirement and saving money? Are you saving for a vacation, a new car, or college? Can any of your accounts help you with these goals? When you have a future goal to work toward, it becomes much easier to save the $50 or $100 extra a month in the present.

 

  • Record expenses and make a budget. If you’re nearing retirement, you will need to know exactly how much you will need per month and year to keep your standard of living the same. Record every expense, down to the last cup of coffee, to determine just how much you will need in retirement. Multiply the yearly number by how long you plan on living after retiring, and factor in extra medical expenses. You should reach this minimum savings goal before even thinking about turning in your two weeks’ notice at your place of employment.

Beware of Prohibited Transactions with Self Directed IRAs

Self-directed IRAs can be a great retirement option for those looking for more options and flexibility with their funds. However, there are still several rules and regulations to follow when it comes to these types of IRAs, and breaking them can be costly. You may have to pay taxes or fees on your earnings, or your account could be entirely disqualified if the terms are breached. Since it’s you and you alone who’s responsible for protecting your retirement funds, you should learn about the various restrictions below before your hard-earned investment takes a dastardly hit.

 

  1. Property usage by a disqualified person. If you purchase a property with your self-directed IRA money, you can’t benefit from the property in any way, and neither can your family members. This means you can’t live in the property, use it as a vacation home, or rent it to family members. This applies to all types of property, from single family homes to office spaces.

 

  1. Receiving income from plan property. You can’t use your retirement investment as a present-day income strategy. For instance, you can’t purchase an apartment building with your retirement money and manage the building at the same time. You can’t collect personal checks for rent or receive any personal income from the property in any way besides appreciation through your retirement account.

 

  1. Benefitting from personal equity. The IRS prohibits plan owners from contributing personal funds to the property or performing manual labor on the building itself in order to increase their investment numbers. Manual labor, even if free, counts as sweat equity and is strictly forbidden. If you want to improve the property, you will have to use your plan funds in order to do so.

 

  1. Lending of money to the disqualified person. Another prohibited transaction is lending or gifting money to a family member (or yourself) from your plan. Again, this is directly benefitting you and your family, so it’s not allowed.

 

  1. Disqualified fiduciary. Since the people who help manage your plan receive an administrative fee for their services, usually a percentage of the earnings over time, the plan fiduciary cannot be a relative of yours or have any stock in the investment itself. For instance, the fiduciary can neither own 50% or more of the company you’re investing in, nor own 10% or more in shares of the company. Basically, if they directly benefit from your investment, they can’t be in charge of it.

 

  1. Using funds for loan security. Lastly, you won’t be able to use your investment funds as collateral for a loan if a disqualified person approves or confirms the consideration. If you plan on using your retirement funds in this way, consult a third-party to avoid penalties.

 

In short, steer clear of disqualified persons and don’t try double dipping on your earnings. As long as you think of your investment as only there to benefit you at retirement, you shouldn’t have many issues. For more information and advice on self-directed IRAs, talk to your personal financial advisor.

Investing in Private Placements with a Self-Directed IRA

Self-directed IRAs offer a few more investment options than typical IRAs, one of these options being private placements. Private placements are investments in privately owned companies, rather than public companies that are registered with the Securities and Exchange Commission. A few examples of private placement investment opportunities include those with:

 

  • Limited Liability Companies (LLC)
  • C corporations
  • Start-Ups
  • Small businesses
  • Limited Partnerships (LP)
  • Hedge Funds
  • Land Trusts
  • Secured (deeds of trust) and unsecured (not backed by collateral) notes

 

These types of investments rely on individual investments to raise funds since many banks restrict loans to these businesses. Investors have the potential to earn much more on their investment than with “safer” stocks, bonds, and mutual funds. Private placements can also help diversify an investor’s portfolio, which may or may not be advantageous depending on how close the investor is to retirement. Generally, the closer an investor is to retirement, the riskier investments should decrease while the safer investments increase to ensure they have enough funds for retirement.

 

What are the Restrictions on Private Placements?

 

Not everyone can invest in a private placement. There are certain criteria that must be met before investing to help manage the risks involved. A few of these criteria are explained below.

 

  • Investor cannot work for the business that their IRA funds.
  • IRA owner cannot own 50% or more of the business if it is an existing entity.
  • Accredited investors must have a net worth of $1 million.
  • Accredited investor must show an income more than $200,000 ($300,000 with a spouse) from the past two years and be expected to earn at least that much in the next year.
  • If investor doesn’t meet accredited investor criteria, they can still invest as a non-accredited investor.

