The topic of self directed IRA accounts seems to be shrouded in secrecy to the average investor, an unfortunate state of affairs given the incredible profit potential inherent in this method of investing. Did you even know you can open a self directed IRA? Well, you can! Furthermore, you probably should. While we can’t make you a retirement expert in a single blog post, hopefully the discussion will spur you to seek out more information and pass it along to your clients. They’ll thank you for it later because this stuff can change your financial life.

Q: Is it even legal to put assets besides stocks in an IRA?
A: The short answer – absolutely! A slightly longer answer is this. The Employee Retirement Income Security Act of 1974 established guidelines for both traditional and self directed IRAs. Instead of creating a lengthy list of what sorts of investments are allowed, Congress instead singled out two particular assets that are excluded, namely life insurance contracts and collectibles such as art, jewelry, or baseballs. Other than that, consider the field wide open.

Q: Why am I just now hearing about self directed IRAs?
A: The truth behind the secrecy regarding self direction of retirement assets is easy to understand once you think about it. The retirement industry is driven in large part by massive corporations that create a significant chunk of income through transaction fees. More transactions equals more profits for them. Great for their bottom line. Not so good for you. This is why large investment brokerages spend millions in advertising, touting the benefits of their business model – DIRECTED IRA accounts – in hopes that the true benefits of guiding your own destiny gets lost in the hubbub.

Q: How many people actually use self directed IRA accounts?
A: The number is growing by leaps and bounds because the retirement industry can’t suppress the truth forever. Wall Street instability is helping push people to seek other investment choices. Right now, about 4% of retirement account holders own non-traditional assets, but we seem to be at a tipping point. Analysts expect to see about $2 trillion entering this market over the next few years. The reason? Once again, people love the idea of controlling their own destiny.

Q: What’s the best non-traditional asset to put in an IRA?
A: Ask one hundred different people this question and you’re likely to get just as many different answers. For our money, though, the choice is real estate, hands down. History has shown that income property ownership is the all time best investment. To be able to add it to a retirement account on a tax deferred basis is icing on the cake. And don’t worry if your friend, attorney, lawyer, banker, or mother-in-law claims that real estate held in an IRA is illegal. While some types of IRAs don’t allow this, a self directed IRA, commonly called a real estate IRA, is expressly intended for this purpose.

Q: How do you open a self directed IRA?
A: The process is similar to opening a traditional Individual Retirement Account. Many banks and other types of financial companies offer self directed IRA services. They fill out the paperwork, keep the books, and disburse profits, but may NOT offer financial advice. Expect various annual fees and services to add up to around $300 to $500. Since the IRA mandates how real estate and self directed IRAs must be administered, there’s really no way around these expenses. Just keep in mind what you’re gaining – the ability to invest in non-traditional assets on a tax deferred basis. This could be worth hundreds of thousands, maybe even millions of dollars, to your portfolio’s net worth when you retire.

One thing we should be perfectly clear on when it comes to investing in real estate inside an IRA. You cannot put a property into a self directed IRA which you intend to use personally. Your dear Uncle Sam is quite serious about this point. Say you divert $100,000 from a traditional IRA to purchase a piece of property you plan on leasing to hunters. If the IRS gets wind you’re using the land for your own recreation, they’ll slap you with a “self dealing” penalty and immediately consider ALL the funds in your traditional IRA to have been distributed, which, if you’re younger than 59 ½ years old, triggers income tax and early withdrawal penalties. Trust us, no duck in the world is worth that price.

The bottom line is this. When it comes to investing in an IRA, don’t overlook the fact that you might be able to create much more wealth in the long term by opening a self directed retirement account.

The AIPIS Team

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