Early Retirement With Your Self-Directed IRA

Most folks by now are well aware of the age threshold for taking penalty-free distributions from your Self-Directed IRA or 401(k).

Unless hardship conditions apply, or you are spreading income out in substantially equal periodic payments under Section 72(t) of the Revenue Code (essentially annuitizing your Self-Directed IRA or 401(k)), you have to wait until you are age 59½ to qualify for penalty-free distributions from these accounts.

Fewer people, however, are aware of a little-known rule that allows certain 401(k) beneficiaries who have left their employers, or whose employers no longer exist – to access that money as early as age 55, without having to pay the 10 percent excise tax on early distributions.

This provision, called the “Rule of 55,” allows any beneficiary of a 401(k) or 403(b) plan pull money out of the plan without penalty if they are age 55 or older, and if they’ve been fired, laid off or quit their job without a 10 percent penalty. You’ll still have to pay income tax on the amount you take out, unless you’re taking income from a Roth 401(k), which is generally tax free as long as the assets have been in the Roth at least five years.

The provision benefits any workers who leave the service of their plan sponsor at any time during or after the year in which they turn age 55 years.

The benefit only applies to the job or jobs you left at age 55 or older. Money in plans of former employers must remain in place until you reach 59 ½, or you will pay the penalty.

The rule also doesn’t apply to assets in IRAs, including Self-Directed IRAs. You’ll have to wait until you’re age 59 or older to access these funds, though IRAs typically qualify for more hardship provisions that allow you to avoid the 10 percent penalty than 401(k) plans do. These hardships include:

  • Avoiding foreclosure or eviction
  • Disability
  • Funding college up to $10,000
  • Funding a down payment of up to $10,000 for a first-time homeowner
  • Unreimbursed medical expenses
  • To pay for medical insurance if you lost your job or you received unemployment compensation during the year
  • IRS levy
  • Certain mobilized National Guardsmen and Reservists

Note: While these provisions help you avoid the 10 percent excise tax on early withdrawals, if you qualify, you will still have to pay any income taxes due on amounts you withdraw.

Note also that when you withdraw assets from a 401(k) plan, the 401(k) plan administrator is required by law to withhold 20 percent of the amount distributed and forward it to the IRS to pay income taxes. Any penalties that apply amount to 10 percent of the entire amount distributed, and not just to the 80-percent that you actually receive.

To avoid this provision, you can roll assets in your 401(k) into a IRA and then take the distribution from there, rather than take the distribution from the IRA itself.

The same rules apply to a Self-Directed IRA.

American IRA, LLC is among the nation’s leading administrators of Self-Directed IRAs. We help Self-Directed IRA owners ensure that their transactions are executed in a timely, accurate and cost-efficient way – with only a fraction of the fees that most investment companies charge. For more information, visit us online at www.americanira.com, or call us today at 866-7500-IRA(472).

Using a Self-Directed IRA to Invest in Private Businesses

One of the most powerful tools at your disposal is a Self-Directed IRA.

Self-Directed IRAA Self-Directed IRA is a unique type of IRA that allows you to invest in range of different investments – since, after all, you are the one doing the directing of your IRA. These Self-Directed IRAs offer you the flexibility to invest money in precious metals, in real estate, and yes, in private companies as well.

Investing in a private business is a great way to earn money over the long term – if you know what you’re doing. For others, it can be a scary and intimidating way to invest their money outside of the public realms of the stock market.

Where do you fall within these two categories? If you’re like most people, you haven’t done a lot of investment in private business. But that doesn’t mean you have to be limited to public trades on the stock market as the sole source of your retirement investments. In fact, if you truly want to diversify your portfolio, as so many experts say you should, then you should certainly look into private investments as well.

But just because you know how to get started investing in private businesses with a Self-Directed IRA doesn’t necessarily mean that you’re ready. To that end, we’ve put together this quick guide for navigating the risky – and often rewarding – world of private company investments.

Getting Started with Private Investments

One thing that many people will do to kick off their foray into private investments is start an investment club. This is a great way to meet like-minded people who are interested in private investments, of course, but it’s also a great way to get some lower-risk “practice” before making even larger investments. Experience, after all, is one of the most important teachers there is; it will help you to practice looking at individual companies, understand which variables to value, and ultimately, give you a better set of “instincts” when it comes to investing in private companies.

