Expanding Your IRA (with real estate, options, etc.)

For many Americans their IRA represents one of the largest amounts of wealth they have. Are you getting all you can out of your IRA?

Before you answer that, consider some of the blindly accepted beliefs that you may have about IRAs. These beliefs could be preventing you from getting the most from one of your largest assets:

IRA Myths - I can't benefit from contribution to my IRA because I make too much money. - I can't invest in anything but mutual funds and stocks. - I can't access my IRA prior to 59 ½ without enduring catastrophic tax penalties. - I can't invest my IRA money in real estate. - I can't invest my IRA money in options. - I can't convert my IRA to a Roth IRA without massive tax consequences. - I can't use my IRA to fund my business endeavors. I can't, I can't, and I can't!

Your stockbroker and financial planner haven't told you that you can, have they? There is a lot of misinformation out there about how you can and can't invest your IRA money. Most of the misinformation is propagated by the people we tend to seek financial advice from-investment advisors. Even though they have a lot to lose by you knowing about alternative investment options, I don't believe they are maliciously keeping you from the truth. Instead, they simply don't know about it either. Your stockbroker and financial planner tend to only know and advise you on the investment options that make them money. That is because that is what they are taught by their firms. They are taught to sell. That is exactly why you have never gotten a call from your broker or registered representative to tell you about a great rental property investment.

Just like most of us have never heard of tax liens, real estate wraps, or deeds of trust, you may have never heard of strategies for investing your IRA's. These can be very attractive investments because of the return that can be achieved as well as their relative safety because they are backed by real estate. Wouldn't it be nice to invest your IRA in real estate backed investments? You can.

What about options? There are a lot of people who love to invest in options. However, they have gotten shot down time after time when they attempt to trade options in their IRA. They are told they must settle for the mutual funds and stocks on which the broker makes money. How much money is being lost? Possibly a fortune, considering most mutual fund managers don't outperform the market. By the way, you are paying fees to that mutual fund manager to under perform.

Here's the truth-your IRA can invest in almost anything it wants. Isn't that great? There are a few exception. For example, it cannot be used to purchase life insurance or collectibles (gems, fine art, rare coins…).

With those two exceptions and a few rules that must be followed, your IRA can be set free to invest in more than just mutual funds and stocks. Let's look at the rules. Generally, your IRA cannot engage in any transaction with a related party.

- A sale or exchange or leasing of property between a plan and a related party; - Furnishing of goods, services or facilities between the plan and a related party; - Transfer to or use by a related party of income or assets of a plan in his own interests or for his own account; or - Receipt of any benefit for his own personal account by any related party in connection with a transaction involving the income or assets of the plan.

Don't worry. These aren't roadblocks. You can legally invest your IRA money as you see fit. And we can show you how. First let's look at who is considered a related party.

- The IRA owner. - One who makes decisions for the plan, - One who provides services to the plan, - An ancestor, spouse, descendent of the IRA owner, or spouse of any of the above, - A corporation, partnership, trust or estate of which 50% or more of it is owned by any of the above, - An officer, director, a 10% or more shareholder, or a highly compensated employee (earning 10% or more of the yearly wages of an employer) of the above, and/or - A partner of any of the above.

Basically a related party is an ancestor, spouse, descendent, spouse and/or any business owned 50% or more by one of the above.

Be careful with your structure. It can be a slippery slope. If your IRA engages in a prohibited transaction, your IRA could be considered fully distributed and taxed accordingly.

- Your IRA loans you $100,000 to start your business. Is this a prohibited transaction? Yes. You are a related party. - Your IRA loans $100,000 to your and your brother's company of which you own 49% and your brother owns 51%. Is this prohibited? No. Your brother is not considered a related party. - Your IRA loans $25,000 to your niece to pay her college tuition. Is this a prohibited transaction? No. Your niece is not considered a related party.

As you can see with some creativity, you have a lot of flexibility. Additionally, there is a provision (that is relatively unknown) in the prohibited transaction rules. The provision says that the IRS shall coordinate requests with the Department of Labor (DOL). Essentially, the Department of Labor has the power to grant exemptions to the prohibited transaction rules. In fact, hundreds of exemptions are granted each year.

One exemption has even allowed the IRA owner to have his IRA purchase the mortgage on his home. Not only is the interest on the loan being paid back to the tax-friendly IRA, there is possibly a mortgage deduction, and the mortgage creates a lien against the home (major asset protection).

Possibly you re thinking, "All I have to do is open a self-directed IRA." However, to truly set your IRA free, there are a couple of simple steps that will give you checkbook control of your IRA and profound asset protection that you may not otherwise enjoy.

First of all, most custodians, even true self directed custodians, require massive amounts of paperwork and numerous hoops to jump through in order for you to invest your IRA money in an "alternative" investment. This costs you time and money (custodian fees). To more effectively use your IRA, your IRA will instead place all of its assets into a limited liability company. Do not fear, this is easy and we do it countless times per year on behalf of our clients.

