Using Your 401k Or IRA To Buy Real Estate

ike most Americans your retirement savings have been tied to Wall Street your entire adult life.  For better or for worse, your ability to grow your retirement savings is directly tied the massive machine called the stock market.  For some there is a comfort in staying with the pack, for others the lack of control can be maddening.  When a desire to jump past the herd and take control of your retirement future becomes strong enough you start looking for alternatives. You ask yourself is there a better way?  For millions of Americans that search for a better way leads them to a Self-Directed IRA

To the surprise of some, in the eyes of the law all IRAs are Self-Directed.  Every IRA in America has the legal capacity to invest in and outside of Wall Street.  The only differences from IRA to IRA are the restrictions placed by the Trustee.  Most IRA Trustees are Banks, stock brokers, or otherwise tightly tied to the securities market and they know how to make money on accounts invested there.  So when someone refers to a Self-Directed IRA they are referring to an account in which the Trustee does not require all investments be made in the stock market.

 

Not all Self-Directed IRAs are the same however.  Each Trustee has the right to set policies as to which investments are acceptable within their accounts.  For the most part those policies are set on the basis of the Trustee’s ability to profit from the investment.  Investments that create a higher level of labor or documentation will be limited to Trustees with the size and infrastructure to handle these services and to charge larger fees accordingly.  Costs can be a genuine concern for account holders considering a Self-Directed IRA.

The best way to reduce the cost of your Self-Directed IRA is to set up an account that allows you to take on the responsibilities that Trustees either restrict via policy or charge very high fees to handle for you.  The law allows you to take direct signature, checkbook and management control via an arrangement known by most by the simple moniker of an IRA/LLC.  Simply put the IRA/LLC arrangement combines the significant tax protections of an IRA with the powerful legal protections of a Limited Liability Company/Corp. (LLC).

With an IRA/LLC your IRA owns an LLC.  You are named manager of the LLC and - like the CEO of a company - you are charged with running that LLC for the best benefit of the IRA shareholder.  You decide what, where, when and how to invest your IRA for the maximum opportunity for growth and minimum risk.  By taking on that responsibility you can reduce the cost of your IRA over 90% versus a typical Self-Directed IRA Trustee’s fees over the course of the lifetime of your account.

So once you have your Self Directed IRA open, what are the legally available investments?  An easier question to answer is “what investments are not available?”  The reason is that the law does not lay out the acceptable investments, only those that are prohibited.  For example the law that authorizes IRAs does not state that you can invest in the stock market.  Rather, because stock market investing is not prohibited it is therefore allowed.  The same is true for the “Big Six Self-Directed IRA Investments” we will explore below. 

But first, what you cannot invest your Self-Directed IRA into:

  • No investment that is deemed a collectible.  So no comic books, stamps, wine or even coins unless the metal is precious and meeting a very high purity standard.
  • No life insurance contracts of any sort are permitted, but the most common type of life insurance investment is known as a viaticals investment and that particular investment arrangement is amongst the prohibited life insurance investments.
  • No investment that transacts value with the IRA holder, the holder’s spouse, lineal ascendants, lineal descendants or the spouses of lineal descendants.  Such parties are known as “disqualified parties.”
  • No investment that violates the holder’s fiduciary responsibility to ensure that all investment decisions are made with the growth and protection of the IRA as the sole motivating factors.  The law requires you avoid conflicts of interests with the IRA’s best benefit.

 

 

 

So that is what you cannot do with your Self-Directed IRA.  Everything else is permitted.  Everything is a broad topic and as such we will look at the 6 most popular investments for Self-Directed IRA accounts.  There are millions of IRAs already taking advantage of these investments.

