What should Self-Directed IRA owners do right before they retire?

Are you reaching retirement age soon? Already pushing it? Ever thought about a Self-Directed IRA? It’s time to make some important decisions about your financial strategy going forward. Here are several things you should be thinking about as you transition into the retirement stage of your financial life cycle.

  • Roll back risk exposure. Now’s the time to begin reducing exposure to uncertainty and market risk. While most Self-Directed IRA owners are not fully invested in the U.S. stock market (diversification is one of the reasons why many investors choose to self-direct their retirement accounts in the first place!) investors should conduct a sober review of their portfolio and its exposure to various kinds of risks. For example, we know from the sad experience of 2008-2010 that real estate can be subject to every bit as much risk and uncertainty as the stock market, under some circumstances.
  • Reduce leverage. If your real estate IRA or other retirement account is heavily leveraged, you may think about working on toning it down. The more of your portfolio is mortgaged, the bigger the short-term unexpected swings there may be – and you don’t want to be on the wrong side of a bear market right when you retire, because you’ll have a hard time earning your way out of the hole.
  • Enroll in Medicare. If you’re turning 65 this year or next year, don’t get so focused on your Self-Directed IRA investing that you forget your Medicare initial open enrollment period. You have a window of seven months to formally enroll in Medicare. The initial open enrollment period begins three months before the month in which you turn age 65, and closes three months after the end of the month in which you turn sixty-five.

For example: If you turn 65 in July of 2018, your open enrollment period will open April 1st, and go through May and June – then July, your birth month, and then three more months after that: August, September and October.

If you miss your open enrollment period, you will have to pay significant penalties in the form of higher Medicare premiums.

  • Assess life insurance coverage. As people get older, many times they are carrying a lot of life insurance they don’t need anymore. With no dependent children, and a comfortable nest egg for both spouses to retire on, it may make sense to convert a substantial life insurance policy into an annuity using a Section 1035 exchange. The law allows those who bought life insurance early in their lives to convert their life insurance policies into annuities, tax free, to unlock another source of retirement income. Some people choose to use the annuity to pay long term care insurance premiums. Others just convert the annuity to income, either now, or at a higher rate later.
  • Decide whether to take Social Security Benefits. You can begin taking a reduced Social Security Benefit beginning at age 62. However, the longer you wait, the greater your monthly benefit will be, until you reach full retirement age. In most cases, if you’re in poor health, it makes sense to begin taking the benefit early. If you’re in excellent health, and expect to live well past full retirement age, you’re actuarially better off waiting and maximizing your monthly benefit over a long retirement.

Is Your Self-Directed IRA Too Complex? Here’s How to Break It Down

Admit it: you sometimes struggle with the concept of a Self-Directed IRA. It was hard enough to figure out an IRA where someone else was helping you a long, such as a 401(k) through your employer. And while there are a tremendous amount of rules and regulations with IRAs—and, hence, plenty of things for you to figure out when you self-direct—the truth is that the entire process is much more simple to break down than you might imagine.

That just leaves one question: how do you do it? Here are a few of our tips.

Ask the Basic Self-Directed IRA Questions

Forbes acknowledged the reality of the difficult-to-figure-out IRA recently. But what’s great about Forbes’ approach is that they were able to break it down into basic questions for your Self-Directed IRA:

  • Are you double-dipping? In other words, do you personally benefit from your ownership in the IRA, or is it separate from you? The IRS wants it to be separate.
  • Is your investment type allowed in the IRA? Most investment types are—in fact, the IRS explicitly marks down which investment types are not allowed. But it’s important to know which ones are prohibited.
  • Have you received a legal opinion about the investment? Until you talk to an expert, you’ll never truly know whether or not you’re crossing the line. And it’s always better to know.

These three questions do a good job of breaking down whether or not you’re following the rules—or planning on following them. And they’re simple enough that most people understand what the main issues are with Self-Directed IRAs. Even so, let’s see if we can break it down in even simpler terms so most investors can see just how accessible the strategy of a Self-Directed IRA truly is.

