You Can't Do That... Can You?

Last month at a party, I was telling a friend about a real estate investment I found on eBay and how I financed that purchase inside my IRA. Suddenly, I felt like I was in an old E.F. Hutton TV Commercial. You remember the spots, with the punch line "Well my broker is EF Hutton and he says…" while the entire room stands frozen in place, leaning forward as far as possible to hear the hot stock tip, as the announcer states "When E.F. Hutton talks, people listen."nnIn this information age called the 21st Century, information can become a two-edged sword. Information is good, even powerful, but too much leaves us confused, like a deer in headlights. In this and future Space Coast Business articles, I’ll bring you usable bits of powerful information that you can turn into money. nnThe most widely known, yet least understood retirement vehicle is, arguably, the IRA. Most Americans are aware of only a fraction of the power IRAs hold. Ask most bankers or brokers how much you can borrow in your IRA, or how to set-up a checking account for your IRA, and they’ll look at you as though you are from another planet. But, both can be done, simply and quickly. nnMany financial institutions use the term self-directed when describing your IRA investment choices. What’s not told to you is that, when working with them, you can only choose between a few investment categories such as stocks, bonds, and mutual funds – the ones they are in business to promote. But what about the rest of the investment universe? nnWe all know it’s possible to achieve solid and safe returns, when investing in real estate, funding mortgages, or buying tax certificates – don’t we? You must simply establish, in advance, the IRA structure that allows seamless movement among stocks, real estate, bonds, mortgages, mutual funds, and tax certificates. This is done, in part, by placing your retirement funds with a true self-directed custodian, a trust company that holds your IRA assets. nnIt’s just that simple. Choose a custodian who gives you nthe control of your own retirement assets. One that allows you to take advantage of what your broker has preached for years, diversification and asset allocation. To the financial industry, this has come to mean that you can diversify but only within what we sell. nnBut, as we know from experience, all investment categories cycle in and out of favor. So, if you want your IRA to take advantage of, say, a real estate boom, you cannot afford to be locked into only stocks or mutual funds. But, remember, when real estate peaks, you must have the ability to seamlessly move at least some of your money back to securities. It is not one particular investment, but seamless movement you want.nnnnnLet’s not forget how leverage can help enhance your returns. We see the effect of leverage when buying a home. We buy a $300,000 home and put $60,000 down (20%). The home’s value, over time, increases to $400,000. What’s our return? Is it 33%, since the house increased 1/3 in value ($100K/$300K)? No – you only invested $60,000 to achieve a $100,000 profit. That’s a 167% return, and that’s leverage! nnSo, why not employ the same type of leverage in your IRA! The IRS allows leverage, and leverage can help increase your returns. If you are not allowed to leverage your IRA investments its usually because of the internal rules of your custodian. Simply put, your brokerage firm or bank has established a business model to block you from investing your money in anything that they don’t sell and the custodian enforces their rules. nnYou may ask why you haven’t heard about this before. The San Francisco Chronicle said it best on January 26, 2003: “The reason you haven’t heard about them [these investment alternatives] is that there is little profit incentive for financial institutions, which primarily sell stocks and bonds to IRA accounts.” nnThe more you learn about self-directing your retirement funds, the more it may become apparent that you not only have the wrong IRA custodian, but also are receiving the wrong investment advice. Choose carefully – after all, no one cares more about your retirement funds then you do. See you next month. n