I will be discussing the importance of asset protection for real estate investments at various workshops this fall. Each of the convention hosts asked if my presentation would conflict with the information being presented by the self directed IRA speakers. The short answer is no. In my 90 minutes of speaking time, I do not have time to get into tax deferred investing. But if I did… then there would possibly be a conflict and here’s why.
With the exception of a Self Directed ROTH IRA, why would anyone want to roll their traditional IRA or 401k into a self directed IRA with the following attributes:
- You will pay a fee to set up your Self Directed IRA. This fee ranges between $1,000 to $2,000.
- You will pay your Self Directed IRA custodian an annual maintenance fee of X% of the IRA value and/or you will pay $$ for each transaction your Self Directed IRA enters into on your behalf.
- You will not be able to enter into deals on behalf of your Self Directed IRA.
- All offers to purchase, purchase and sale contracts, insurance purchases, property management agreements, etc., must be faxed into your Self Directed IRA custodian for his signature. More $$
- YOU CANNOT SIGN. Hopefully your Self Directed IRA custodian works weekends so you can tie up the great deal you run across on Saturday afternoon.
- Your Self Directed IRA custodian will have to wire any and all monies to tie up the property (earnest money) and eventually close on the property. More $$
- Everything in item #3 also applies when you sell.
- Everything in item #3 can be avoided and you can control your own money if you set up a LLC managed by you, but owned by your Self Directed IRA. This is easily accomplished for another $1,500.
- You cannot borrow from your Self Directed IRA.
- If you and your spouse each want to create a Self Directed IRA, the fees are doubled. You cannot combine IRAs. More $$$$
The answer is simple. The company’s recommending Self Directed IRAs never tell you any of this information. The sale is in the sizzle – and not in the facts. “Take control over your IRA and invest in real estate or anything you desire.” I have given some of the facts regarding Self Directed IRAs now let me give you the “sizzle” and the “facts” about a Self Directed Pension Plan.
- You are the trustee of your own plan. You are the person who will negotiate with the seller, sign the contract, collect the rent, etc., all on behalf of your plan. COMPLETE CONTROL.
- You can invest in real estate, other businesses, your own Corporation, precious metals, life insurance, trust deeds, tax liens, private notes, and much more…
- You can combine multiple IRA accounts held by different individuals into one account. You and your spouse, business partner, child, etc., can participate in your plan. As a participant, you can elect to combine accounts into a master account. Thus, everyone’s rollover IRAs or 401ks are held in one investment account under your control.
- You can borrow from your own pension account. As a participant, you can borrow the lesser of $50,000 or 50% of your plan balance. Thus, if you rolled an IRA valued at $125,000 into your plan you could borrow back $50,000 the next day. (Note, you must repay the loan within 5 years or it will be treated as an early distribution.)
- You can convert any amounts held in your plan to a ROTH regardless of your income tax bracket.
- You can make annual tax-deductible contributions of up to $51k into your plan and/or $17,500 into a ROTH account (total contribution to your plan can not exceed $51k between the ROTH and regular plan contribution).
- You can have multiple pension plans.
and the facts …
- If you have employees, whether in your real estate business or another business you own, you must allow your full time employees to participate in the plan. Thus, if you are considering contributing to your plan, you must make contributions for your employees. In these situations, a Self Directed 401k is preferable to a Self Directed Profit Sharing Plan.
- You will pay to set up the plan. The typical fee ranges $1,500 to $2,000 depending on the type of plan.
- You will incur an annual plan administrative fee of $300 to $700 per year depending on the number of participants in your plan and the amount of plan assets.
- Your plan may have to file an annual 5500 tax return if you have more than one participant (husband and wife are considered one person) and/or your plan assets exceed $250,000. The preparation of this return and its cost is included in the annual administrative fee above.
When it comes to investing with your retirement funds, it’s wise to know your options. A Self Directed IRA is great because it gives you control over your investments, however the control comes with strings attached. If you would like the same control without all the strings and a few other benefits, then consider a Self Directed Pension Plan as an alternative. If you would like to discuss how this plan might benefit you, here is a link to my calendar to set up a free 30 minute consultation: http://www.vcita.com/meeting_scheduler?v=85134fde