The Self-Directed IRA at its Most Basic

It’s that phrase “Self-Directed” that throws off many investors. We’re so used to seeing unfamiliar words in front of “IRA” that we think this means a completely new type of headache. But the truth is, all of your investments are self-directed. It’s your money, after all—you’re the one in charge of making the decisions. And that means that you’re self-directing your own retirement strategy, even if you have none at all.

Once you take that element out of the equation, you realize that a Self-Directed IRA is, at its heart, simply an IRA. You just use your own control over this IRA rather than outsource it to a fund manager’s. For example, if you buy real estate within your IRA, it’s your responsibility to seek out that real estate and secure the loan for your IRA, for example. Rather than trust someone else’s opinion entirely, you’re making investments based on what you see.

Another type of IRA is a Self-Directed IRA that holds precious metals like gold and silver. These are very simple, as well—your IRA holds the precious metals. That’s not difficult to figure out. The Self-Directed nature of the IRA means that you’re deciding what kinds of precious metals to holds, and how much. You’re in charge.

But there are plenty of prohibitions and restrictions that do deserve your attention. And therein lies the complexity of the Self-Directed IRA. Like fire, it’s a powerful tool when you know how to harness it. But if you don’t bother to learn, you might find yourself in need of someone who does know how to handle an IRA.

Help your own cause by working with a Self-Directed IRA administration firm. To find out more, call 866-7500-IRA or keep reading here at www.AmericanIRA.com.

How New Investors Can Avoid Self-Directed IRA Common Pitfalls

Although investing in a Self-Directed IRA doesn’t have to be a complicated mess in the slightest, there are some investors out there who are new to the concept. And when people plunge into new things they don’t understand, mistakes sometimes happen. The prudent investor is willing to take his or her time, have patience, and get to know a strategy before jumping in the deep end of the pool.

That’s why it’s important to take some time out and talk about the common Self-Directed IRA pitfalls…and how new IRA investors can avoid these same pitfalls.

Common Self-Directed IRA Mistake: Not Understanding the Withdrawals

According to USAToday, which recently wrote an article on this very topic, one of the most common mistakes was actually on the back end of investments—when investors start to take the money out of the account. Or, rather, when they forget that they’re actually supposed to.

Taking the proper RMD’s includes an onus on the taxpayer, which means that the IRS isn’t going to send you a letter and tell you exactly what to do. You’ll have to know that it’s time. Hopefully, you’re talking to an adequate tax professional on a regular basis who can help you in this regard, alerting you to the issues at hand. This is the kind of thing that you need to plan for well in advance, as well, because it means that those playing “catch-up” have to be aware that they’ll have to take distributions at a certain age. And, yes, you can face stiff penalties and fines if you don’t follow through on your end of the bargain in this regard.

Choosing the Wrong Type of IRA

Perhaps the most overlooked—and most important—mistake is made at the very beginning. This happens when someone chooses an account type that may not be right for their specific situation. For example, a Roth IRA means you put in taxed money on the front end. Other accounts may let you deduct your contributions, so you’re putting in “pre-tax” money into the account. Is one better than the other? Not necessarily. Your own financial situation and your goals for retirement will have an impact on the type of IRA you should choose.

If you’re unsure, it’s important to consult with a professional to get an idea of what you need. Not only will this professional help fill you in on the rules, but will help recommend the ideal vehicle for your investments—one that lines up with your goals and strategy more than the other options on the table.

Failing to Start

Perhaps one of the most important mistakes investors can make is to never get started in the first place. Sure, it’s true that there are some “catch up” rules in place with the IRS that allow late investors to get some money into their retirement accounts before reaching retirement age. But if you don’t invest early, most of the gains that come about as a result of exponential growth are left on the table. Those are gains that should ultimately go into your pocket—they shouldn’t be left out there for no one to enjoy.

That’s why it’s important to develop an investment plan and to get started as soon as possible. That means asking questions as the first step, even if you’re not sure where you want to put your money yet. Especially if you’re not sure where you want to put your money yet. You can continue to visit www.AmericanIRA.com to learn more about the Self-Directed IRA, or you can call 866-7500-IRA to learn  more.

