How are you different from other investment groups?
Once ERISA was passed, the securities markets were responsible for bringing the IRA and 401(k) to the mass market. The banks and brokerage houses created a misconception that buying stocks, bonds and mutual funds was all that was allowed through retirement products such as an IRA. This is 100% false! Banks and brokerage houses have a vested interest in having you invest in stocks, bonds and mutual funds - not real estate, businesses and other non-traditional investments. Do not let the interests, or lack of knowledge of your financial advisor limit your ability to maximize the investment potential of your retirement accounts. There are many great brokers who understand that true diversification happens when your funds are invested in a variety of different markets. PropertyVestors would be more than happy to introduce you to a professional who will be able to help truly diversify your IRA.
Why do you give away free information?
It is possible to use funds from most types of retirement accounts:
Traditional IRA
Roth IRA
SEP IRA
Keogh
401(k)
403(b)
And many more!
It must be noted that most employer sponsored plans such as a 401(k) will not let you roll your account into a new vehicle while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
How many people have self-directed IRA accounts?
This is a difficult number to determine. However, the self-directed industry is growing at a rapid pace and is expected to see upwards of $2 trillion enter the market during the next two years. Some of the latest numbers show more than 45 million IRA holders in the U.S. and less than 4% of those funds are held in non-traditional assets. This number is expected to increase significantly during the next five years as more and more individuals and their financial advisors attain a greater awareness of self-directed IRAs.
Are there limits to the investments I can make?
Yes. As discussed previously, you cannot invest in Collectibles or Life Insurance Contracts. In addition, there are certain transactions in which you cannot participate when using IRA funds. These are referred to as "prohibited transactions". Prohibited transactions are defined in IRC § 4975(c) (1) and IRS Publication 590. They were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Professionals often refer to these as "self-dealing" transactions. Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit rather than to benefit the IRA. As an IRA owner, if you violate these rules, your entire IRA could lose its tax-deferred or tax-free status. It is very important that you work with a competent Retirement Account Facilitator to help avoid violating these rules.
Specifically, what are prohibited transactions?
IRC § 4975(c) (1), identifies prohibited transactions to include any direct or indirect:
Selling, exchanging, or leasing any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intend to use.
Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.
If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction. A Retirement Account Facilitator can help educate you regarding how these may apply to investments you are considering.
Who are disqualified parties?
Many of the prohibited transactions are the result of a very simple equation:
Plan (or plan asset) + Disqualified person = Prohibited Transaction
A plan is defined to include tax-qualified plans, IRAs and other tax favored arrangements. For the complete definition you can reference IRC § 4975(e) (1). A disqualified person (IRC §4975(e) (2)) is defined as:
Spouses of Lineal Descendents (son or daughter-in-law)
Investment advisors
Fiduciaries - those providing services to the plan
Any business entity i.e., LLC, Corp, Trust or Partnership in which any of the disqualified persons mentioned above has a 50% or greater interest.
Why are the rules considered to be complex?
These rules exist to ensure that your IRA does not engage in any investment activity other than for the exclusive benefit of the IRA. There are many types of investments which violate this law. For example, buying a house and then letting your mother rent it would potentially create a conflict of interest. If your mother, who was making rent payments, all of a sudden could not - you would be conflicted from evicting her and finding a more reliable tenant. You would then have a conflict of interest between your relationship with your mother and what is in the best interest of your IRA. These rules were put in place to help avoid these sorts of scenarios. See IRC § 408.
What is the consequence of a prohibited transaction?
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA's assets on the first day of the year in which the prohibited transaction occurred.
How do I make sure that I am following the rules?
As mentioned previously, the IRS does not identify what investments or transactions you can make in your IRA. They instead state which investments are prohibited and what makes certain transactions prohibited. Identifying, interpreting and following these rules can be complicated, but not impossible.
My CPA and Financial Advisors say this is not allowed. Why?
It may be that they are influenced by self interest or they are simply uninformed. Often times an individual will ask their CPA, attorney or financial planner for advice and in turn are told: "That's illegal," "You can't do that," or "It is very risky." Attorneys stick to their core competencies and rarely deviate from them. Tax preparers are taught to do just that: prepare taxes. Your financial advisor's company or agency may either be disinterested in this typ of business or have not been educated regarding this type of investing format. A stock broker makes money when they sell stocks, bonds and mutual funds-not real estate.
What is a self-directed IRA custodian?
The custodian is a bank or savings and loan institution, as defined in IRC § 408(n), or any other entity that has the approval of the IRS to act as custodian. In order to have a self-directed IRA, it needs to be held with a custodian who will allow investments into non-traditional investments.
Why are there not more of these custodians across the country?
There are very few non-traditional IRA custodians simply because the business is not as profitable as it is for the brokerage houses. It requires many more hours to complete a real estate transaction than to purchase stocks over an electronic system. Traditional banks do not compete because it does not fit within their business objectives. They make money by leveraging the dollars you have sitting in their accounts.
How does a custodian make money?
You are charged a fee for simply having an account with a custodian each year. A custodian generates revenue in a variety of ways:
Asset based fees.
Transactional fees
Holding fees
Special fees
Asset fees are typically based on a percentage of the value of your self-directed IRA. As your IRA continues to increase in value, they are able to charge you more - even if you never purchase an asset. Larger accounts are penalized under this system.
Transactional fees apply when your IRA purchases an asset. In regards to real estate, there can be fees assessed for wiring an escrow deposit; fees for reviewing a purchase and/or sale; fees for recording each document; and fees for the final wire of funds to complete the purchase. The process repeats itself when you sell that asset. This can add up quickly for active investors.
Holding fees are also assessed for assets that are held with a custodian. If your IRA purchased a piece of real estate, the custodian could assess a quarterly fee for just holding the deed on behalf of your IRA.
Special fees include things like expediting service, express mail, wiring funds and so on. Special fees can add up quickly, especially when trying to close transactions quickly.
Am I limited in which types of investments I can make?
Self-directed IRAs allow you to deal with a wide variety, and different types of investments. Some of the more common include:
Residential Real Estate
Commercial Real Estate
International Real Estate
Sub-Leasing
Real Estate Options
Loans
Mortgages
Tax Deeds
Tax Liens
Businesses
Franchises
Limited Partnerships
Limited Liability Companies
Private Stock
Public Stock
Mutual Funds
And much more!
How do I open a self-directed IRA account?
Opening a self-directed IRA account is quite simple; it can be done in as little at 72 hours. We can put you in contact with reputable companies to hold your account and assist you in funding your investments.
