Alternative Investment Option to Consider – The “Self-Directed” IRA
Many Americans invest retirement funds into publicly-traded assets such as stocks, bonds, mutual funds and so forth. This isn’t a surprise since the large investment institutions encourage people to invest in these types of assets and don’t do much advertising about unconventional ways in which you can use your retirement funds. You may not realize that the laws governing IRAs (i.e. Independent Retirement Accounts) allows virtually unlimited investment flexibility. This is where “self-directed IRAs” come in.
Using “self-directed” IRAs has become extremely popular in recent years. The purpose of these self-directed accounts is allowing an investor to invest some (or all) of an IRAs assets into “alternative” investments, which means pretty much anything other than stock market-based investments. Some alternative investments include real estate, loans, tax liens, and privately-held companies.
But keep in mind that there are restrictions with self-directed IRAs. For example, you cannot engage in self-dealing. Therefore, if you invest in a rental property, you can’t just rent the place to yourself,according to a relevant USA Today article.
Let’s say, even with some of the restrictions, you’re interested in this type of investment. One of the first steps is to speak with an estate planning attorney and discuss how to “roll” or “transfer” some (or all) of your retirement account in to an IRA custodian. Once again, this is where an experienced estate planning attorney can help. There are a variety of IRA custodians willing to hold alternative IRA assets, but keep in mind that not all custodians are the same. For example, some custodians offer low fees, but the cost is a lack of customer service. Conversely, other custodians offer a high level of customer service, but you pay more for that service.
An important consideration for determining which custodian is right for you is whether the custodian will be open to using the IRA assets to purchase an LLC (i.e. Limited Liability Company). This is important if you’re the type of client who wants to have a high level of control in how the IRA assets are invested. If the custodian is open to an LLC purchase, it will allow the client to serve as the “Manager” of the LLC and make investment purchases using a check from the LLC’s checking account. This can reduce transaction costs since the custodian has minimal involvement in the investment strategy. Also, since the LLC is a “flow-through” tax entity, investments made using this strategy is typically tax-deferred, though this is not always the case.
Once again, speaking to an experienced estate planning attorney would be extremely valuable if you decide to utilize this IRA strategy.
About the Editors: InSight Law is an estate planning firm in Ashburn, Virginia (VA).The firm’s areas of practice include estate planning, business planning, trust and probate administration, assisting veterans and their family members with obtaining benefits, and medicaid planning. If you have questions, don’t hesitate to contact our office at 703-654-6019. We’re here to help.