Self-Directed IRA vs. 401(k) – Which Is Best For You?

When it comes to Self-Directed IRA investing – the practice of investing IRA or other tax-advantaged retirement funds in alternative investments and directing them yourself, personally – there are important differences between the IRA and 401(k) structures.

So knowing where to park your assets and under what circumstances is important for the Self-Directed IRA owner.

First, let’s look at what the IRA and 401(k) have in common:

  • Both protect current income and capital gains from taxation, both at the federal and state level.
  • Both offer Roth options, which don’t allow you to subtract your contributions from your taxable income for the year, but they do allow your assets within the account to compound tax-free for as long as you live, and make tax-free withdrawals of any assets that have been in the accounts for at least five years.

The rules are the same for both Self-Directed and conventional accounts – it’s just the assets within the Self-Directed accounts that are different.

But IRAs and 401(k)s have some important differences, too. For example:

  • Self-Directed 401(k)s may help shelter any leveraged assets from a special tax called unrelated debt-financed income tax. This is a tax on any current income or capital gains attributable to other people’s money, rather than your own. For example: If you buy an investment property for $200,000, and you borrow half of it, and receive $20,000 in rent the first year, and you still owe half the value of the property on the mortgage, then 50 percent of your rental income is subject to unrelated debt-financed income tax.

However, a quirk in the law means that assets held in 401(k) accounts, rather than IRAs, may be exempt from this tax.

Investors who plan to use a lot of leverage in their investing strategies may wish to lean towards a solo 401(k) for that reason – if they don’t plan on taking on any employees other than their spouse!

  • 401(k)s allow account owners to take loans. It’s illegal to borrow money directly from your IRA, with a narrow exception for a rollover not exceeding 60 days. But if you sponsor your own solo 401(k) plan, you can set up the plan to allow you to borrow against your 401(k) balance for any reason you like, for up to five years. This may be a convenient source of liquidity for small business owners undergoing a cash crunch, for dealing with a financial emergency or taking advantage of an investment opportunity. Again, the advantage here goes to 401(k) plans.
  • IRAs are better vehicles for heirs to inherit. This is because non-spousal beneficiaries who inherit a 401(k) account must empty the account – and pay income taxes on the liquidated assets – within five years of inheriting it. Often, this hits heirs during their own peak earning years, when the tax hit is at its peak. However, non-spousal IRA beneficiaries may be able to stretch the inherited IRA over their remaining expected life spans. This is a much more tax-efficient way to pass assets on to heirs. Advantage: IRAs – particularly Roth IRAs.
  • 401(k)s have much higher contribution limits than IRAs. IRA contributions are limited to $5,500 per year, with an additional $1,000 allowable for account owners over age 60 in so-called “catch-up” contributions. 401(k)s, on the other hand, allow for elective contributions of up to $18,000 (or $24,000 total for those over age 60). When you add in total potential matching contributions from the company, you can contribute up to a total combined amount of $54,000.

This is much greater than the potential new money contribution allowable for IRAs. And you can make pre-tax contributions to a solo 401(k) at any income level. In contrast, traditional IRAs limit your ability to make deductible contributions at higher income levels, and high incomes may limit or eliminate your ability to make Roth IRA contributions at all.

However, solo 401(k)s are suitable only for a defined market of self-employed individuals, independent contractors and those who own businesses with no full-time employees other than a spouse.

If this applies to you, then a solo 401(k) may be a terrific small business retirement plan option. Otherwise, you may want to consider a SEP IRA or SIMPLE IRA plan, depending on your circumstances. Both of them support Self-Directed IRA strategies.

American IRA, LLC is a family-owned business that focuses on helping owners of Self-Directed IRA accounts ensure their transactions are handled quickly and accurately and that they are properly documented in accordance with IRS rules. Our offices are located in Charlotte and Asheville, North Carolina, but we work with Self-Directed retirement account investors in all 50 states.

For more information on Self-Directed retirement investing, call American IRA today at 866-7500-IRA(472), or visit us online at www.americanira.com.

