I like solutions that give me maximum choice and control. I repair my own motorcycles and guitars. I do my own basic electrical and plumbing repairs. I file my own taxes…unless they get really complicated, in which case I know where to draw the line and call an expert.
Along the way, I’ve learned to avoid large and remote institutions, as they don’t give me many options. Retirement planning is a case in point. For a few years I had a 403(b) plan from a previous employer. Once I accounted for fees and costs, it became clear that I would be better off paying taxes on the salary that would have gone toward contributions and investing it myself.
Many people are waking up to the fact that individual retirement accounts (IRAs) suffer from the same problem…but it’s one you can solve by moving away from IRAs offered by large institutions and switching to a self-directed IRA.
The IRA released
Most retirement investment products are not designed with you in mind. Instead, they are designed to direct your retirement savings into the US stock markets. A whole “food chain” has grown up around the US retirement system, pumping money from Main Street to Wall Street. .as if he needed more.
The problem is the lack of investment options. Most institutional IRAs offer only a limited range of US stocks and bonds.
The truth is, your IRA can legally pursue almost any investment option imaginable: real estate, business start-ups, intellectual property, precious metals, you name it. A “self-directed” IRA is perfectly legal and can be as simple or as complex as you feel comfortable with.
Is that how it works. By law, all IRAs must have a “custodian” in the US who is responsible for custody of your IRA, record keeping, transaction processing, IRS form filing, and other administrative tasks. . Most large custodians keep things simple by offering a standard menu of US stocks and bonds. But there’s nothing to stop an IRA custodian from offering offshore investments, real estate, private mortgages, precious metals…and much more. In essence, some custodians allow you to manage your own IRA.
A self-directed IRA is like a conventional IRA: tax-deductible contributions; no income tax; distributions are taxed as ordinary income. The difference is that a specialized IRA custodian allows you to actively choose your investments.
For example, your self-directed IRA could buy a house that you plan to use when you retire, but rent in the meantime. Tax-deferred rental income is used to maintain the property and to finance other investments. You can select the property and negotiate the terms of the deal yourself. (However, the custodian must be the legal owner, so all documents are in your name, even if they refer to you as the owner of the IRA, as “Custodian of company XXX for the benefit of (your name) IRA “.
When you take title to the home at retirement, you’ll pay ordinary income tax on the appreciation in value of the home since the IRA purchased it. For example, let’s say your Self-Directed IRA buys a house for $100,000. You rent it and it appreciates at an average annual rate of 8%. After 20 years, your $100,000 investment will be worth $215,890, and when you move out you will pay income taxes on the $115,890.
the golden option
Thanks to the Taxpayer Relief Act of 1997, a self-directed IRA can hold gold, silver, platinum, platinum, and palladium, either as bullion or coins. In both cases, the metal or coin must be of a specific quality to qualify for an IRA. For example, an IRA may hold American Gold Eagle coins, Canadian Gold Maple Leaf coins, American Silver Eagle coins, American Platinum Eagle coins, and gold and silver bullion that is 99.9% or higher pure. (Some well-known gold coins, including the South African Krugerrand, are banned, as are bullion bars that aren’t pure enough.)
To meet IRS requirements, the precious metals in an IRA must be held by the custodian…sorry, you can’t keep it yourself. IRS Publication 590 specifies that “the trustee or custodian must be a bank, federally insured credit union, savings and loan association, or an entity approved by the IRS to act as trustee or custodian.” Many trustees/custodians use private depositories to store IRA metals. Alternatively, your IRA can invest in COMEX metal futures or exchange-traded funds (ETFs).
The ultimate option at sea
There’s another IRA “trick” that can really open up the world of retirement investing. That is having your IRA custodian create and own a limited liability company (LLC), either in the US or abroad, which in turn can make the required investments, including gold and other metals. In this case, you can essentially manage the LLC yourself, bypassing the custodian for most matters.
The key to all of this, however, is getting sound advice from an experienced and knowledgeable tax attorney. The IRS rules for IRAs are quite strict, and mistakes can lead to “early distributions”…with the tax implications that come with that.
So go ahead and overload your IRA…but get help. After all, DIY doesn’t mean doing it alone.