 

What to Know Before Investing in Private Placement

 

Just because private placement investments inherently carry more risk, it doesn’t automatically mean they are all “bad” investments. There are, however, a few best practices you should exercise to protect yourself from dangerous, or even fraudulent, private placement investments.

 

First, conduct thorough research on the company offering the investment opportunity. Understand their industry and the competition, and evaluate the reasonableness of their claims and expectations. Obtain a copy of how the company plans on using the funds raised. Carefully review any offering documents and familiarize yourself with the terms of the investment. Pay special attention to transfer restrictions, when proceeds will be paid back to the investors, and the difficulty of selling or reselling your investment. Some private placements take years before investors can sell or resell, so you will want to make sure the timeframe is in-line with your retirement goals. Lastly, discuss the investment with your broker to see if it makes sense to add this type of investment to your portfolio. They will also provide their expertise on the riskiness of the investment, and may also conduct deeper research into the business itself on your behalf.

 

Private placement investments may not be beneficial for every investor, but they can reap higher returns than other standard IRA investments. Private Placements are investments worth investigating, especially for investors who are far away from retirement or who need to balance their portfolio with a higher-return investment.

Five Common Misconceptions of a Self-Directed IRA

The self-directed IRA account is becoming the new norm for those individuals who want to play a more active role in their retirement funding. With so many resources out there it can be hard to weed through the information to find the truths about how to properly direct your own IRA account. Today, we’re going to look at five common misconceptions that individuals have about self-directed IRAs. Let’s jump in below.

1.) You Must Possess An LLC To Invest 

This is simply not true at all. You don’t need to be an LLC investor to invest in your own self-directed IRA fund. In fact, this could potentially cause major problems later down the road. You should realize that setting up an LLC to invest in a self-directed IRA is a marketing tactic that firms are using to get consumer business. They market that consumers need an LLC to set up their IRA and the company offers a secondary service of setting up the LLC for the consumer. Don’t get caught up in this trap as you absolutely don’t need an LLC to invest in your own self-directed IRA.

2.) They Require Specialized Tax Forms 

The word taxes tends to scream complicated for individuals and business owners alike. When it comes to a self-directed IRA fund you don’t have to worry about any complicated or specialized tax forms. This type of IRA basically functions as the other types when it comes to tax reporting. Those who have a self-directed IRA account need to report their annual contributes to that account on each year’s taxes. The only other time you will be responsible for reporting anything to the tax agencies on your personal return is when you distribute the funds of your IRA account for non-investment purposes.

3.) They’re Difficult To Setup 

Again, this is another myth setup by the companies that offer IRA setups. Self-directed IRAs can be easily setup by the individual owner at any time. There are many online websites you can use to setup your IRA account within a few minutes. It doesn’t take knowing a plethora of financial terms in order to establish your own self-directed IRA account.

4.) They Have The Same Investing Options As Standard IRA Accounts 

This is simply false. When it comes to standard IRA accounts, your only options are bonds and stocks. While there may be various options to choose from, there is a restriction of your investing to the options on Wall Street. With self-directed IRAs, you can invest in other endeavors such as private businesses, tax liens, gold, and real estate. There are so many options with self-directed IRAs that you simply can’t get with standard IRA accounts.

5.) You’ll Be Penalized When Switching From A Standard IRA Account 

When you switch from a standard IRA account to a self-directed IRA account you won’t be charged a penalty if you do it correctly. You need to roll your existing IRA account into your new self-directed IRA account. This will prevent you from paying any penalties. If you instead withdraw the funds from your standard IRA account and use them to open a new self-directed IRA account, you will be penalized due to the early withdraw.

Understanding more about self-directed IRAs can allow you to better grasp just how convenient these accounts are. As you can see by the list above, there are many common misconceptions out there about these types of accounts. We encourage you to do your research instead of just going by word of mouth.

Why You Need a Self-Directed IRA

There are many reasons why you should be contributing to a retirement account as soon as you start working. However, a typical IRA can feel restrictive as it generally only invests in stocks and bonds. While this may be helpful for many people, it may not result in optimal returns. What are some other good reasons to have a self-directed IRA?