Real Estate IRA – Fire Insurance Claim Tips

Fires are among the most costly perils in the home insurance business. When you take out a fire insurance policy on a property you own within a Real Estate IRA, you are protecting yourself against a hazard that cost insurance companies, on average, nearly $40,000 per claim.

Sure, none of us like paying insurance premiums. But when you look at the potential costs of a fire if your Real Estate IRA owned properties aren’t insured, those premiums begin looking a lot more reasonable.

Assess smoke damage. Just because your Real Estate IRA property didn’t burn doesn’t mean it wasn’t damaged. Smoke can cause damage to a home, resulting in a claim against your fire insurance policy. You may have to replace drywall, carpeting, wallpaper, drapes, do a major paint job, and undertake a number of other repairs just from smoke damage alone. Be sure to document this damage thoroughly.

Further, cleaning your own home after a fire or major smoke event is unsafe. You will likely need professional cleaning and mitigation. Professional clean-up firms bring special protective equipment, like hepafilter masks and special vacuums to protect their workers from harmful fumes, soot and other hazardous particulates. So ensure you are prepared to support your claim for compensation for these significant expenses.

Furthermore, some do-it-yourself repair attempts backfire, making stains and other damage worse, not better!

Document early and document everything. At a minimum, keep records of the following:

  • Date of damage or loss
  • Type of damage (smoke, flame, water damage from firefighting efforts, etc.)
  • Description of damage.
  • Injuries, if any
  • Identities of all parties involved
  • Condition of the Real Estate IRA property or home at the time of the fire
  • Description of any temporary repairs you made
  • Cost of temporary repairs (include estimates and receipts
  • Police or fire department reports
  • Insurance claim ID number
  • Insurance company authorizations for any temporary repairs you do

Additionally, it may be a good idea to insist the tenants living in your Real Estate IRA own renter’s insurance. While your insurance policies will cover damage to your property, including interior and exterior damage, it won’t cover your tenants’ belongings. Furthermore, since renter’s insurance also has liability protection for your tenants, it helps protect you against any damages your tenants may cause, such as accidental kitchen fires, etc.

Some additional tips:

  • Don’t throw away damaged property before the insurance adjustor sees it.
  • Hire only licensed and ensured contractors to do repairs. Ask for certificates of insurance before starting any work.
  • Don’t sign documents allowing the contractor to collect payments directly from the insurance company. While the practice is legal, in reality the consumer almost never benefits.
  • Consider filing claims for loss of use of your property, or loss of rental income while the Real Estate IRA property is uninhabitable. Your landlord insurance policy may provide coverage against this loss.
  • Ask for an advance against your final insurance claim. This advance can help you pay for needed mitigations and to help prevent further damage, such as wet rot and mold from accumulated water from firefighting attempts.

How New Investors Can Avoid Self-Directed IRA Common Pitfalls

Although investing in a Self-Directed IRA doesn’t have to be a complicated mess in the slightest, there are some investors out there who are new to the concept. And when people plunge into new things they don’t understand, mistakes sometimes happen. The prudent investor is willing to take his or her time, have patience, and get to know a strategy before jumping in the deep end of the pool.

That’s why it’s important to take some time out and talk about the common Self-Directed IRA pitfalls…and how new IRA investors can avoid these same pitfalls.

Common Self-Directed IRA Mistake: Not Understanding the Withdrawals

According to USAToday, which recently wrote an article on this very topic, one of the most common mistakes was actually on the back end of investments—when investors start to take the money out of the account. Or, rather, when they forget that they’re actually supposed to.

Taking the proper RMD’s includes an onus on the taxpayer, which means that the IRS isn’t going to send you a letter and tell you exactly what to do. You’ll have to know that it’s time. Hopefully, you’re talking to an adequate tax professional on a regular basis that can help you in this regard, alerting you to the issues at hand. This is the kind of thing that you need to plan for well in advance, as well, because it means that those playing “catch-up” have to be aware that they’ll have to take distributions at a certain age. And, yes, you can face stiff penalties and fines if you don’t follow through on your end of the bargain in this regard.