Self-Directed IRAYou can also do a lot of private reading to ensure that you cut the learning curve short. There are lots of books about private investments that you can seek out – and it won’t hurt to seek out the philosophy of some major investors, such as Warren Buffet, as well. Adhering to some basic principles of investing will help you no matter which stage of the game you find yourself in.

Finally, you should look for opportunities around you, as well. Learn to read the business section and find out which companies are on the move. Discover what kinds of things you can do to learn more about your business community, whether that means joining a local business group or simply keeping your finger on the community pulse.

Options for Private Investing

We’ve said the word “company” a lot. And if you’re going to invest in a company with your Self-Directed IRA, it would help if we could narrow down that vague term a little bit. There are, after all, plenty of options for investing with a Self-Directed IRA; you shouldn’t feel limited to any one specific kind of business.

  • Consultant firms
  • Bakeries
  • Retail stores
  • Importing-exporting
  • Farms
  • Ranches
  • Services businesses
  • Tech businesses

The list of potential businesses you can get involved in goes on and on – and what’s great is you can use these investments within a Self-Directed IRA to build a nest egg for yourself that doesn’t rely on the public stock market. It’s wise, of course, to seek out the businesses that you have an interest in or know yourself – that way, you can use your experience and passion to ensure that your investments are sound.

[tweetthis twitter_handles=”@iraexpert” hidden_hashtags=”#SelfDirectedIRA”]Use investments in a Self-Directed IRA to build a nest egg for yourself[/tweetthis]

If you want to learn more about investing in private businesses through a Self-Directed IRA, be sure to contact us at 866-7500-IRA(472) to learn about your full range of options.

 

 

 

 

 

 

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Gross: Stocks are Fully-Priced

Self-Directed IRAOwners of stock-heavy 401(k)s, IRAs and other investment portfolios, take note: Stock prices have had a very nice run of late. It’s been three years since we’ve even had a price correction of 10 percent or more – the last one was in 2011. In the meantime, the Federal Reserve has been throwing everything but the kitchen sink at the economy to shore up asset prices and hold down interest rates.

But indications are that stocks’ best days may be behind them for the time being.

That’s not just us saying that – that’s one of the most respected professional investors in the world, Bill Gross, manager of PIMCO’s Total Return Bond fund – the largest actively managed bond mutual fund in the world.

Gross believes that stocks are ‘tapering off’ at this point. Why? Because of the widespread enthusiasm for them, as well as the massive Federal Reserve support for them under QE 3 and a colossal effort to hold interest rates down and increase the money supply.

That policy that had the Federal Reserve actually purchasing over $80 billion in mortgage assets every month to shore up the housing market has to end sometime. Recently, the Federal Reserve under the dovish leadership of new Fed chair Pamela Yellen, has announced the Fed will be “tapering off” this massive support.

What does this mean for investors? First, stocks will be losing an important source of support as the Federal Reserve takes its foot off the monetary acceleration pedal.

But as even Gross will tell you, returns available in the bond market are frustratingly low. Interest rates are a fraction of what they were a generation ago. That’s good news for homebuyers – and low interest rates continue to support real estate prices and contribute to affordability. But it’s not great news for investors seeking and adequate return on investment.

Sure, we recognize that Gross is “talking his book.” He’s usually skeptical of stocks because his livelihood depends on attracting investment towards his interest.

Furthermore, if interest rates are near historic lows, they would seem to be likely to rise in the future, at some point. When that happens, bond prices will fall.

We’re all about diversification. But diversifying onto two different asset classes poised for underperformance, at best, or declines at worst, doesn’t do you any good.

That’s where the nimble and creative have an advantage. Those investors who have the education and ability to take independent control of their retirement accounts via self-direction have a powerful advantage over others.

With Self-Directed IRAs, you are not directly subject to the same systemic risks that plague the stock market and bond market. If you choose, those who self-direct can commit retirement assets to a vast array of alternative asset classes that don’t rely on the stock market, bond market or national interest rates for their returns.

Examples include:

  • Rental real estate
  • Commercial real estate
  • Land
  • Private lending
  • Private equity
  • Tax liens and certificates
  • Oil and gas interests
  • Precious metals
  • Angel investing
  • Hedge funds
  • Closely held C corporations, LLCs and partnerships

And much more.

