The Case for “Real Assets” Inside a Self-Directed IRA

Self-Directed IRAsIt’s been a spectacular run for stocks. As of this writing, the trailing 12-month return for stock, as measured by the S&P 500 Index of U.S. large-cap stocks, is 24 percent. Over the last three years the stock market has averaged 16.44 percent. And over five years, the average return has been 18.69 percent for traditional investors and even better for Self-Directed IRA investors who realized those returns tax-free and/or tax-deferred.

You don’t get too many runs like that. And they don’t last forever.

Meanwhile, what investment theorists call “real assets” have been lagging. Asset classes like real estate, natural resource stocks and funds and commodity futures have logged their worst returns – compared to the S&P 500 – since 1970, according to John Ruff, an investment advisor and author of

Don’t blame real estate, though: It’s been engaged in a broad and substantial price recovery right along with stocks, since both stocks and real estate crashed at close to the same time, in 2008-2009 – to the chagrin of those who where too heavy in stocks and over leveraged in their homes, thinking stocks and real estate by themselves provided adequate diversification.
That didn’t work out well.

Meanwhile, Americans are starting to face the prospect of inflation in certain sectors – the inevitable result of years of rock-bottom interest rates just a few points above zero, quantitative easing and massive deficit spending. The consumer price index remained over 2 percent for June 2014, though it was energy (+3.2 percent) and food prices that were responsible for the bulk of it (Hamburger has just reached a record high, for example.) Excluding food and energy, inflation was clocked at 1.9 percent for June, or 2.1 percent with all items included.

If this is true, then producers are starting to find some pricing power – and price gains could continue. This bodes well for a variety of real asset classes, which are natural hedges against inflation.

As we transition through this inflection point in monetary policy, with the Fed gradually taking its foot off the money creation gas pedal, Jon Ruff believes that these unsung asset classes will once again soon take their places in the limelight.

This isn’t just good news for Ruff’s investors (Ruff heads the Real Asset Strategies desk at AllianceBernstein); it’s good news for open-minded, flexible and diversified investors – the kind who elect to use self-direction to diversify their own retirement portfolios.

As we never fail to point out, there is no law that limits your Self-Directed IRA, Solo 401k, SIMPLE, SEP or even Coverdell accounts to the usual mundane asset classes of stocks, bonds and CDs. Indeed, with stocks at such heady heights, interest rates still near historic lows, a Fed that is pulling back on the throttle, and murmurings of inflation, these traditional asset classes may not be where you want to be concentrated.

Using Self-Directed IRAs, you can take the same tax advantages these retirement savings vehicles offer to the standard asset classes, and bring them to bear on these potential investments:

  • Real estate
  • Raw land
  • Commodities
  • Foreign stocks
  • Limited partnerships
  • Oil and gas development
  • Pipelines
  • Farming and ranching
  • LLCs, partnerships or closely-held C corporations
  • Private lending
  • Gold and precious metals
  • Mining interests
  • Wineries and breweries (but not direct ownership of alcoholic beverages such as wine collections)
  • Tax liens and certificates
  • … and many more.

All these different asset classes allow the individual to maximize his or her individual expertise and find new ways to diversify away from vulnerable assets that have already had a good run.


Self-Direct Your Retirement

If you didn’t know anything about the stock market before October 4, you’d think the US had the strongest economy ever. The Dow rallied more than 1,220 points since then – a gain of 12%! Naturally, the uninformed investor may think it’s time to jump into this bull market.

However, thousands of investors are waking up to the reality of Wall Street – that it’s become more of a Vegas gamble than an investment based on fundamentals. Nothing is backing this latest rally, except for a few headlines swaying public sentiment.

When the media announces that Europe has found a temporary solution, stocks rise. Then when the uncontrollable debt inevitably rears its ugly head again, stocks plunge. Is this where you want your precious life savings?

Americans have lost over $6.6 trillion of their retirement savings due to the volatile stock market, according to a study commissioned by Retirement USA. Thousands of investors have had enough and are looking into alternatives to traditional tax-deferred retirement plans.

The dream of letting someone else manage their money and expecting it to be ready and waiting for them after 30 years is dead. One of the savvier investor’s best kept secrets is one you probably haven’t heard about from your traditional financial planner: the self- directed IRA.

With a self-directed IRA, you can take control of your retirement by choosing over 45 different types of investments outside of Wall Street – without penalties. Here’s a partial list of what you can do with your self directed IRA:

  • Residential real estate, including: apartments, single family homes, and duplexes
  • Commercial real estate
  • Undeveloped or raw land
  • REITs (Real Estate Investment Trusts)
  • Real estate notes (mortgages and deeds of trust)
  • Private limited partnerships, limited liability companies, and C corporations
  • Tax lien certificates
  • Foreign currencies
  • Oil and gas investments
  • Private stock offerings, private placements
  • Gold bullion

The IRS actually only disallows two investments within the IRA: Life Insurance Contracts and Collectibles ( Pub 590). Everything else is fair game so long as it’s for “investment purposes only.”

If you wanted to self-direct your IRA to buy real estate and take advantage of today’s bargains, you could not invest in a home for you to live in or a second home to use for vacations. However, you could buy a rental property, and all the rental income would flow back into the IRA tax-free or tax-deferred.

A great benefit of investing with money from your IRA is your ability to let money grow year after year, compounding faster without the loss of tax payments. Real estate values have overcorrected in many parts of the US. If your IRA bought a discounted property that increased in value over time, all the profit upon sale would go back into the IRA – tax-deferred.

Some banks even offer financing for your self-directed IRA. However, to avoid paying UDFI taxes, use a self-directed 401K instead if you plan to leverage your real estate purchase.

A great benefit of a self-directed 401(K) plan is the large annual contribution limits allowed. Businesses with a spouse on the payroll can also contribute to the Solo 401k. Provided the business owner and spouse have sufficient income from the business, taxpayers may be able to contribute up to $49,000 each ($54,500 each if both are age 50+) in 2011.

That Solo K Plan would allow the taxpayer to contribute a total of $109,000 during the year, and save close to $50,000 in taxes. This is significantly higher than the IRA contribution limit of $6,000. You get a huge tax write off in the years of contribution, and the funds can be immediately utilized to invest into real estate and receive tax deferred treatment. (Verify with your tax professional.)

Most types of retirement accounts can be converted into a self-directed 401(k) plan. However, if you discuss this option with your traditional financial planner, you may be highly discouraged to proceed.

Remember, most traditional financial planners only get paid when your assets are under their management. Why wuld they encourage you to leave them, even if it’s a better deal for you?

Source: Townhall Finance