Choosing the Wrong Type of IRA

Perhaps the most overlooked—and most important—mistake is made at the very beginning. This happens when someone chooses an account type that may not be right for their specific situation. For example, a Roth IRA means you put in taxed money on the front end. Other accounts may let you deduct your contributions, so you’re putting in “pre-tax” money into the account. Is one better than the other? Not necessarily. Your own financial situation and your goals for retirement will have an impact on the type of IRA you should choose.

If you’re unsure, it’s important to consult with a professional to get an idea of what you need. Not only will this professional help fill you in on the rules, but will help recommend the ideal vehicle for your investments—one that lines up with your goals and strategy more than the other options on the table.

Failing to Start

Perhaps one of the most important mistakes investors can make is to never get started in the first place. Sure, it’s true that there are some “catch up” rules in place with the IRS that allow late investors to get some money into their retirement accounts before reaching retirement age. But if you don’t invest early, most of the gains that come about as a result of exponential growth are left on the table. Those are gains that should ultimately go into your pocket—they shouldn’t be left out there for no one to enjoy.

That’s why it’s important to develop an investment plan and to get started as soon as possible. That means asking questions as the first step, even if you’re not sure where you want to put your money yet. Especially if you’re not sure where you want to put your money yet. You can continue to visit www.AmericanIRA.com to learn more about the Self-Directed IRA, or you can call 866-7500-IRA to learn  more.

Baby Boomers Getting Frugal, But Gen X and Millennials Should Boost Contribution to a Self-Directed IRA

Baby boomers are becoming more frugal, but most of them say they feel financially prepared for retirement. That’s the conclusion form the “New Generations Ahead” study just published by Allianz Life. 72 percent of Baby Boomers surveyed – those Americans born between 1946 and 1964 – report that they feel financially prepared for retirement. That’s a significant increase from 2010, in which only about 58 percent of them reported being financially prepared for retirement. But they’ve had an additional seven years to work, save and invest, and of course their real estate, Self-Directed IRA and equity investments have enjoyed the tailwind of a seven-year bull market in both.

About a third of them told researchers that they found economic uncertainty made it difficult for them to decide whether and when they can retire. That’s much lower than the 50 percent who reported being hamstrung by economic uncertainty during the recession year of 2010. But as long-term Self-Directed IRA investors and market watchers know, the very times when uncertainty about markets seems lowest is when actual market risks are at their highest.

There has been a major attitude change among Baby Boomers – once derided for their spendthrift ways when compared to their Greatest Generation parents who survived the Great Depression and the sacrifices of World War Two. 64 percent of Baby Boomers now regard themselves as “savers” rather than spenders, and 61 percent report that they keep careful track of their retirement account balances. Fully 25 percent of Baby Boomers characterize themselves as “penny-pinchers.”

65 percent of Baby Boomers now regard retirement savings as a necessity, along with food and housing expenses.

“The Generations Ahead Study highlights encouraging news for boomers and proves that with proper focus and engagement, anyone can turn around a poor savings situation and start building for a successful retirement,” said Paul Kelash, vice president of Consumer Insights for Allianz Life. “Whether taking lessons from the past or forging a new path, the key for each generation is to recognize that a solid retirement plan doesn’t happen by chance, but rather with a clear process and defined actions.” 

The Kids Aren’t Alright

It looks like today’s crop of Millennials won’t be maxing out contributions to their Self-Directed IRA and real estate IRA accounts anytime soon. 17 percent of them say they spend money as soon as they get it, 50 percent of them report they spend more on going to clubs, bars, restaurants and other entertainment venues than they spend on rent or mortgages, and 63 percent of them consider themselves spenders rather than savers.

To be fair, the average college graduate with student loans  is now entering the job market with over $30,000 in student loan debt and an average payment of more than $240 per month. That’s going to take a chunk out of retirement contributions by itself, and most of those folks aren’t thinking about real estate, IRAs and other retirement investments yet – though they probably should be!

That said, Millennials are doing better than their Generation X predecessors in one metric: The median retirement savings on hand for Millennials and their older Generation X forbears is roughly the same – $35,000. That’s going to be inadequate for Gen X folks, given that they are much closer to retirement than Millennials. Generation X was much harder hit by the Great Recession than Millennials, many of whom were not even in the work force when the worst of it hit.