Each of these assets is subject to different influences and move in different ways than the broad stock market and broad bond market. If you believe stocks are a little “toppy” these days, and you aren’t happy with the historically meager returns available among investment grade bonds, then it may be time to diversify into some of these other asset classes.

You can do so by taking advantage of a Self-Directed IRAs, Self-Directed 401(k)s, Self-Directed SEPs and Self-Directed SIMPLEs, while still retaining the important tax advantages these vehicles offer.

For more information, visit us at www.AmericanIRA.com, or call us at 866-7500-IRA (472).

 

 

 

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Self-Directed Retirement Plans for Small Business Owners – An Overview

Self-Directed IRA, Self-Directed Solo 401KMuch has been written about the Self-Directed IRA. The concept is beginning to catch on more and more among entrepreneurially-minded and independent investors who aren’t satisfied with the modest, watered-down expected returns usually offered by run-of-the-mill investment companies, mutual funds, annuities and the like.

We are big fans of the Self-Directed IRA, of course – but the Self-Directed IRA has one major drawback compared to taxable investments: A $5,500 ceiling on annual contributions!

Yes, those who are age 50 or older can make an additional $1,000 per year in catch-up contributions. But that’s still a very modest sum compared to a lot of minimum investment figures and the real-world liquidity needs of a lot of assets held within a Self-Directed IRA.

Even if you rolled over a larger sum from another retirement account into a Self-Directed IRA, you are still constrained by the relatively low contribution limit on IRAs.

Fortunately, for many people, there are other options.

If you own a small business, you may be able to open up a self-directed small business retirement plan. Specifically, you can choose to establish one of these popular self-directed retirement plans:

  • Self-Directed Solo 401(k)
  • Self-Directed Simplified Employee Pension Plan (SEP)
  • Self-Directed SIMPLE plan

Each of these options offers most of the advantages of Self-Directed IRAs – but with significantly larger maximum annual contributions.

Self-Directed Solo 401(k)s

Solo 401(k) plans allow you, as an employee of your own entity, to set aside as much as $17,500 per year. For those over 50, you can contribute another $5,500 per year above that for a total of $23,000. The employee portion may be contributed as a Roth. That by itself is a big boost over the contribution limits available with Self-Directed IRAs.

  • The total combined contribution including the employee and employer may be as high as $57,500, depending on the circumstances. However, the IRS does limit the employer contribution to a maximum of 25 percent of employer compensation.
  • The Solo 401(k) can also be structured to allow for loans from within the plan. The maximum loan is $50,000 or 50% of the account balance, whichever is less.
  • The Solo 401(k) plan is designed for sole owners, corporations, LLCs, and partnerships.
  • One advantage to Solo 401(k) plans is they are not subject to unrelated debt taxable income (UDTI) under some circumstances unlike other retirement plans. This is of interest to those who plan to employ leverage within their self-directed 401(k)s, such as to buy real estate.

Self-Directed SEP IRA

  • This popular option allows for contributions of up to 25 percent of compensation, to a limit of $52,000 as of 2014.
  • Self-Directed SEPs can work well for sole proprietors and the self-employed/independent contractor. They can also work for partnerships and S-corporations, as well.
  • If you have employees, the SEP allows you to include them in the plan more efficiently than the Solo 401(k) plan. Administrative costs are also low compared to 401(k) plans and other plans designed for larger businesses.

Self-Directed SIMPLE

  • This plan is designed for small businesses with fewer than 100 employees who do not want the administrative burden of establishing a full 401(k) plan.
  • Employees can contribute up to $12,000 per year, and those over age 50 can contribute an additional $2,500 in “catch-up” contributions as of 2014.
  • Corporations/employers can also contribute to employees’ plans. But they are not required to, and can change the contribution each year, based on cash flow and any other factor they like.
  • This option may be appropriate for those business owners who have employees and who want to be able to offer them a valuable incentive while still retaining flexibility to contribute to their own accounts – and manage them on a self-directed basis.

Need more information? Give us a call! We are at 866-7500-IRA (472). We look forward to serving you.

 

 

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Lessons Learned Part Two: Self-Directed IRAs and Liquidity and Loan Guarantees

Self-Directed IRAOne thing all investors know is that liquidity and the ability to obtain loans can be the difference between success and failure. Still when it comes to Self-Directed IRAs, there are a few more considerations to keep in mind.

