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RealnetCO.com |
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VA Buyers srill get a $8000 rebate!
What is a Self- Directed IRA/SEP 401 (k)?What is a self-directed IRA? A Self-directed IRA is a retirement plan set up in a way that will finally provide the golden parachute to the individual retiree that the corporate world has been providing to its executives for years. This is especially true for those who will be self-directing their IRAs. Banks administer IRAs for individuals and provide product for those IRAs to invest in. Typically the products provided by banks are certificates of deposit and mutual funds. Insurance companies provide another home for IRAs and also provide the product for investment: usually annuities. A third option is stock brokerage houses, which allow investment in products they sell: Primarily stocks with mutual funds. An independent administrator on the other hand, administers the self-directed IRA. That means the administrator has no product to sell. You, the account holder, are the one who chooses the products in which to invest. You can choose real estate, mortgages, or any number of investments including the more traditional ones mentioned above.
What do you do when your CPA says, "You can't do that"? Investing IRAs in real estate has been available, legal and appropriate for decades. I was told “You can’t do that”. many times, and I believed it. As a real estate practitioner, I wanted to use retirement funds to invest in real estate, but my advisors told me I couldn't. Now I've learned that of course you can, and it has been done for quite some time. Each year I travel to a national real estate seminars to get educated by and network with the top Realtors in the nation. Many, like me, did not knew that you could invest in real estate with your retirement plan.. Their CPAs and attorneys had told them just like me, "You can't do that". At a seminar 2 years ago, one of the speakers told of using retirement money to buy real estate. I was awe struck. My CPA then said after I told her I had just learned of using retirement funds to buy real estate that she had heard of it, but knew of no one that would accommodate real estate, but to “let her know if I learned how”. You can use your self-directed retirement plan to invest in real estate, trust deeds, limited partnerships, and LLCs. At first I thought the lack of knowledge was a phenomena that was only common to the Denver area. Maybe we were just out of touch with the laws that Congress has passed and what was allowed in Section 408 of the Internal Revenue Code. I have checked with my current IRA custodian a mutual fund, also banks and stock brokers, and was told flat out, "You can't do that." Of course, now I’ve learned that what they really meant was, "You can't do that here." In fairness though, they may not know there are other choices as well. Often CPAs, administrator, and financial advisors confuse the rules that apply to qualified retirement plans with those that regulate IRAs. Self-directed pension plans (including IRAs, Keoghs, SEPs and some 401(k)s are the most flexible of all retirement vehicles. They are much more resilient than employee sponsored qualified plans. The rules that apply to qualified plans and are enforced by the Department of Labor (D.O.L) do not apply to IRAs. One of those rules that are often misapplied is the one regarding maximum contributions by retirement funds to limited partnerships. It states that no more than 25 percent of a limited partnership can be funded by retirement funds. This is a good rule when you consider that in an employee-sponsored qualified plan, retirement money from many parties are commingled into one investment plan. The individuals who have their money in such a plan have little or no say as to how that money is to be invested. They are at the mercy of the plan administrator. A non-prudent retirement plan administrator could make a mistake and lose the whole bundle in one investment. This administrator, whom you have probably never spoken to in your life, does not consult you regarding the investments he makes and therefore needs the D.O.L. limitations to prevent them from putting all your eggs in one leaky basket, say Enron. The IRA, on the other hand, does not have these limitations. It is not governed by the D.O.L. The account holders of the self-directed IRAs have complete and total control over the investments they choose. They have the obligation of thoroughly investigating each investment to be considered and, hypothetically speaking should be less vulnerable to poor investments. Because of the personal due diligence they are able to perform, they don't need the extra non/limitation of the 25 percent rule. The absence of this regulation on IRAs opens tremendous potential for profit making for the self-directed pension. Additionally, real estate investments that other wise would be out of the reach of individual pensions can be acquired by banding two, three, or more together in a limited partnership or limited liability company. An example is a single family rental property. Purchasing a property for all cash would be out of the reach of many IRAs. Some IRAs might not have the $200,000 that it might take, or may not want to risk that amount on one project, but by pooling several IRAs, a purchase could be made. The property could be rented out, and the cash flow would go into the IRA accounts to accumulate tax free/deferred. A annual return of 5-7% would be customary, but allowing the property to appreciate over a number of years can make the return truly attractive. That sure beats the 1% I’m getting on my money market now, and to me its pretty secure. The only problem with this investment is that it is out of the reach of many IRAs. Anticipating that, a limited partnership agreement, or Limited Liability Company could be created that allowed investors to buy into the partnership for as little as say $20,000 (1/10 of $200,000). That could allow smaller investors or ones that wanted to spread their risk to still participate. Each investor still had the ability to conduct a thorough investigation into the viability of the investment, one they could see and touch. I’m tired of giving my money to someone with no control whatsoever, and without true knowledge of the market place. I always felt that things were completely out of my control. With real estate however, it is possible to participate in the kind of return that would enhance any IRA in a way that is significant. In the above case ten investors were used; but one of the IRAs could purchase two or more shares, or a property in its entirety. Another investment prohibited by your bank and stockbroker is the purchase of trust deeds. Long a common investment for banks and stockbrokers alike, the purchase of trust deeds can also be an excellent way to double or triple the return of traditional IRA investments. Typically, banks and stockbrokers buy the trust deeds in bulk at a discount and then either hold them for the yield or re-sell them at a lesser discount. These same opportunities are available to the IRA investor. The difference is that they are not bought in bulk. Each trust deed is investigated and purchased separately. The good news is that the IRA can obtain even better discounts and better products than when buying in bulk, which causes the failure rate to be much less. What would your bank or stockbroker say to you if you asked to do one of these types of transactions? Well, we now know the answer should be "You can't do that here." Then again, you probably can't make that kind of return there either. How do you prepare your IRA for these types of opportunities? Designate the amount of your retirement funds that you wish to use in real estate investments and open a new IRA accounts with an independent administrator, which we can help you with. There are no limitations on the number of accounts one may have. I suggest that you use separate accounts for each type of investment: one for your CDs, one for your stock or mutual fund investments, and one for your real estate investments. By having separate IRAs for each type of investment, you will have a better sense of which investments are producing good results and which are not.
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