Why an LLC? The LLC gives great asset protection and tremendous tax advantages. The LLC enjoys the asset protection of a corporation while it can be taxed as a partnership. Partnership taxation is great because the LLC itself will not pay taxes. Instead, the owner of the LLC pays taxes as if they earned the income. Who is the owner of the LLC? That's right, your IRA (a tax- exempt entity).

From an asset protection standpoint, there are states that extend only limited protection to your hard earned IRA nest egg. The state of California, for instance, basically states that it will decide how much of your IRA you get to keep in the event you lose a lawsuit and your creditor is allowed access to your IRA assets. Not much comfort there. With the IRA assets placed in the LLC, you are provided huge asset protection advantages.

Under most state laws, if someone were to sue the owner of the LLC and win, they could not take away the assets of the LLC. The most they can get generally is a charging order against the LLC. A charging order gives very limited rights to the person awarded the charging order. In fact, the charging order entitles the person awarded the charging order only to receive distributions from the LLC. If the LLC doesn't make distributions, the person with the charging order gets nothing. Therefore, if you were not taking distributions from the IRA, your creditor would get zero, zip, nada. In addition, you still get to make all of the investment decisions for our IRA. What if you decided that it was a great investment for your IRA to loan money to a corporation or other business entity owned 51% by your brother and 49% by you? The creditor would receive none of the loan and you would have access to your IRA. Even though interest will be paid back to the IRA for loaning the money, unless there is a distribution, the creditor still gets nothing. What great protection. Plus, the same protection is yours with the IRS. It was determined by one of the IRS's own attorneys that even the IRS could not force the liquidation of an LLC.

- Invest your IRA money in real estate, - Invest your IRA money in options, - Invest your IRA money in virtually anything you want and, - Provide ironclad asset protection.

1. Open a self-directed IRA. 2. Transfer your IRA assets to the new, self-directed IRA account. 3. Establish a LLC. 4. Apply for your LLC's employer's identification number (EIN). 5. Set up a brokerage account for your self-directed IRA. 6. Instruct the custodian to place the IRA assets into the LLC. *Caution: Structuring your IRA Expansion Program properly is extremely important. One misstep and you suffer huge tax consequences. Please make sure it is done right. Feel free to call our office for help.

This is just the beginning of how a business entity like an LLC can be married with a tax-exempt entity like your IRA to achieve phenomenal results. In fact, with the IRA Expansion Program that we have described, it is possible for you to make your IRA virtually tax-free (even when you access the IRA money). There are many options and avenues to explore. So, instead of obligingly settling for the run-of-the-mill mutual fund and stock investments, set your IRA free and get the most from what you have.

I have been putting money in REITs (real estate investment trusts) for the past year. They are high yielding stocks and have been getting a healthy 10-12% return. The stocks have been flutuating up and down a few points, but I am getting a healthy return from the dividends. As far as the real estate market busting, I don't think there is an end with the market tanking, more people are putting their money in real estate. I will ride it out as long as I can.

Here are a couple of mutual funds that enable you to invest from your IRA or 401k without getting on that slippery slope that this writer is recommending.

Ask any good trust lawyer about getting on the slippery slope that this author is pushing.

Here are the symbols for a couple of good real estate funds:
TAREX, FRESX. Another new one that has been paying good dividends is KIFCX, we don't own this one yet. We do own Tarex and Fresx.

One of the best ways to play the real estate market is a fund that buys stock in the good smaller banks/savings and loans and mortgage companies, FBRSX. Do a three year chart on this fund and kick yourself for not knowing about it before. It is one of the few even good funds to still have an excellent YTD increase inspite of May-July.

These are no loads and have excellent management and low yearly expenses/costs.

Introduced by DICK GEPHARDT on 4-18-02

H.R.4482 Universal and Portable Pension Act of 2002 (Introduced in House)

`Sec. 408B. Universal Retirement Savings Accounts.' (c) TERMINATION OF CONTRIBUTIONS TO INDIVIDUAL RETIREMENT PLANS, INCLUDING ROTH IRA'S- (1) Subsection (a) of section 408 is amended by adding at the end the following new paragraph: `(7) No contribution (other than a rollover contribution referred to in paragraph (1)) shall be accepted for any taxable year beginning after December 31, 2002, unless such account is a simplified employee pension or a simple retirement account.' (2) Subsection (b) of section 408 is amended by inserting after paragraph (4) the following new paragraph: `(5) No contribution shall be accepted for any taxable year beginning after December 31, 2002, unless such annuity is a simplified employee pension or a simple retirement account.'

Just thought this may be of some interest...Our Gov't at work, Lets' hope this never gets to the floor.

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