Invest In Whatever You Want

Perhaps the best reason to have a self-directed IRA is that you can invest in whatever you want. This means that you can invest in oil futures, startup businesses or even your own company. You could also choose to use the proceeds from a self-directed IRA to buy real estate or land for development.

You Are the Trustee of the Account

With a self-directed IRA, you are generally the trustee of the account. Therefore, you have complete control over where the funds in your account go. All you have to do to make an investment is write a check from that account when you are ready. With a traditional IRA, a bank or financial institution acts as the trustee, which means that it has final say over how your money is used.

Only You Know Your Goals and Risk Tolerance

Having control over your retirement account is ideal because only you know your risk appetite as an investor. Furthermore, you should be allowed to invest in products or companies that you understand best. If you happen to understand real estate better than the bond market, being forced to keep money in bonds may lower returns. Over the course of 10, 20 or 30 years, even small reductions in annual return could reduce your nest egg by thousands of dollars.

Contributions Can Reduce Your Tax Burden

Contributions to a self-directed IRA may be used to reduce your taxable income for the year. This may be a powerful way for the self-employed to save money today while helping to secure their financial future. Like a traditional IRA account, you can contribute up to $5,500 of self-employment income if you are under the age of 50. If you are over the age of 50, you may be entitled to contribute an extra $1,000 per year. Talk to your tax adviser before making a contribution if you have any questions about how it impacts a future return.

Costs to Run the IRA Are Lower

Whenever someone else manages an account for you, that person or entity will charge a fee. When you run your own retirement account, you won’t charge yourself a management fee. Furthermore, there is less paperwork and fewer reporting requirements, which means that you will spend more time finding investments and less time with administrative tasks.

If you have self-employment income, you need to have a self-directed IRA. It offers tax benefits, flexibility when it comes to what you can invest in and is allows total control of your money. By investing in what you love and understand, the odds are better than you can achieve your retirement goals.

The Difference between Conventional and Self-Directed IRAs

An IRA is one of the most effective tools that you have in your quest to secure a financially comfortable retirement. In addition to offering compounding returns over your lifetime, it also offers several tax advantages. Typically, a bank or other financial institution will control your IRA investments. However, with a self-directed account, you decide how to save for retirement.

Self-Directed Accounts Allow You to Be the Trustee

As the name implies, a self-directed account allows you to decide where your contributions go. This means that you can invest in startup businesses, gold or anything else that you think will earn a return on your investment. At the same time, you get the same tax advantages as you would with any other IRA. 

Who Can Have a Self-Directed Account?

Those who have self-employment income can have such an account. The good news is that anyone can have self-employment income without quitting their day job. If you babysit for your neighbor’s kids, walk dogs, or write articles for money, that may be enough to qualify. If you are curious as to whether you have self-employment income in a given year, don’t be afraid to ask a tax professional before opening an account.

Are There Limits to How Much I Can Contribute?

The same contribution limits apply regardless of what type of account that you have. For 2017, you can contribute up to $5,500, and catch-up provisions allow those over the age of 50 to contribute another $1,000 in a year. If you make less than $5,500 in self-employment income in a given year, you can contribute that amount instead. Contributions to your self-directed IRA will also be reduced by any contributions made to other accounts. 

Withdrawal Rules are Also the Same

If you decide to take money out your account before the age of 59 ½, you may be subject to early withdrawal penalties. You will also lose the ability for that money to compound until retirement age. Furthermore, income taxes will need to be paid on any cash withdrawn prior to age 59 ½, and the withdrawal may bump you to a higher tax bracket.

Conventional IRA Accounts Limit Investment Opportunities

A typical IRA will allow you to invest in stocks and bonds. In some cases, you will be allowed to invest in gold or other precious metals. This can be extremely limiting if you don’t understand how the stock market works or don’t want to deal with low bond yields. Depending on where you have your IRA, you may be paying management fees for trading decisions that you likely could make on your own. 

If you are looking for a way to take control of your retirement, a self-directed IRA may be the best option for you. The freedom to invest in what you know and love can make it easier to get higher returns without necessarily increasing your risk. Earning higher returns may make it easier to retire sooner because you will have the financial security to do so. 

Why the Self-Directed IRA is the Best Long-Term Savings Vehicle

Being able to save for a financial goal is one of the most valuable skills a person can ever develop. You’ll likely set a variety of savings goals throughout your life, including short-term, medium-term and long-term goals. The ultimate long-term savings goal is saving for your retirement. And the ultimate savings vehicle for retirement is the self-directed IRA.

