This post is a follow-up on a case study we posted a month ago wherein we showed a client a better solution using DCF Exchange higher yield fixed and period certain payments. The client is in the final deliberation stage and bounced questions off an ill-informed other advisor. A few questions about DCF Income Payments in self-directed IRAs revealed a misunderstanding, and hopefully, this post clears a few things up about the acquisition and allocation processes. Read below.

Question #1 - Are DCF Income Payments a non-qualified asset, and is there a problem with it being acquired with qualified funds?

Answer: There is no problem using qualified funds. DCF Income Payments are amortizing receivables and can be treated the same as any other note receivable. The ownership of the underlying annuity does not change hands, and therefore the ‘qualified’ or ‘non-qualified’ nature of the underlying annuity is not relevant to the transaction.

When the right to receive the payments is acquired by an IRA, the payments pay into that IRA’s cash account and the money remains qualified until such time as the owner takes a distribution from that IRA.

Related questions:

1a) Is it inadvisable to acquire an asset with an exclusion ratio using qualified funds?

Again, this is an ill-informed question that reflects a misunderstanding of the underlying asset.

DCF Income Payments are a stream of payments each comprised of principal and interest. Buyers using non-qualified funds can use the DCF payments table method or the exclusion ratio method for tax preparation purposes, as discussed HERE.

But for buyers using qualified funds, 100% of the funds received into the IRA are tax-deferred until distribution, whereupon they are 100% taxable. The amortization schedule and exclusion ratio are irrelevant to a buyer using qualified funds.

As to whether it’s advisable or not misses the point.  The tax consequence depends on whether it’s the person or their IRA acquiring the asset, and so if DCF Income Payments as an asset makes sense depends entirely on the client’s overall situation, RMD requirements, and their total portfolio of qualified and non-qualified assets.

Question #2 - What about RMDs (Required Minimum Distributions)?

Answer: RMDs are calculated on the year-end value of all qualified accounts. Distributions to satisfy the RMD can be taken from any one account, or some from one and some from another. Distributions from several IRAs for RMDs do not need to be proportional.

In this discussion, the proposed payments (sometimes known as a secondary market annuity) allocation was to use the client’s self-directed IRA to create income of +/-20 years.

The client can elect to take that income as a distribution, and in so doing will take out qualified money to apply against his overall RMD requirement. Alternatively, he may choose to let the money accumulate in the cash account in his SDIRA, and take his RMD from another qualified source. It’s up to him.

Related questions:

2a) Will the proposed allocation be worth more or less on 12/31 than it is today?

That depends entirely on the assets acquired, the cash flow produced by those assets, and the distributions taken by the client. The proposed allocation is to income streams, and assuming the income generated is taken as a distribution, then logically the IRA balance would be lower at year-end than at inception, due to the withdrawals.

2b) What is the value on 12/31?

This is shown on the amortization schedule and the payments table attached to each cash flow, on the last page, under the year-end valuation summary. This is the value input into the asset management system at the self-directed IRA custodian for year-end valuations. These tables are are available for download from our inventory page and included in the closing book.

DCF Income Payments Self Directed IRAs

Question #3 - Yield and asset allocation

In this scenario, the client was considering an allocation to DCF Income Payments and comparing against a similar principal amount/ lower payout allocation to a joint life SPIA with return of premium rider.

DCF Income Payments offer a fixed yield of around 4% (depends on the specific assets selected, but is typically not less than 4% for the term selected, appx. 25 years). The SPIA with Return of Premium only offers a 0% rate of return until the younger of the two (the wife) turns +/- 93. The value of the SPIA is solely in longevity income protection.

In this situation, with significant overall assets and pre-existing fixed income, the risk of outliving income is non-existent. Therefore, the logical, prudent and responsible allocation is to create secure income with a good rate of return but primarily for the surviving spouse’s peace of mind, and leave remainder assets in the market for long-term growth for inheritance/legacy purposes.

Related question:

3a) It was asked if it made more sense to not use qualified funds to buy this income.

Given what I understand about the client’s situation, it seems that he has significant IRA funds and that RMD’s will get more significant as a % of assets each year as they age.

In my opinion, it would be advisable to create as much of the essential and discretionary income needed from qualified sources as possible, as the IRA must be taken at some point. Yes, there is taxable income, but if you continue to defer and grow qualified funds into your 80’s and 90’s, you run the risk of escalating into a higher tax bracket in the future simply due to higher RMD requirements, regardless of if you need the income or not.

As a related item, it would be wise to allocate all available non-qualified funds to tax-efficient deferred growth, where a step-up in basis may be anticipated by heirs. Again this would be planning for legacy purposes, and should only be done when there is more than enough fixed income to satisfy all current income and RMD needs.

Hopefully, this helps other advisors with their sales situations, and as always, feel free to call or email with any questions.

What our customers say about DCF Exchange

“I have worked with DCF a little over 2…”

I have worked with DCF a little over 2 years and have found Nathaniel and Ross the most knowledgeable owners I’ve worked with. In addition, their products are exceptional as I have sold them in IRAs, personal retirement, for Grandchildren, for college expenses and replacements for low yielding CD’s. I will continue to offer them to all clients that need a guaranteed Fixed Rate from Major Insurance Carriers.


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I’ve had many conversations with one of the firm’s Principals, Nathaniel Pulsifer , and he is extremely knowledgeable in every aspect of this asset class, and is always willing to customize his inventory to fit my clients’ needs, when possible. ALSO, the DCF illustration system is very easy to use for client presentation and to do what-if scenario modeling!

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I have purchased a few payment streams and am in the process of purchasing another one today. Nathaniel and his staff are great to work with. The transactions have been easy to finalize and the monthly payments have all been received on time, as expected. I have purchased payment streams from 3 other companies and, working with DCF is, by far, the best experience. Nathaniel and his staff really care about providing good customer service. They are responsive and work to earn your business. I have been very happy with my experience with DCF Exchange.

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This is the second transaction I did with Nathaniel Pulsifer at DCF and both went very smoothly. Clients are very happy. I try to incorporate these types of secondary annuities when appropriate. I would highly recommend Nathaniel Pulsifer and DCF to anyone who wants to incorporate these in a clients financial plan.

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I was most pleasantly surprised how quick and efficient my payment was processed. Very safe, efficient and accurate.

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Thank you for putting your platform together. Very nice work, easy for everyone to complete transactions. Almost as easy as writing annuities was 20 years ago –you probably weren’t around when the entire annuity application was 1 sheet of paper, front and back. You could send in that one piece of paper with a check and the deal was done!

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