According to CNBC, Rudy Giuliani recently said, “The President is ignorant of economics.” Giuliani goes on to say, “We have the largest debt ever, probably our weakest economy in a generation.” Further he offers, “Money doesn’t grow on trees, nobody gives you money, you’ve got to go out there, you’ve got to work, you’ve got to earn it.” Jim Hitt, CEO of American IRA, a national provider of self-directed IRAs, says, “In this economic climate Americans can no longer rely on the fact that Social Security will be there when they retire. It is more important now than ever to self-direct those retirement accounts. Giuliani is correct, we have got to get out there and take control of our financial future.”
People see IRA advice on TV all the time, and it’s always the same. Contribute to an IRA or a Roth IRA if they’re eligible. Buy mutual funds. Some specialized channels like CNBC might have someone on giving ideas about what stocks to buy. Or they can buy individual bonds, for income, or for safety.
Jim Hitt says, “Remember that the media has to cater to the mass. Their advertisers are largely mutual fund companies and traditional investment companies. Furthermore, 96 percent of their viewership uses their IRAs to invest in stocks, bonds and mutual funds. Roughly four percent of their viewers invest in alternative assets. Consequently, a vast majority of the 96 percent are either not aware of self-directed IRAs or they don’t have enough knowledge of them to make the move that would be most beneficial-the move to a self-directed IRA which will allow them to invest in alternative investments they know and understand.”
Naturally, media companies have to play the numbers, and please their sponsors. This is why there is so little mention of self-directed IRA alternatives in the mainstream financial press. But the alternatives are there, they are legal, and they open up entirely new ways of diversifying their portfolio, of employing leverage to maximize growth, and to maximize their net after-return.
Thinking Outside the Box
Here’s what the media talking heads rarely say: That people aren’t stuck with funds, or even publicly traded stocks and bonds in their IRA. They can invest their IRA assets – whether rollover assets or new contributions, in many different kinds of investments, by using a special arrangement called a self-directed IRA. In fact, as long as they can abide by some specific prohibited transaction rules, they can invest their IRA funds in all kinds of things:
- Shares of closely-held companies
- Their own small business
- Horse breeding
- Gold and other precious metals (with some restrictions)
- Residential real estate
- Commercial real estate
- Foreign real estate
- Raw, undeveloped land
- Tax liens
- Private lending
- Venture Capital
- Partnerships…and much more.
Other than collectibles, alcoholic beverages and life insurance, there is really no limit to what they can do with an IRA, as long as they abide by some common sense rules against self-dealing, or using their IRA to benefit themselves or their immediate family directly.
Because the IRA is such a versatile investment vehicle, there are many ways to use their IRA to diversify their overall portfolio against stock market and bond market risk.
When they hold assets that generate a significant income yield, such as rental property, outside of an IRA, their rental income is subject to income tax. By shifting these portfolio elements out of taxable accounts and into an IRA, however, they can make income tax concerns a thing of the past: Income within traditional IRAs (and SEP IRA and solo 401(k) accounts) is tax-deferred until they take distributions. If they hold the income-producing asset in a Roth IRA, the income generated is tax-free.
By properly allocating normally tax-inefficient assets like rental property to their IRA, they may be able to maximize their net return on the assets in the IRA or Roth IRA, while their more tax-efficient investments, such as growth stocks, raw land and index funds, are held in taxable accounts. Since these assets generate little taxable income anyway, it may be advantageous to keep them in taxable accounts, accept the income tax on what little dividends/rental income these assets provide, and avail themselves of the more favorable long-term capital gains rates, as well as enable them to take advantages of tax loss harvesting techniques, using losses to offset taxable gains. Saving their IRA space for less tax efficient vehicles can increase the after tax returns of their whole portfolio.