You Can Invest in Alternative Assets, Such as Real Estate, with an IRA
Author: Dan Cordoba, Principal, Asset Exchange Strategies, LLC
You can have greater control over where your retirement dollars are invested.
It is a well-known fact that investors have become increasingly disappointed with the uncertainty of the stock market and that many would prefer to have more choice in, and control over, where they invest. Many have resigned to work longer before retirement and feel restricted by the types of investments they have traditionally been offered by financial planners, which frequently operate by making a commission on stocks and bonds or obtaining a fee for advisory/management services. Increasingly, investors are learning that IRS regulations enable them to invest in a host of other alternative options, including real estate, mineral rights, gold coins, businesses, private stock and notes, gold coins, tax liens, hedge funds, mutual funds, etc., providing greater choices and options for growth.
You don’t have to be rich or have cash in hand to invest.
There are all types of investments that you can invest in with your IRA—private stock, REITs, tax liens, gold coins, etc. You are not limited to just real estate or other high ticket purchases. And, for people that want to buy real estate with their IRA, but may not have enough money in their account, they can invest in a property with others, supplement it with a loan (under the advisement of a professional to set it up) or purchase REITs.
You don’t have to have all of the money in your IRA required for the purchase.
You can put a small down payment on the property through your IRA and take out the rest in a loan. You can get a loan for the balance with a purchasing entity. The partnership agreement in the purchasing entity also details who is responsible for events like taxes, maintenance, etc. If you are interested in doing this, however, it is best to work with a firm that has attorneys on staff that can help you to set up the loan properly.
You stand to gain tax benefits from investing with your IRA.
Purchasing investments with an IRA provides a number of favorable tax benefits on the appreciation and cash flow of the investment, enabling you to further benefit from gains over using other monies. With a Roth IRA, the investor is using after-tax money. The Roth grows tax-free and is not taxed upon distribution. A Roth IRA has no minimum distribution, so it is up to the investor when (after 59 ½) and how much he or she takes as a distribution. The Roth IRA may also be passed onto heirs without taxation. A traditional IRA can be invested before tax, and is taxed at the time of distribution.
What if the real estate market/my asset goes down?
As with stocks and bonds, this is a risk that all investors take. However, by diversifying your portfolio with alternative and traditional investments, you are better safeguarding monies for retirement. Also, in terms of real estate, most investors hold property for a period of time, giving the market time to correct itself, versus buying and flipping. Finally, you are not limited to real estate, and have a host of other options—for example, notes or private mortgages. These assets offer an investor the opportunity to enter the real estate market while providing greater liquidity.
Just as with the stock market, holding non-traditional assets in a down market may be advantageous to the investor if he/she is purchasing the asset at a favorable price. If it happens that the stock market peaks and the real estate market is in an investment favorable mode, then the investor may chose to go that route. However, he or she must always ensure that the IRA is positioned in a truly self-directed vehicle by working with a professional.
Why can’t I do this with my current advisory firm?
There are very few financial firms equipped to handle the necessary documentation and that possess the expertise required to set up and manage non-traditional assets. It should be kept in mind that Wall Street firms are making a profit by leveraging IRA holders’ assets. If these assets are in a cumbersome package for them to handle, they may not disclose these opportunities and/or will not accommodate the client’s desires.
It is less complicated than most people think.
Investing in alternative investments does not need to be more complicated than investing in stocks and bonds. In fact, it can be considerably more user friendly to the IRA holder. For example, if a person understands how to buy used vehicles at auction and turn them for a profit, the investing process may have far less risk for that individual than the purchase of a mutual fund of which the client has no understanding. It is clear by the reforms that have been placed by the SEC in recent years that the average investor understands very little about the securities-related investment choices that are made for his/her retirement, and many would welcome the opportunity to place a portion of those savings into something they better understand.
Having complete control of assets is essential.
There are four essential elements of a self-directed IRA that an investor should have available to them. These four elements are only found through the use of an IRA owning a Limited Liability Company (LLC) with the IRA holder positioned as an outside manager. These specialized tools are provided by self-directed IRA advisors and redrafted to be compliant with IRS regulations. The four essential elements of these special instruments are as follows:
-Ability to have checkbook control of the IRA account
-Litigation protection of the IRA assets
-Ability to make their own investment decisions
-Ability to enjoy the lowest custodial costs in the industry
A good self-directed IRA advisor will provide advisory support and education, sitting down with the IRA holder to first get an understanding of their individual objectives and informing the them about his/her alternatives.
You need checkbook control.
Having greater control over one’s investment choices requires the tools to manage their growth and cut losses at the appropriate time. A self-directed IRA advisor will provide clients with these specific tools, including the ability to have checkbook control, or to write checks for one’s own investments with the IRA, by setting up an IRA LLC.