Liquidity and Self-Directed IRAs

Real estate investments periodically require large cash infusions. For example, you may need to replace a roof and spend $20,000 in the process. But you can only contribute a maximum of $5,500 or $6,500 depending on your age to a Self-Directed IRA. This can easily cause liquidity problems if the Self-Directed IRA owner is not careful.

The mistake many Self-Directed IRA owners make is not keeping enough liquid funds in reserve within their IRA. This creates problems when the IRA owned assets have expenses that exceed the available balance of the IRA account.

To raise the additional funds, the owner has the following options:

  1. Roll money over from another retirement account
  2. Borrow the money via a non-recourse loan to the Self-Directed IRA. But that could generate unrelated debt-financed income tax as described above, in future years.
  3. Put off the repair until their Self-Directed IRA has the cash available in it, either from selling other assets within the IRA, rolling eligible accounts over into the IRA, or accumulating future year contributions and earnings

Loan Guarantees and Self-Directed IRAs

Borrowing money within IRAs is not prohibited. Personally guaranteeing a loan is not prohibited for non-IRA transactions. But providing a personal guarantee on a loan made to your IRA is prohibited.

Unfortunately, a couple of investors had to learn that lesson the hard way. They provided a personal loan guarantee for an entity within their IRAs (their IRAs jointly owned the entity). The IRS got wind of it, and disallowed it. They went to tax court, which ruled against the two investors, costing them $45,000 in penalties.

It’s easy to see why they got confused: The rules clearly state that you cannot make a loan directly to your IRA. But not too many people think of loan guarantees as a loan. Even the IRS doesn’t think of loan guarantees as an immediate benefit, which is why recipients of guaranteed loans aren’t taxed on the proceeds.

But when it comes to Self-Directed IRAs, the IRS took a much harder line.

Consequences for not understanding these compliance issues can be extreme, including penalties and taxes from the disallowance of the entire Self-Directed IRA. It’s important for taxpayers to use caution when investing and administering Self-Directed IRAs.

Furthermore, it’s vital to use advisors who have experience specific to Self-Directed IRAs. Many rookies and generalists do not have a detailed understanding of how Self-Directed IRAs work – leading to problems like the ones described above. American IRA is an administrator who has been in business for 10 years and has a team comprised of people who are both experienced investors and IRA experts. This blend of expertise ensures transactions flow smoothly as their team is uniquely qualified to communicate with professionals (advisors, CPAs, attorneys, etc.) about investments at all levels within a Self-Directed IRA. American IRA does not give investment/financial advice in relation to any investments.

 

 

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Lessons Learned Part One: Self-Directed IRAs and Tax and Legal Compliance Problems

Self-Directed IRAExperience, they say, is the best teacher. But it’s a fool who learns by no other.

That’s why we’re writing this post: A brief survey of difficult tax issues and compliance problems faced by others. Self-Directed IRAs and other retirement accounts provide a lot of advantages – but they aren’t something for rookie advisors to be dealing with. There are a number of tax and legal issues that come up that are unique to Self-Directed IRAs, 401(k)s, SEPs and the like. They shouldn’t pose a problem in the vast majority of cases, but at the margins, or for people who are careless or who receive poor advice from advisors with little or no experience in Self-Directed IRAs, seemingly small mistakes can lead to big consequences.

Unrelated Debt Income Tax and Self-Directed IRAs

When most people read about IRAs in the media, all they see is that IRAs allow you to defer income taxes on contributions and profits (for Traditional IRAs) or allow for tax-free growth (for Roth IRAs). But that’s not entirely true.

In some cases, assets in an IRA can generate something called unrelated business taxable income, or unrelated debt-financed income. Both of these are taxable.

These don’t ordinarily come up for most conventional IRA owners (that is, people who do not use Self-Directed IRAs) because Sections 512 and 514 of the U.S Code Chapter 26 exempt most securities from the requirement.

But if your IRA owns an interest in an LLC or other closely-held business that employs leverage to operate, the portion of earnings that can be attributed to debt could become taxable as unrelated debt-financed income.

In other words, it’s only earnings from your own contributions that are tax-deferred within a Self-Directed IRA, when it comes to real estate or closely-held business. Earnings attributable to other peoples’ money may be taxable, in the current year!

Many advisors don’t realize this, though, and their clients are blindsided by a tax liability.

