Did you know that you can invest in real estate, mortgages, leases, and LLC’s and many other investments all in your IRA? Your Self Directed IRA can even lend and borrow money. It has proven to be a powerful vehicle to build investment wealth and limit risk; all while reducing or eliminating future tax considerations and thus being truly DIVERSIFIED. How is this possible? Self-Direction.
We have seen a tremendous increase in the desire for Self Directed IRA’s by many in the real estate profession and by those that just want more control over their retirement accounts. This has been due in part to recent economic circumstances that leave the individual investor with their hands tied in their current retirement accounts. The most common being a very limited choice of investments offered by your company plans. Plans that allow a vast choice of securities to choose from may appear to allow diversity, but you are still locked into the stock market or very low return CD’s. Not to mention the possibility of an Enron situation where your company could loose your entire life savings. With Self Direction, you can be truly diversified in your investments with the vast number of increased choices and retain complete control of where your funds are being invested.
Since 1975 Self-Directed plans have been available, although relatively few IRA holders are aware of this possibility. Recently, the IRS has increased the contribution limits to unprecedented levels for most plans. For example, business owners without common law employees may qualify for the Individual/Solo (k) and thus defer up to 100% of their first $12,000 and up to $42,000 annually, all completely Self Directed.
The opportunities outside the “standard” investments are significant. You may buy, sell or exchange investment property. You can partner with friends, relatives and business associates to purchase property, and then lease it to anyone that is not a disqualified person. You can roll property from one plan to another – or even take property from your plan as a distribution.
We have seen clients form investment groups, combining IRA and non-IRA funds to purchase and hold property, rehab and turn properties or simply lend out the funds in the form of notes and mortgages. In addition to these ideas, an IRA may also invest in partnerships, LLC’s, private stock offerings, loans (both secured and unsecured), tax lien certificates, purchase options, joint ventures and other investments.
Just think of the many people that pulled money out of the market because of fear, or their concern of needing cash. Or think of those clients who have a lost a fortune in their 401(k) plans. Had some part of their retirement portfolio been invested in Real Estate or other non-traditional investments, and even better, had that investment been purchased in a Self-Directed IRA, your accounts would continue to grow through these investments tax deferred or tax free.
What if I do not have a lot of money in my retirement account? No need for major cash. Even with small dollars in your IRA or Qualified Plan, you have an opportunity to take advantage of wealth accumulation tax-deferred or tax-free. Options, leases, tax liens, small private mortgage notes are just a few of the vehicles one could acquire with smaller amounts, versus one property costing tens of thousands or more. You can personally partner with your plan or IRA to make any investment. So if you have a small amount in your IRA and need much more for an acquisition of property, you and anyone else you know, including companies you or anyone else owns can put up the balance you need to complete the transaction.
There are three things you should know when you Self-Direct your retirement plan:
- Which retirement plans are best
- Traditional IRA, Roth IRA, SEP, Simple or Individual(k)
- What types of investments you want to make within the plan
Understand the IRS rules of self-dealing and prohibited transactions
The IRS rules regarding prohibited transactions are not too complex, yet one should consult a tax advisor for specific advice. Disqualified people include your immediate family (except siblings) employers (in a qualified plan), certain partners, fiduciaries and other categories spelled out in IRS code. IRA owners may not borrow money from their IRA, sell property to it, and receive unreasonable compensation for managing it. However, the IRA may lend money and borrow money via non recourse loans. In short, the IRA holder, regardless of being self directed, may not receive direct benefit from the IRA, as this would be considered a dispersement and taxed as such.
So if you are confident in your abilities to make your own investment decisions, have the desire to reduce or eliminate the tax consequences on your gains, and want to Un Lock your retirement account and thus have complete control over your investments and your economic future, Self-Direction may prove to be a wise choice. By being an informed investor, knowing what the rules and regulations are regarding your investment strategy, and how this relates to your financial future, allows investor the ability to know what they are getting into, before they buy. Start out 2005 by being informed.