February 2011

Take Control Of Your IRA: Become Truly Self-Directed

Author: Robert Star | Photographer: Photography by Anne

You have worked hard your entire life, saved money and contributed to your retirement accounts. Now you are retired and are drawing on the income and possibly principal from your investments. You want to take charge of your investments but only have access to stocks bonds and CDs. Are you disappointed with the returns, or are you worried about capital preservation? Have you suffered losses in the value of your retirement accounts? Do you need to rollover a 401K or other qualified plan? Are you seeking a safer investment alternative than the unpredictable and volatile stock market for your retirement funds? You may want to consider a true self-directed IRA (SDIRA).

Banks and brokerage firms are the most common IRA account custodians. Although they advertise SDIRAs, they limit your investment choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments. It is in their own interest to do so, because they make additional fees from the sale of these types of investments. They will generally offer only their platform of products and third-party funds as investments to their SDIRA account holders, which severely limits the investment choices.

A true SDIRA can be created by funds transferred from a 401k, IRA, Sep IRA, Roth IRA, or a 403b to a true SDIRA custodian. In fact, all custodians follow the same rules and guidelines. Under the law, all custodians can allow you to invest your IRA in the same types of investments (stocks, bonds, real estate, notes, tax liens, etc.) which have been allowed by the IRS for many years. There are only a handful of specialized custodians, called “self-directing,” who allow you to diversify into these other investments. A truly SDIRA allows you to make the decisions.

You may be asking why this is the first time you are hearing about this option for your IRA accounts. This is simple: Your bank or stock broker does not offer this option. Almost 97 percent of all IRAs are in the control of custodians/brokers who decide what investments are appropriate for your retirement accounts. Since stocks and bonds are really the only investment choice banks and brokerage firms offer, the majority of individuals are in long-only market portfolios. This strategy may only benefit the bank or brokerage firm as they want to keep your assets in house to generate fees. By now, most individuals who have experienced the NASDAQ crash in 2001 and the 2008 stock market crash should know that stock/bond market portfolios that are structured to finance your retirement with the hope that the markets will always go up may result in you outliving your retirement funds.

Perhaps you would be better suited to diversify your holdings and put some funds in investments that you have both knowledge and control over. Do you have expertise in remodeling homes? Do you have a business you would like to purchase? Do you have opportunities to finance a mortgage or business loan or be a partner in the project? Do you like to day trade or do you have panache for trading options?

Investments in your SDIRA include the following options: closely-held stocks, private limited partnerships, limited liability companies, real estate including tenants in common, debt financed or leverage real estate, tax lien certificates, promissory notes or corporate debt offerings, trust deeds, mortgages, managed commodity trading accounts, mutual funds in any mutual fund family, stocks and bonds in a brokerage account, annuities, public limited partnerships, direct participation programs , REITs, treasuries, bank CDs, U.S. Treasury coins or bullion.

Now there are some limitations to the SDIRA. Your IRA is prohibited from transactions that benefit you personally and not the IRA itself, which means there can be no “self-dealing” transactions. Unfortunately, you are prohibited from purchasing real estate you already own. Here are some examples of a prohibited transaction:

•Your IRA cannot purchase a home from you or your immediate family.

•Your IRA cannot purchase a vacation home for your use when you go on vacation.

•You cannot compensate yourself for work done on the property in the IRA.

Internal Revenue Code 4975 explains the rules on prohibited transactions. Prohibited investments include: artwork, antiques, gems, metals, rugs, life insurance contracts, stamps and other personal property.

One of the most common reasons for utilizing the SDIRA is to invest in real estate. You can purchase a fixer-upper, a beach home, or a foreclosure. You would have the ability to manage the property, collect the rent and pay the bills. Of course the rent would go back into your IRA and would be tax-free income. If you wish to invest in real estate but would prefer to be passive in the management, there are many alternatives. You could invest in non-traded real estate investment trusts (REITs) or limited partnerships, which have specific investment niches. Some examples would include: self-storage facilities, assisted living facilities, apartment buildings and large retail centers.

The bottom line is that most retirees are very capable of managing their own assets and do not like the market exposure. The SDIRA is a great alternative and will allow you to truly take control of your retirement assets.

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