K-1 earnings from partnerships and rental income from real estate IRAs are particularly likely to generate UDFI tax liabilities, so investors and their advisors should be on the alert to address them as they arise. That way, investors would know to file a timely IRS Form 990-T, declaring the unrelated debt-financed income, and avoid potential tax liabilities and problems.

Consequences for not understanding these compliance issues can be extreme, including penalties and taxes from the disallowance of the entire Self-Directed IRA. It’s important for taxpayers to use caution when investing and administering Self-Directed IRAs.

Furthermore, it’s vital to use advisors who have experience specific to Self-Directed IRAs. Many rookies and generalists do not have a detailed understanding of how Self-Directed IRAs work – leading to problems like the ones described above. American IRA is an administrator who has been in business for 10 years and has a team comprised of people who are both experienced investors and IRA experts. This blend of expertise ensures transactions flow smoothly as their team is uniquely qualified to communicate with professionals (advisors, CPAs, attorneys, etc.) about investments at all levels within a Self-Directed IRA. American IRA does not give investment/financial advice in relation to any investments.

 

 

 

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Avoiding Real Estate IRA Tax Traps

Self-Directed IRAReal estate provides a unique combination of investment qualities:

  • Tangibility – Unlike securities, value almost never drops to zero.
  • Current income – From rent, mineral rights, logging or farming
  • Potential for capital appreciation
  • Tax advantages

Yes, rental income is taxable as ordinary income. But for those who use Self-Directed IRAs, holding real estate within an IRA allows you to defer those taxes until they take distributions. If it’s a qualified Roth account, distributions are tax-free!

The combination of real estate with the tax advantages of retirement accounts such as Self-Directed IRAs is a potentially powerful investment engine. But if you want the tax advantages to stick, you have to follow a few basic rules to avoid IRS penalties. Running afoul of them even once could cause the IRS to revoke the IRA status, resulting in big tax penalties.

Self-Dealing Rules

The first thing to understand is the prohibition against self-dealing. That is, using your IRA property for your own personal benefit, or the benefit of your own family.

Under the law, your IRA is holding your property in trust for you for the purpose of contributing to your retirement income security. If you begin appropriating the property for your own immediate short-term use, that creates a conflict of interest for your IRA. It also short-circuits the original purpose of the IRA itself: Congress grants tax advantages to IRA accounts because taxpayers have to give up current consumption to contribute to IRAs.

For this reason, if you own real estate within an IRA or other self-directed retirement account, you cannot stay in the property yourself, personally. Additionally, you may not provide services to the property such as maintenance.

You also cannot make the property available to your spouse, parents, grandparents, children or grandchildren. You can’t even make your property available to any advisor who provides you advice on your IRA, because of the potential for conflict of interest.

Taking the rules a step further, your IRA cannot take a loan from you, and cannot lend money to you or any of the people described above. You cannot pledge assets in your IRA as a collateral for a personal loan (though your Self-Directed IRA can borrow money on a non-recourse basis – as long as the proceeds remain within the IRA).

Furthermore, you cannot mask yourself behind an entity you control. For example, you cannot hold a property in a Self-Directed IRA and have the property hire your corporation to do remodeling, landscaping, lawn maintenance, or anything else. The same goes for any corporations controlled by your spouse, parents, or children or your spouse’s parents or children. For more information, see IRS Publication 590, or click here.

FAQs

Can my Self-Directed IRA buy or sell property from or to myself or my family members?

No. Your IRA cannot conduct transactions directly with you, your spouse, decedents or antecedents, outside of contributions and distributions.

Do nieces and nephews count as family members?

No. Curiously enough, there’s no rule against renting the property or granting use of the property to brothers and sisters and their descendants. The law only prohibits your IRA from doing business with or benefiting your spouse, decedents and antecedents, your advisors and their spouses.

Can my brother and I both own vacation rentals within Self-Directed IRAs and allow each other’s family to stay in the house?

Technically, yes. But we wouldn’t recommend it. The IRS could possibly challenge it, and courts have generally taken a dim view of attempts to circumvent the spirit of the law.

Can I take a salary for managing my property within a Self-Directed IRA?

No. The same goes for your parents, spouse and children. This would violate self-dealing rules. Utilizing a property manager is the safest method for managing your IRA owned real estate. They can take care of evictions, collections, and send the profits to your IRA. This keeps everything at arms length for you.

Can I take money out when I sell the property within a Self-Directed IRA?

Sure. But it would be counted as a distribution, and taxes and penalties would apply, just as it would for any non-Self-Directed IRA.

