Yes, You Can Buy Investment Property Using a Self-Directed IRA

Your stock broker will tell you that you can’t because he wants to keep your money from leaving ‘his’ portfolio! Just think, wouldn’t it be nice to take your dog for a walk past your retirement account (an actual tangible asset located right in your neighborhood)? You control it, the money flows in and out of your IRA account (so you don’t get taxed) and the money you make can even grow tax -free if you are using a Roth IRA or the new Solo-K (these can be created, funded and used by all private contractors).

How can I do this you say? Check out the link I have attached that can answer all of your questions:

self directed ira – 50 questions answered

 

Use your Self Directed-IRA for Real Estate Investing

by Patrick W. Rice, IRA Resource Associates, Inc.

Does your IRA grow at a rate that is less than inflation? Are you dissatisfied with its growth? Maybe the time has come for your impatience to turn to action. Time for you to plan and self-direct your own destiny.

Individual Retirement Arrangements (IRAs) are included in the Employee Retirement Income Security Act (ERISA) of 1974. The intent of the Act is to encourage individuals to establish tax-sheltered retirement accounts for themselves and/or their non-employed spouses. Self-direction is a meaningful part of the Act, yet, how many of us really self-direct?

The popularity of the IRA is overwhelming; millions of taxpayers now have IRAs. The test though, is not only to set up a retirement plan, but to make it grow to the extent that it substantially enhances your retirement years. Many plans have failed this test through simple neglect.

Statistics show that Americans spend only 10 hours in their lifetimes preparing for retirement and that 96 percent of Americans retire flat broke. The purpose of the IRA is to help those numbers, but most IRAs are neglected and left to languish at the direction of others. The taxpayer dutifully makes his annual $2,000 tax deductible contribution to his IRA, leaves it to an administrator to invest, and complains at the end of the year about the poor return. And then does the same thing the next year.

IRAs established with banks are traditionally limited to investing in funds that are subscribed to by that bank. IRAs set up with brokerage houses are normally limited to investing in stocks, mutual funds, etc., that are marketed by that brokerage house. Don’t confuse this with self-direction.

ERISA put a limit on investing with IRAs and it is not, “invest only in mutual funds.” Generally speaking, one may not invest in a life insurance policy or collectibles (paintings, oriental rugs, etc.). That’s it. Everything else is fair game.

What does that leave? Real estate (bare land, subdivision properties, improved properties, leases, free and clear and leveraged properties), trust deeds, unsecured notes, annuities, treasuries, stocks, real estate investment trusts, money market funds, limited partnerships (both private and public), bonds, mutual funds, and certificates of deposit to name a few.

You can take control of your retirement and direct your IRA to the level of risk and return that fits your comfort zone and grow at a rate that will cause it to be self sustaining in your retirement years. Or, you can continue to let it grow at the rate it is now and hope that Social Security or some other source will help when the time comes.

Who has not seen the real estate investment that you could have bought for pennies “back then” and can’t afford to buy now? Who can be satisfied with their mutual fund breaking even or being slightly profitable when trust deeds or real estate contracts could have been purchased with a 15 to 20 percent yield?

Outline a plan

First, determine the types of investments that you would make if you were in control of your IRA funds, keeping in mind the frequency with which you would make them. Planning is a very important step to lowered costs and increased returns , and you will need this information when you compare administrators.

Research administrators

Second, contact several self-directed IRA administrators and compare flexibility, durability, ability and cost. Since administrators establish different in-house rules and fee schedules, comparison is a must. I recently conducted a survey of six administrators using the same investment plan, which included the purchase of real estate, a trust deed, limited partnership interest, and mutual funds, only to find that they varied in the fees they charge by 477 percent.

Establish an IRA

Third, establish an IRA with the self-directed administrator of you choice. This can be done in several ways. You can open a new IRA and deposit your annual $2,000 contribution. If you already have an IRA, you can establish a new self-directed IRA by simply transferring a portion of the funds or assets from your old one. A third way is to use a rollover from a qualified plan to establish the self-directed IRA. There is no limit to the number of IRAs one may have.

Purchase the property

Fourth, purchase the real estate of your choice, always using the counsel of your attorney, accountant and investment advisor. Suppose you wanted to purchase a 20-acre tract in Clark County and the purchase price was $50,000. To initiate the purchase, a direction letter is sent to the administrator. Assume you keep your excess IRA funds in a money market account with Broker Joe. You direct your administrator to sell $50,000 from Broker Joe’s account and buy the lot for $50,000.