Checkbook control of assets that are managed by the IRA holder is essential for individuals who need cash management. For example, the person who purchases tax liens must be able to attend an auction and have the ability to immediately write a check for the purchase price, and the person that is renovating a rental must be able to handle issues without costly intervention and delays caused by custodians.
Your assets can be protected.
Another essential benefit of a self-directed IRA is that assets can be protected from creditors and litigation through increased overall asset protection of an IRA LLC. Currently, IRAs are regulated by states and in some states, the IRA may be vulnerable to litigation. In the case of judgment, the judge could make the decision on how much is needed by the IRA holder to retire. Investors should look for an advisor that is knowledgeable in this process.
Ability to make investment decisions.
In many cases time is of the essence to make an investment. Also an investor may want to make investments not supported by a self-directed IRA custodian. With the employment of an IRA LLC the IRA holder has complete control of the timing and direction of the investment.
Administration costs are low.
If a self-directed IRA holder has their assets with a self-directed IRA custodian and does not have an IRA LLC, he or she is subject to transaction and holding fees. These fees go away with an IRA LLC; the typical annual costs, from a company like Asset Exchange Strategies, are around $190.
This is not a new thing.
Once ERISA was enacted in 1974, the securities markets were the first to respond to the funding of the IRA and 401(k) market. At the time, banks and brokerage houses controlled the creation of the “Plan Document” (which is the governing document that determines what assets can be invested in the retirement plan), so stocks, bonds and mutual funds were the only permissible assets in the IRA or 401k.
It was the crash of 2000 and the advent of the Internet that gave rise to the self-directed IRA market and created fertile ground for the custodian of self-directed IRA and other retirement plans. With the passing of the market correction of 2000, September 11th and recent corporate abuses, investors were actively seeking alternative investment vehicles for their retirement capital. At the same time, the Fed had reduced interest rates to their lowest position in decades, thereby fueling the real estate market. With the real estate market prospering, many retirement holders wanted to take advantage of equity gains in that market. This economic episode, in conjunction with the rise of the Internet-driven Information Age and investor disgust, initiated the migration of non-traditional assets into retirement accounts.
It is not expensive.
Asset Exchange Strategies charges $190 per year to hold the asset and a one-time cost ranging from $1,900 to $3,000 for advisory and educational services. The costs can be paid for with your IRA funds or out of pocket if you prefer.
You have more options than some firms will tell you.
Many self-directed custodial firms, that enable investors to purchase alternative investments with their IRAs, set forth guidelines on how transactions can be set up and managed, above and beyond what is legally permissible, based on how they prefer to work (some, for instance, prefer not to deal with the purchase of real estate overseas). Other firms are more flexible, giving investors the tools they need in advance and offering them the ability to structure their own deals without custodial micro-management.
It is important to work with a qualified self-directed IRA advisor.
There are some restrictions you should know about. For example, if you purchase real estate with your IRA, it cannot be used for your own personal use, such as a vacation home or an office for your business. An advisor can help you effectively work within these legal considerations.
An example of when an advisor is useful is demonstrated by application of the IRS code. For example, the IRS code does not prohibit the purchase of foreign property, yet most custodians do not allow such investments. IRA trustees are permitted to impose additional restrictions on investments. For example, many IRA trustees do not permit IRA owners to invest IRA funds in real estate because of administrative burdens. IRA law does not prohibit investing in real estate, but trustees are not required to offer real estate as an option. The IRS specifies that the custodian has the right to limit investments, one reason why there is sometimes conflicting information about acceptable assets and methodology.
A qualified IRA advisor can help you to get the most from your investments with an IRA LLC.
An IRA LLC is a specialized vehicle that is compliant to IRS regulations and also offers substantial control and flexibility to the IRA holder. The IRA LLC offers four benefits that cannot be obtained with self-directed IRA custodians:
-Checkbook control of the IRA assets
-Investment decisions made solely by the IRA holder
-Litigation protection for the retirement account
-Flat fee structure for custodial costs
Asset Exchange and Captuity Investments is best qualified to help you.
-Advising investors on non-traditional investments since 2000
-This past year has moved more than $70,000,000 from the stock market into self-directed accounts; this activity has caused internal growth and caused the need for a larger office for expansion
-Sole focus on self-directly IRAs
-Provide a consortium of financial, tax and real estate professionals
-Have worked with hundreds investors
-Founder Daniel Cordoba is a Certified Estate Advisor through National Association Financial and Estate Planning
-Provide advice and educate investors to help them make the best decisions for their individual situations, unlike other firms which simply act as retirement facilitators for the transaction
-Knowledgeable staff and direct access to tax attorneys
-Low fees
-Personalized service
-Straightforward, informative conversation with no hard sell
To learn more about the Self Directed IRA LLC, visit Captuity.com
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