I’ve been learning a bit more about Individual Retirement Accounts and wanted to share a few things I’ve learned about how flexible IRAs actually are. Obviously talk to a qualified financial advisor before acting on anything you see here. If I got anything wrong, please let me know in the comments where everyone can read it.
Most people think of IRAs as being something you can invest in stocks, bonds, mutual funds and that is about it. If you really look at the law, it is much more generic than that. In fact the actual tax law only lists a handful of things that IRA can not be invested in. Here is the list:
- Life Insurance Contracts
- Alcoholic Beverages
- S Corporation Stock
Obviously that leaves a great number of things that you can invest IRAs in that most people don’t have access to. For example, you can invest your IRA funds in:
- Residential Real Estate
- Private Loans
- Tax certificates
- Automobile Loans
- Trust Deeds and Mortgages
- Private Stock
- Commercial Paper
And other investments. Most brokers however, aren’t interested in the paperwork and hassle of making these types of investments, so they restrict your account to stocks, bonds and mutual funds. If you are interested in making these types of investments with your retirement accounts, you need to look into something called a Self Directed IRA. A Self Directed IRA is setup where you can find pretty much any investment and have your broker cut a check to invest in it. The other IRA rules are all the same. It just opens up a bunch of different types of investments that you normally don’t have access to through your broker.
Obviously this is a lot more work for the broker, so you may need to find one that specializes in self directed IRA investments and you may have to pay much higher fees. Some brokers handle this through a Checkbook IRA LLC. The tax law says that you can’t just have the ability to write a check from your brokerage account for your retirement funds. However, your broker can start a limited liability company and fund it with your IRA funds. Then they can make you the manager of that company and give you the authority to write checks. Technically the LLC is owned by the brokerage who is holding it for your retirement account which you own.
This type of setup minimizes the hassle for your broker and gives you the ability to make investments without needing to go back to the broker every time you want to cut a check. Of course there are a lot of rules that go along with this type of setup. In general, you can’t invest money in ways that will benefit you or your relatives now. So you can’t invest in your spouse’s new business. However you can potentially invest your friends new restaurant or a small startup.
When you retire, the assets in your LLC can be withdrawn just like in a normal IRA. If it is a traditional IRA, you’ll have to pay taxes on the value of the assets. If it is a Roth IRA the assets are tax free. So what some people have done is create a Checkbook IRA LLC to get access to the IRA funds and then buy a home where they plan to retire. Then they rent out the home to generate some income. When they reach retirement age, they can move into the property as their own, with no taxable income (because it was a Roth IRA where the tax is paid up front).