The Beginning of What Could Be An Open Pandora’s Box – The Subject of “Non-Traditional Assets” in Individual Retirement Accounts (IRAs)

• IRON100
• January 29th, 2010

If anyone of you read last week's post about trading one's IRA, I openly asked for questions on topics. Lo and Behold, our own @BarrieAbalard asked a fantastic one about Master Limited Partnerships within Individiual Retirement Accounts (IRAs). I will begin to answer that question starting next week, but let us once again step back a minute and review exactly WHAT you can own inside an IRA.

 My goal in discussing this is not just to spark interest in the 45-plus crowd that can actually do some of these investments, but to spur the imagination and planning of 20-and-30-somethings out there who need to know that there are non-security assets that one can hold in an IRA that can shed hundreds of thousands of thousands of dollars tax-deferred or tax free, if one chooses to do so. I am not casting aspersions on those investment bankers and brokers out there who want to sell you the hottest investments, but I think one needs to open one's eyes to new possibilities out there.

To review, what kinds of assets can be held within IRAs? To cut to the chase, here is a Journal of Accountancy article on what can and cannot be held in an Individual Retirement Account, whether it is a Traditional or a Roth variety. In general, however, one cannot invest in life insurance or collectibles (art work, antiques, and most precious metals). Foreign investments are OK as long as they are American Depository Receipts (ADRs) or domestically sponsored foreign asset mutual funds or exchange traded funds.

If one can obtain, either through job loss or by starting a side-business (self employment or a home business), a self-directed Individual Retirement Account, one can, if one so chooses, buy residential and even commercial real estate if one can afford to do so. If you build up enough assets to do that. One can (and please do not throw the infomercial garbage at me) actually wholesale properties, do short sales, foreclosures,  and rental properties, or flip properties though an IRA. I have a friend here locally who has built a fortune in an IRA doing so and he continues to do so. The thing to realize is:

1) This individual has the expertise to perform such transactions and does it as a separate business.

2) One would need an IRA plan administrator to help manage the paperwork (and legal work) associated with real estate transactions within that IRA.

Though each real estate investment much be researched, and ONLY funds from INSIDE the Individual IRA used to fund these investments, it is not impossible, in good times and in bad, to generate 10% or more net return per year. If one buys property at wholesale prices (typically 70% of current market value for investment properties), one can see quite substantial net returns if one's time horizon is long enough.

I will do my best in the coming weeks to describe some of these opportunities to you, but you must understand a couple of  things:

1) These transactions need to be managed by a trust administrator to make the transactions completely defensible to the IRS (remember folks, the IRS is hungry for assets and if something looks askew, particularly in tax-deferred investments, they will find the errors).

2) You need to understand your own asset allocation needs and risk tolerance before attempting these transactions. You also need to learn how to manage the risk of such transactions in terms of buying, selling, and even financing these properties so that your asset base is not depleted in the process of the investment's life. These investments can and do provide substantial returns, many exceeding traditional mutual fund returns over time, but again, timing and exit of these investments is critical to success. Ask anyone buying an investment condo late in 2004 feels now if he or she still owns it. If it is not generating cash flow, that person likely has a bad opinion of real estate.

Why do I mention this topic to 20-somethings and 30-somethings? The main reason I want them to know about this is that they need to get off their assets (I think I added an extra consonant in there somewhere) and start a home-based business. All of those assets can be funneled into various Traditional or Roth IRA vehicles that can cast off  tens of thousands of dollars each year which will allow you to invest and grow non-security assets like real estate.

It IS doable, but you must have discipline and a plan, just like a trader would. 30 years of investment capital spun out of a home-based business can and will, if you allow it to do so, build you a comfortable retirement. It will not be easy, but do you really want to be watching American Idol and become at 62 years of age a contestant auditioning for a contest in which you are too old to participate? I think the easier way to have financial freedom is to invest that slack time in front of the HDTV screen in a business that will allow you to expand your investments and your ability to achieve financial freedom one day in the future. To do this, your pants indeed must be off the ground.

I will get into this more later. It also gives me an idea to see if a guest writer who has expertise in this area will write for us. This person's schedule is packed, but he might relent a time or two if I ask him politely.

For younger people, personal finance should be a thinking and evaluation process of learning how to manage assets and grow them so that their obligations, wants, and even dreams can be fulfilled. As long as Congress does not destroy these tax-deferral opportunities, each of you has the opportunity to meet your dreams more than halfway. You, however, need to step forward and do what needs to be done, because no employer will ever care more about you and your family than you will. Trust me on that last statement.

Enough of this pep talk. I will step out a bit into the abyss of non-traditional IRA investing, and do some research on those Master Limited Partnerships and how they may be held in IRAs.

More knowledge to come. If you would like to add to this personal finance knowledge pool, get in touch with me at buffalotrader100@gmail.com. Also, be a @BarrieAbalard and ask some tough questions. I will find  the answer or find someone who will write about it. That is what the StockTwits community is all about and why it leads all investment social media in sharing data all day long around the world.

 

 

Tickers: flipping properties, foreclosures, plan administrator, real estate within IRAs, Roth IRAs, self-directed IRA, Traditional IRAs, wholesaling real estate

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