No matter your age, though, the time to boost retirement savings and increase diversification in those savings is now.

Hiring Contractors for Your Real Estate IRA Property

Real estate held within a Real Estate IRA is no different than real estate held elsewhere.

Most of the same general principles that are applicable to any other real estate investment apply to Real Estate IRA properties, including contractor selection and hiring. This piece will deal primarily with the specific issues that apply to Real Estate IRAs (as well as real estate investments held within self-directed 401(k)s, SEPs, SIMPLE IRAs and other tax-advantaged accounts).

  • Observe prohibited transaction rules. When you own a Real Estate IRA, there are certain restrictions on whom you can bring on as a contractor to help fix, repair or renovate your Real Estate IRA First of all, you cannot hire yourself. You cannot work for direct compensation or salary in any capacity in your Real Estate IRA. The IRS enforces very strict laws that prohibit you from using your Real Estate IRA to transact directly with yourself, your spouse, your children, grandchildren, parents or grandparents or those of your spouse, as well as any advisor who works with you on your Real Estate IRA in a fiduciary capacity. The same goes for any corporation or other business entity they control.

Simply put means you may be able to hire your brother to do the drywall, but not your son-in-law. And you can hire your brother-in-law’s landscaping company, but not your son.

Don’t try to pay yourself a salary for overseeing or managing your property held within a Real Estate IRA. You can do general management work without compensation, other than the eventual increase in value of the property. But you cannot take a salary, or the IRS could disqualify some or all of your IRA account, force you to take an immediate distribution, and then you’ll have to pay potential taxes and penalties on everything you take out.

The best way to select contractors is to use an arm’s length bidding process to find the best value, while disqualifying prohibited individuals.

  • Do not mingle personal and Real Estate IRA The second principle is you must keep personal and IRA accounts strictly segregated. If you hire a vendor or contractor to help repair your Real Estate IRA property, you must make all payments solely with money from within the IRA account. This means you must make these payments only with money that you rolled over to the account, contributed to the account directly, or with profits generated from within the Real Estate IRA.

Naturally, like any property owner, you should use only properly licensed and bonded contractors, and verify that each contractor who sets foot on your property carries important insurance coverage like worker’s compensation insurance and/or construction defect insurance. Failure to do so exposes your Real Estate IRA to tremendous potential risk.

The 50 Best Cities to Live In…But What if You Have a Self-Directed IRA?

Recently, USA Today unfurled their list of the 50 best cities in which to live. This selection of 50 American cities has everyone buzzing. Which cities belong on the list? Which cities don’t? What constitutes a great American city anyway? This ignores a basic fact: there is no one single city for everyone. People have individual needs and goals, and different locations can either help or hinder those goals. For those investors with a Self-Directed IRA, the answers might be different.

The Cities at the Top, and What It Means for a Self-Directed IRA

First, let’s review the cities themselves. At the top of the list, you’ll find:

  1. Carmel, Indiana. With a top-25% placement in home values and very low crime and poverty rates, this active community grabbed the top spot on USA Today’s list.
  2. Centennial, Colorado. Sharing many of the same statistical placements as Carmel, Centennial is one of the safest cities across the U.S.
  3. Arvada, Colorado. Low violent crime rates, high education standards, and a very high median home value mean that if you can retire in Arvada, you’re probably doing something right.

You’ll notice something in common about these cities and the criteria USA Today used when analyzing them:

They completely ignore the Self-Directed IRA. In fact, they seem to ignore retirement altogether.

When people read about the best cities to retire in, they often consult lists like these. But “great for retirement” doesn’t always equal “great for general living.” There are other elements that come into place, especially with those who have a Self-Directed IRA and want to take hold of their financial destiny by living in the best possible city for them and their loved ones.

How is a City “Good” For the Self-Directed IRA?

It’s easy to understand what USA Today is doing. By looking at basic demographics, they’re getting a general sense of whether a city is a great place in which to live. These sweeping statistics aren’t perfect, but by looking at issues like crime, education, and home prices, you get a sense of what a community is like.