Do I pay capital gains tax on property held within a Self-Directed IRA?

No. Capital gains tax does not apply to property held within IRAs. The cash proceeds just remain within the IRA. When you distribute the proceeds, it is generally taxed as income (minus an allowance for any basis you may have accrued as a result of non-taxable contributions). Of course, if you funded a Self-Directed Roth IRA with after-tax contributions, and the money’s been in your Roth IRA for five years or longer and you have reached 59 ½ , then the proceeds are tax-free!

Are there other taxes I should be aware of?

Yes. Your profits won’t be subject to ordinary income tax or capital gains tax as long as the assets remain within the Self-Directed IRA. But if you used debt to finance your purchase, you could be liable for something called unrelated debt-financed income tax. In a nutshell, the portion of your profits that can be attributed to leverage is subject to this tax. For more information on unrelated debt-financed income tax, see 26 U.S. Code Section 514.

 

 

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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 PracCap.com.

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.

 

‘Crowdfunding’ Multiplies Self-Directed IRA Investment Options

Self-Directed IRA | CrowdfundingA relatively recent development in social media is opening the door to a vast number of new potential investments for those who use Self-Directed IRAs: Crowdfunding.

Crowdfunding is the practice of raising funds for a project or investment by aggregating the contributions of a wide number of people via the Internet. The process frequently bypasses the traditional methods of equity raising – including Wall Street investment bankers, who are often prohibitively expensive. The Internet, thanks to websites like GoFundMe and Kickstarter, are also making it possible to raise capital for relatively small projects, or efficiently make use of relatively small contributions. It’s also making it much easier for individuals and small groups to fund startups with very limited capital of their own.

For those who are ready to look beyond the traditional stock, bond, CD and annuity investments usually found in IRAs, the emerging crowdfunding space promises to be a rich environment for those who choose to use Self-Directed IRAs – provided you are willing to take on the risk of investing in these smaller, unregistered ventures.

Relevance to Self-Directed IRAs

According to a recent report published by HealthiosXchange – a crowdfunding site specializing in health care-related investments – “Equity crowdfunding (“portals”) which leverage the Internet/Social Media to raise smaller amounts of capital per investor from larger groups of investors, is perfectly equipped to assist Self-Directed IRA investors with achieving attractive returns in private equity.”

For those who want to play on a larger scale, you may want to consider sites like Offerboard, AngelList and CircleUp – all sites that look to occupy the space traditionally served by “angel investors,” private equity and/or venture capitalist funds. These sites allow smaller ventures to bypass the usual gatekeepers of capital and appeal directly to the investment community – without the usual fees the gatekeepers charge.

As regular readers know, Self-Directed IRAs allow investors to direct retirement assets into a much wider and more diverse selection of assets and asset classes than are typically available via traditional investment company-sold IRAs. The same holds true for other kinds of retirement accounts as well, including Self-Directed Solo 401(k)s, SEPs, SIMPLEs, and even Coverdell ESAs.

In some ways, these kinds of investments suit retirement accounts very well: Both retirement account investing and venture capital/angel investing usually have time horizons of several years. This matches up well with Roth account rules for Self-Directed IRAs and Self-Directed 401(k) “designated Roth accounts” that penalize withdrawal after anything less than five years.

Furthermore, these types of crowdfunding websites usually offer investment options at below $5,000 – specifically calibrated to make them friendly to Self-Directed IRA investors. This is a major change from the previous customary arrangement, in which angel investors had to be in a position to pony up at least $35,000 and even $50,000 in order to participate in an investment.

This is doubly important for Self-Directed IRA investors because of the extreme riskiness of any one of these types of startup endeavors. In the angel investing/ venture capital world, expected returns for the entire asset class are generally pretty high – over time. But the likelihood of any individual company flaming out for any number of reasons is also very high. If nothing else, crowdfunding sites have made it possible for startups and venture funds to lower their minimum investments. This alone is a game changer, because where before the investor with just $35,000 to invest could participate in just one offering, he or she can now participate in as many as six or seven.

If you’re tired of the lackluster returns available via traditional asset classes and you are open to making some changes in your retirement investing, or simply want to learn what self-direction is all about, give us a call at 1-866-7500-IRA(472). Or, of course, visit our home page at www.AmericanIRA.com. We look forward to hearing from you.

 

 

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