Self-direction of IRA money into real estate can be the perfect match. Typically, IRA funds are captive for a considerable length of time and typically, real estate is considered a not-so-liquid asset. A real benefit of the IRA is the nontaxable event that occurs when IRA assets increase in value, and a real benefit of real estate is the sometimes dramatic jump the values can take in a short period of time. The IRA is your security for the future and what better security than owning a piece of the rock?

Self-directing takes some coordination and planning and it can be very rewarding. Is it really this simple? Almost. Compare the return you received over the last couple of years on your IRA to the 15 to 20 percent annual return properties in Clark County have appreciated over the same period, and you can easily decide.

Real estate investment with IRA self-direction is a viable productive alternative to mutual funds and brokerage accounts. After all, which do you really know the most about, the lot down the street or the NYSE? Has the time come for your impatience to turn to action? Is it time for you to plan and self-direct your own destiny? The choice really is yours.

Copyright © by Patrick W. Rice

Click here to read answers to investors’ top 50 questions, by The Pensco Trust Company

Click here to check out The International Capital Group, they offer property investments all over the country for the smaller investor – You have to start somewhere!

 

Great New Wealth Building Tool – The SOLO K

The PENSCO Trust Solo(k) is now available! Click here for information and to open a Solo(k) plan. Click here to access our Webinar on this exciting new product! January 3, 2006 was the first day that an individual saver and investor could legally make a contribution to the new Solo Roth 401(k) that was enacted by the Economic Growth and Tax Relief Act of 2001. Sounds pretty dry, doesn’t it? Guess again. The Solo Roth 401(k) beats the Roth IRA five times over. Unlike the previous standard for phenomenal opportunity for retirement savings (the Roth IRA), the new Solo Roth 401(k) will allow an individual or married couple who own their own business, to sock away up to $98,000 per year for retirement. Of this amount, $40,000 can be composed of after-tax Roth elective contributions (provided the individual, and their spouse, if applicable) are both over 50. So now, for the first time in history, a retirement saver can put up to $20,000 annually into a retirement plan that can grow tax-free for their lifetime! But it gets better! Not only is this amount five times greater than what can still be put into a Roth IRA ($4,000 limit, plus a $500 catch up if older than 50), but there is no cap on the amount of income an individual can earn before he or she become ineligible to contribute. So, while one is restricted from contributing to a Roth IRA when he or she earns more than $110,000 ($160,000, if married filing jointly), no such restriction exists for the elective Solo Roth contributions! Are we getting your attention now? But it gets even better!! With the Solo Roth 401(k), you can invest in two types of investments (“S” corporation stock and life insurance) that are restricted for Roth or traditional IRAs. Furthermore, unlike what you cannot do with your IRA, you can personally borrow up to $50,000 or 50% (whichever ever is less) from your Solo Roth 401(k). Have you had enough? Or do you want to have “your cake and eat it too?” Well, the home run in the bottom of the ninth with two outs, is this: When you invest in real estate (with a few obscure caveats), and use leverage (e.g., a non-recourse loan from a bank in the form of a mortgage on the property) using a Solo 401(k) or Solo Roth 401k, you are not subject to tax on the income or capital gains produced by the portion of the investment that is debt financed. With traditional IRAs and Roth IRAs any income or capital gains on debt-financed property is taxed at the trust tax rate (generally 35%) to the extent that debt supports the generation of the income. This is a very important benefit to real estate investors who are in the position to be eligible to form a Solo-401(k). Unlike investing outside of a retirement plan, where taxes apply to net income and any gains generated by debt financing, unless they are sheltered through a 1031 exchange, 401(k) plans are exempt. The secondary benefit is the avoidance of having to go through the 1031 process and its expense. So, for example, you could literally buy a house in the morning with $100 down and flip the purchase contract in the afternoon, without paying any tax on the gains. The gains would be tax-deferred thereafter, if they had been funded by the tax deferred components of the Solo 401(k), or tax-free if funded by the elective Roth component. Many of you who have been successful with IRA real estate investments should certainly appreciate the value of this attribute of the Solo plans. Of course, you can also invest your existing Roth and traditional IRAs, including SEP IRAs, right along with your new Solo 401(k) into the same or multiple properties. In summary, the new PENSCO Trust Solo 401(k) plan will allow our clients to experience all of the benefits described above.