You, however, are a retirement investor who’s concerned with stretching your retirement dollar. It’s fair to say that your concerns are a little bit different than that of the general populace.

For example, a low cost of living is far more important for those who want to stretch out their retirement dollar. One can retire in a mansion in Montana for the cost of a small condo in San Francisco, for example. Other concerns, such as the quality of local health care, are important for those considering where to live in their twilight years.

A low cost-of-living is also important for those in the process of planning their retirement. Having money to put aside for a Self-Directed IRA means being able to put more money away toward precious metals, real estate, private companies, and more. The longer you live with a low cost-of-living, the more you’ll feel its effect as cumulative returns come in.

The Self-Directed IRA is a valuable tool and perspective, because it helps you identify what might be right for you. I encourage anyone considering retirement to think beyond basic demographics and concern themselves with the issues that a community can offer their specific needs. Doing so will not only stretch out the retirement dollar—it will lead to a better quality of life in the long run. USA Today’s list is important and valuable, but it’s just a starting point for those who really want to do their homework.

For more information on the Self-Directed IRA, continue reading www.AmericanIRA.com or call 866-7500-IRA.

The Self-Directed IRA and Friends—Should They Ever Mix?

There’s an old saying: no one should mix business with pleasure. To some, that means keeping a distinct boundary between one’s finances and one’s personal relationships. But to others, the beauty of being wealthy is having someone to share that wealth with. But let’s dig a little deeper here and get into specifics: just how should the owner of a Self-Directed IRA handle their investments? Should friends ever get involved? Should friends even know about it?

When It Works: The Self-Directed IRA for Community Benefit

When people hear the “self” in “Self-Directed IRA,” they often assume that it’s shorthand for the word “selfish.”

Not so.

A Self-Directed IRA just means that the investor who holds it has a great degree of control over what ends up in their retirement account. Though there are restrictions on the types of investments that can be held in an IRA, there are plenty of asset types for investors to choose from.

In fact, some investors use this very strategy for purposes that sometimes benefit their community. The New York Times recounts the story of William C. Brown, who helped out a friend with an investment that, while it didn’t necessarily give him the returns he could have hoped for in other places, ended up being very beneficial to those around him.

The key here: Brown was a tax expert who knew exactly what boundaries are placed on the IRA. That means he wasn’t doing it to give a “sweetheart” deal to a friend. Instead, Brown used the funds within an IRA to make a prudent investment within the bounds of the regulations on the books. Brown, a sophisticated investor, was able to structure the deal so that his Self-Directed IRA was well-protected.

When Investing Based on Friendships Goes Wrong

That isn’t to say that every investment meant to benefit someone else as well as the investment holder will always work out. Anyone who’s ever given out a loan to a friend—only to watch that friend dodge them for the next few years—knows that there are inherent risks in mixing business and friendship. For some, the best way to invest in a Self-Directed IRA is to keep professional relationships strictly professional. Others, like Brown, know the rules well enough that they can find common sense investments and involve friends in a safe and legal way.

Where should you fall on this spectrum? The answer isn’t so simple. “It depends” is probably the most accurate way to go here.

For example, don’t invest with friends if you…

  • …are unsure about whether or not you’re breaking the rules. If you’re unsure, then that leaves the possibility open that you are breaking the rules. It’s better to know definitively that you are not.
  • …are unsure about the investment and/or are being pressured into it.
  • …have never navigated this regulatory environment before.

Why? Because if you’re inexperienced with these types of investments, it’s better to get your own feet wet before you spend your hard-earned money on the investments of friends.

After all, what “friend” is really a friend if they look at you as a walking ATM?

Learning Your Way Through Self-Directed IRAs

The better way to go about learning Self-Directed IRAs is to start small. Learn the rules and regulations first. Understand what you can and cannot do. As you get more sophisticated in your investments, you may one day be able to make an investment that benefits a community, just as Brown’s did. But it’s important to be careful. You know what they said about those who play with fire.

Most importantly, work with a reputable Self-Directed IRA administrator. If you want to know more, keep reading our blog here at www.AmericanIRA.com or call 866-7500-IRA.