  • Number one with a bullet is real estate.  Typically residential rental real estate, but many investors will buy land to hold or commercial properties for rental.  With an IRA/LLC you will make an offer on the property in the name of the LLC your IRA owns, close in the name of the LLC, fund all transaction components with the LLC and receive all generated income back into the LLC.  Nearly all of our clients have prior experience purchasing property in their life.  For most people that property is the best investment they have ever made.  For nearly everyone it is a familiar investment. 
  • Loans are an incredibly popular investment category for Self-Directed IRA holders.  By comparison to some of the other investments that are made with Self-Directed IRA, loans can be amongst the lowest labor.  For many investors the idea of passive income can be very attractive.  These loans can come in the form of long term loans like first or second mortgages, or shorter term loans to individuals or businesses.  Loans can be secured or unsecured and the only obligation that the IRA holder has is to ensure that the IRA is getting a fair rate for its risk.  Unsecured loans are generally at higher rates than secured loans.
  • Tax liens are an investment category that have gotten a lot of attention in the past decade or so.  Some of the hype is little more than that – hype.  Nonetheless tax liens are in fact an investment worthy of attention.  In about 25 states the law permits counties that have delinquent property taxes owed to them to auction off that debt in order to secure the revenue that the county needs for its budget.  As an investor you can bid to pay the county the amount owned by the delinquent property owner in exchange for a cut of the penalties that will be paid when the property owner either gets caught up or when the property is sold.  Because the county’s tax lien against the property supersedes the banks’ liens for any mortgages, the repayment of your money plus a return on investment in the form of a piece of the penalty is virtually assured even if it requires the county to exercise its foreclosure rights.  In fact, to protect you - the investor – in tax lien states the county is obligated to exercise its foreclosure rights within a specific period defined by law, typically a period of 2-4 years. With penalties as high as 25% in many states the potential rewards for a tax lien investor can be significant.
  • Private Stock investments are very popular with the Self-Directed IRA crowd. It is important to recall the prohibition on investing with disqualified parties when making a stock investment, but assuming that pit fall is avoided, if you can get in on the ground floor with a company that is poised for growth the returns can be attractive.  With all investments performing proper due diligence is important and never more so than with a private stock offering, but with stories of secretaries, artists and other well positioned folks becoming millionaires when private companies grow huge, there will always be a huge demand for Self-Directed Investors to establish accounts that permit them the freedom to make such decisions.
  • Precious metals are always popular with Self-Directed IRA investors.  Silver, Gold, Platinum and Palladium are the precious metals that a Self-Directed IRA may invest to purchase.  Gold must be .995% pure, Silver .999 pure and Platinum and Palladium must each be .9995% pure.  Essentially all marketed bullion is of sufficient purity (the responsibility to verify purity is the account holder’s).  Some coins and other forms of metal may also meet purity obligations.  One hotly contested area of law in the Self-Directed IRA world is whether or not all forms of precious metal purchased by a Self-Directed IRA must be warehoused by an IRA approved storage facility/custodian.  Certainly non-bullion precious metal investments must be stored in that manner. However, the law leaves some room for debate on the topic when it comes to bullion and a category that has been named but not yet defined which is “IRS approved coins.”  When investing in precious metals it is wise to either have your IRA spring for the storage fee, or seek the legal opinion of a lawyer who will put their opinion in writing before electing to sidestep IRS approved custodian storage.
  • Our final investment category of focus is foreign assets. Foreign asset investments usually fall in the categories listed above as well, but because many IRA Trustees including those that self-label as Self-Directed IRA Trustees do not permit foreign investments because of documentary and asset valuation concerns this is an investment category that deserves its own section.  It may be desirable to use an IRA/LLC when considering a foreign investment because of the Trustee restrictions that abound.  Investors who are attracted to foreign investments may be attracted to the specific value of certain foreign assets, be they stocks, properties or otherwise. In other cases, it may be that the reason for foreign investing is because investors are hedging their bets against a US economic collapse.  Should you be concerned that the US has over-extended itself with foreign debts and trade imbalances, a foreign investment may be the exact investment to deliver the security that you need for your retirement.

Self-Directed investors come from a wide variety of backgrounds but all share a common trait: the desire to have greater control and fewer restrictions over their investments than are permitted by typical IRA trustees.  The model Self-Directed IRA for maximum control and fewest restrictions is the IRA/LLC.  At Cureit Financial we are dedicated to two things: curing the unnecessarily high costs of Self-Directed IRAs and finding a cure for cancer.  Call or email today to set up for consultation with CureIt Financial. Learn how we provide the lowest costs and best support in the Self-Directed IRA Field while contributing 10% of profits to Cancer-Care non-Profit ICAN.

Contact me at leigh.young@cbgreatlakes.com

Leigh Young

Leigh Young

Realtor - Veteran Specialist
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