Let’s look at a few of the reasons why.

Tax-Deferred Growth.

Like other traditional IRAs, the biggest strength of a traditional self-directed IRA is that it provides the opportunity for your investments to grow on a tax-deferred basis. This means that any income you receive from the investments within your account will not be subject to tax for as long as those funds remain in the account. Similarly, any gains from the sale of investments within your account will be free from taxation, provided that those funds (and any investments you make with those funds) remain within your account.

Additional Investment Options.

A self-directed IRA with a custodian such as Quest IRA affords the account holder with investment options that traditional IRA custodian will not permit. For example, you can use a self-directed IRA to invest in assets such as private equity and real estate, and to make loans to businesses or even for real estate mortgages. Many of these asset types have long investment timeframes, which allows you make investment choices to precisely match your retirement goals.

The breadth of investment choices you’ll have with a self-directed IRA is even more apparent when you compare them with any 401(k) plan options that you may have through your employer.

Administrative Advantages.

Speaking of 401(k) plans, you’re likely to accumulate multiple 401(k) accounts over the course of your career. Many plan administrators limit your ability to make new investments once you leave the employer, and having to keep track of multiple accounts can reduce your ability to execute on your retirement plan. Having a self-directed IRA as your sole or primary retirement account can lessen your administrative burden.

Additional Roth Self-Directed IRA Advantages.

If the features we’ve discussed above aren’t enough, then consider the additional benefits you receive by structuring your self-directed IRA as a Roth account.

In addition to having your investments grow on a tax-deferred basis as is the case with a traditional IRA, distributions can also be taken from a Roth IRA on a tax-free basis. Furthermore, Roth IRAs are not subject to the rules on required minimum distribution requirements in the same way that traditional IRAs are. These rules require you to take minimum distributions from a traditional IRA once you reach age 70½.

Finally, eligibility to contribute to a Roth IRA does not end at age 70½ as it does with a traditional IRA. This means that if you have other sources of income during retirement you can continue leveraging the various contributions.

The Three Situations Where You Might Consider an Early Withdrawal From Your Self-Directed IRA

It’s important to understand that the default IRS regulations regarding early withdrawals from an IRA. In general, taking a distribution from your account before age 59½ will subject you to a 10% penalty on the amount of the distribution, plus whatever taxes may be due.

In each of the situations below, there are specific requirements that need to be met in order to avoid having to pay the 10% penalty, but in all cases you still may owe taxes on the amount of the distribution. Pay close attention to all the requirements. If you make a mistake in the distribution process it could prove to be quite costly.

  1. To Purchase a First Home. The IRS regulations allow you to take a distribution of up to $10,000 to pay for a down payment on your home if you are a first-time homebuyer (which is defined to mean that you haven’t owned your own home in the past two years). You can also use this penalty free provision to assist a child or grandchild with their down payment, if having access to these additional funds would make the difference between getting a home and not – but it may be worth forgoing future growth of those funds
  2. For Certain Uninsured Medical Expenses. There are actually two situations in which you can use your self-directed IRA in order to pay for some of your medical expenses. The first is in situations where you need to pay for certain unreimbursed medical expenses. The second situation is to pay for medical insurance premiums for you and your family when you are unemployed. one reason taking this type of early withdrawal can be so important is that it eliminates any temptation that might otherwise exist for you to underinsured or yourself or otherwise not seek necessary medical care.
  3. Higher Education Expenses. The third exception we’ll discuss is taking an early withdrawal in order to pay qualified educational expenses. Generally this means paying tuition or room and board for your child, but you can also make such a withdrawal for your own educational expenses, those of your spouse, or those of a grandchild.

There are no limits for how much you can take out of your account early for these purposes. However, given that an early distribution means that you’re losing out on the long-term growth potential of those funds, you may wish to explore other funding options first, including student loans (which in some cases can involve interest and that’s tax-deductible).

In fact, in each of these three situations, it’s always important to consider other alternatives prior to taking an early distribution from your self-directed IRA. Just because you’re authorized to do so doesn’t mean there isn’t a better way.

In addition to losing out on future investment growth, there are other ways in which taking an early distribution can be a bad financial decision. For example if you need to liquidate certain investments early, then the effective loss you experience by taking the early distribution is effectively much greater than the amount of the distribution.