Did you know that close to $4.2 Trillion in IRA and retirement account assets can be invested in much more than the standard run-of-the-mill investment choices offered at Big Box investment companies?
Ever since IRAs were first introduced in the 1970s, investors have been permitted to invest in a range of stock market alternatives including non-publicly traded assets such as real estate, notes and loans, private equity and tax liens. But not many financial advisors and even fewer investors are fully aware of the options.
Legendary investor Warren Buffett uses a simple rule for success: Invest in what you know and understand. Diversification offers risk protection. And what better way to diversify than to own something that you have experience with like real estate or a business?
You may find greater portfolio diversification and a return-on-investment that might be better geared to meet your individual goals when you consider investing in what you know from experience.
Any IRA including a traditional IRA, SEP, Roth IRA, Coverdell Education Savings Accounts and solo 401(k) can use a portion of IRA funds to acquire interests in these various stock market alternatives. Essentially, an investor determines the amount and source of the funds, transfers them to an independent third party custodian to hold and then instructs the custodian to release funds to acquire an investment in one or more alternatives. The custodian also holds all income for the investor derived from the investment.
The “rules of the road” can be complex but not impossible to navigate with proper guidance. Basically, an investor, spouse, lineal descendant or fiduciary advisor is a “prohibited person” and cannot “self-deal” or make personal use of the property. With few exceptions, a “prohibited person” cannot work for or take income from an IRA investment.
What can an investor do? Combine multiple IRAs from many individuals along with personal funds to buy property as co-tenants, for example.
It’s easier to list the things that a self-directed IRA cannot use as possible investments. These include 1.) collectibles, 2.) life insurance contracts, and 3.) stock in a Sub-Chapter “S” corporation. Most everything else is fair game.
If structured properly, the self-directed IRA can act as a lender to help facilitate a real estate transaction. Self-directed IRAs can invest as a member of an LLC or as a stockholder of a C-Corporation or even as a Limited Partner. This is one way to add a level of asset protection to an investment.
Harnessing the power of a self-directed IRA may offer an investor a whole new way to invest and get retirement dreams back on track.
For a guide to Self-Directed IRA Basics including the “rules of the road” for avoiding IRS trouble spots, please call 617-398-7494 or email steve@ClearViewWealthAdvisors.com for a free copy of the notes from his presentation made to Greater Lowell Landlord Association members on November 11, 2009.
About Steve Stanganelli, CFP ®
Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs. Steve is principal of Clear View Wealth Advisors, LLC, a fee-only Registered Investment Adviser located in Amesbury and Wilmington and can be reached at 617-398-7494.