Can you buy whatever you want with an IRA??
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IRAs and Alternative Investments.
I keep receiving emails about buying real estate with IRAs
My background in this area? I've invested countless dollars and hours to be trained by Ed Slot (http://www.irahelp.com) and I literally have his team on retainer. If I can't answer an IRA question, I get my team in his office to answer the question.
One thing I am very clear about - exercise caution. I've seen many emails enticing people to buy real estate, buy land, buy commercial buildings and even rental property. Heck I've even suggested people/friends use IRAs/401(K)s to assist other friends in funding business ventures. These ideas all have potential, potential for growth in your IRA and also potential for disaster.
In this series of articles I'll be discussing various steps and items to be aware of when using your IRA to purchase various investments. I won't be addressing if any single opportunity is appropriate or not, do you need to be accredited or not. I will be focused on the process. Keep in mind, this can initially look complex and can intimidate people. Working with a skilled Advisor will make all of the difference. When interviewing the Advisor, ask to see the checklists they have to ensure your account and monies are safe - it may not be that important to use an expert on IRAs, you can always earn more money!?
Background: Your IRA is technically already self-directed. With that said there are special companies, called Self-directed IRA Custodians that will hold your monies for you and take care of receiving monies and writing checks and processing paperwork that is required by the IRS.
Okay - the high level view of how this works: You rollover your IRA from where ever it happens to currently be to this special self-directed custodian. Then instruct the custodian to purchase the asset you are looking to buy or invest in. Seems pretty simple? Yes and no.
The "no" side of is where I will focus this series of articles, expose the complex issues and how to address them. There are many issues to address like dying, who can profit from your IRA investments, prohibited transactions, there are mistakes you can make that will cause the IRS to consider your actions to be a lump sum distribution, which is taxable and penalties may apply.
Would you like to know of these issues and how to address them? Great! That is what the next several articles will discuss and address.
The single biggest issue I see is putting 100% of your IRA monies into an asset that makes your IRA 100% illliquid. If anything should go wrong with your investment, such as needing a roof on a rental, you can't take money from your checking account to pay for the roof, that would be considered a prohibited transaction, more on those later in the series. How can you address this issue? Simple - don't put all your IRA money into one asset, keep a large enough contingency cash reserve.
How do you tell if an Advisor knows what they are talking about? You ask questions! Here are five questions to ask your IRA Advisor to help determine just what they know and I'll provide five more questions in the next issue:
- What resources or publications does the Advisor use to keep up-to-date with changing IRS distribution Rules?
- When was the last time the Advisor attended a seminar or training session on IRAs?
- What was the last new IRA ruling or tax law change the Advisor is aware of?
- What factors does the Advisor recommend his IRA clients consider in deciding what to do with their lump sum distribution from their company retirement plan?
- Whom does the Advisor recommend you should name as your IRA beneficiary? And what factors does the Advisor suggest you consider in making that decision?
Covered in future articles in this series:
- Beneficiary setup and review
- More questions to determine your Advisor's IRA expertise
- Who can manage your IRA assets
- Self-directed IRA Custodians and the fees they charge
- Prohibited transactions
- Death
- Estate planning
- Limited Liability Corporations
References for this series of articles:
Books to review and possibly buy:
Special disclaimer: I'm not advising you to do or not do any one of the many things you can do with your IRA. The only way I could advise an individual is by meeting with them and reviewing the entire situation and plan.
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