by Tom W. Anderson
With accounting scandals, weak earnings and an
uncertain economy, more and more IRA owners are seeking
alternative investments. There is in excess of $4
Trillion in IRA funds in the United States today. Most
is invested in the more conventional investment types,
such as CDs, mutual funds, stocks and bonds. However,
these funds are also available to be invested in
IRS-permitted non-traditional assets, including:
mortgages, private notes, private stock, start up
businesses, shares in LLCs, Limited Partnerships,
raw land, commercial buildings, vacation rentals,
multifamily homes, just to name a few. The good news for
investors considering this strategy is that it can be done
without cashing in their IRA account, and can be done
penalty-free, tax-deferred, and sometimes even tax-free!
A long-standing Internal Revenue Service ruling (see IRS
publication 590 for complete regulations) allows all
Americans to invest their IRA funds, or 401(k) funds rolled
into an Self-Directed IRA, in a wide variety of non-
traditional investment types. Rolling current retirement
funds from an existing IRA for 401(k) account into a Self-
Directed IRA to do this type of investing is penalty-free.
Additionally, the taxes due on the growth of the
investments are deferred until distribution begins at
retirement. If the Self-Directed Roth IRA is involved, the
principal and earnings are tax-free when distributed at
The process itself is simple: an individual opens a Self-
Directed IRA account with a specialized custodian,
transfers his current IRA funds to the new Self-Directed
account, and finally, directs the custodian to invest the
funds into the asset he specifies. After an administrative
review to determine if the asset can be administered, the
custodian forwards the funds to purchase the asset, and the
asset comes into the ownership of the individual~s IRA
The timing is excellent now to take advantage of this
little-known retirement planning tool, and the
possibilities opened up by it. Daily headlines in the Wall
Street Journal discuss the damage done to retirement funds
by the low return of stocks, bonds, and Bank CD rates and
the uncertainty of the current and future economy. As a
result, more and more Americans are pulling out of
traditional investments and moving toward non-traditional
assets as a primary or ancillary investment for their IRAs
due to their potential for a higher return.
For example, over the past 13 years, home values have
increased approximately 4% annually. This is an increase
of 57.5% between 1990-2002. Since the beginning of the
year, $2.41 billion has flowed into real-estate mutual
funds, according to AMG Data Services, compared with only
$307 million in the same period a year ago. Also, shares
in real-estate investment trusts have climbed 11% this
year, while the S&P; stock index is down more than 17%.
This isn~t the first time that real estate has climbed
while the stock market declined. Back in the 70~s, which
was the last time the S&P; 500 stock index posted two losing
years, real-estate values soared along with inflation.
Many people saw their home values double or even triple.
This is only one of many lucrative non-traditional
investments available. Given today~s market conditions and
predictions, the time couldn~t be better to consider
alternative investments in retirement planning.
If it~s so easy and potentially lucrative, why aren~t the
vast majority of Americans and their financial advisors
aware of the unique use of Self-Directed IRAs? The reason
is due primarily to the lack of knowledge on the subject as
there are, literally, only a handful of financial service
firms in the nation that are willing and capable to provide
the required custodial and administrative services.
Typically, institutions that are licensed to administer IRA
accounts, such as banks, credit unions, trust companies or
savings and loan institutions, are not willing to undertake
the challenging research, extensive paperwork, and IRS-
reporting that is required in order to administer non-
traditional assets within IRA accounts.
Others, however, such as broker/dealers and mutual fund
companies, have to be separately licensed by the Employee
Plans Division of the IRS (Treasury Department) and
restrict their IRA clients to a limited set of
investments. They do so for several reasons. First, if
they offer investment advice, sell investment product, or
have discretion over the management of investment assets,
they will be concerned about the liability associated with
the purchase and/or administration of any non-traditional
investment. Second, their specific structure or license may
restrict them from certain types of investments. Third,
they may not be organized to profit from any investment
other than their own proprietary investments (e.g., mutual
fund companies). Consequently, the vast majority of
institutions offering IRA servicing do not promote the fact
that clients can choose from a variety of investment
options for their IRAs.
Since most financial providers don't allow their clients to
diversify their IRA holdings, how can the average person
take advantage of these IRS regulations? It's simple--
they must establish a truly Self-Directed IRA with an
institution that offers them, and which does not restrict
the choice of investment. For example, many large discount
brokerage firms claim to offer clients 'Self-Directed'
IRAs. But in fact, they are only Self-Directed in the
sense that you can make the investment decisions and
choices independently (e.g. without advice or discretion by
the provider). All of these institutions still restrict
the "type" of investment to publicly traded investments.
True Self-Directed IRA custodians allow you to select from
virtually any type of investment. Such investments as
private notes, factoring, start-up businesses, real estate,
annuities, and private stock are possible choices for
clients of firms that are truly Self-Directed. While
clients can still include traditional investments such as
stocks and mutual funds within their Self-Directed IRA,
they also have the freedom to diversify their portfolio by
adding a non-traditional asset. Self-Directed IRA
custodians provide a unique service to IRA owners and serve
as a vital source of funds to new and emerging companies by
assisting individuals, including "angel" investors, to
invest their retirement funds in such firms. In many
cases, these investors have large sums of money accumulated
in their retirement accounts, which they can now put to
work in non-traditional investments through the services of
Self-Directed IRA institutions. Self-Directed IRA funds
have been used to start-up a wide range of businesses from
banks to dot-coms.
Self-Directed IRAs, when administered by a special asset
custodian, offer the opportunity to maximize retirement
investment returns in a number of creative, non-traditional
ways. Those interested in having a Self-Directed IRA are
advised to contact their financial planning professional to
determine if a Self-Directed IRA is right for their
retirement planning strategy.
For more information on PENSCO Trust Company or Self-
Directed IRAs, call them toll free at 866-818-4472 on the
East Coast or 800-969-4472 on the West Coast, or email them
at email@example.com, or listen to our weekly call-
in radio show through our web-site at www.pensco.com.
This article courtesy of http://www.investment-index.com.
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