Self-Direct Your Retirement

Gina Loudon
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Posted: Oct 16, 2011 12:01 AM

If you didn’t know anything about the stock market before October 4, you’d think the US had the strongest economy ever.  The Dow rallied more than 1,220 points since then - a gain of 12%! Naturally, the uninformed investor may think it’s time to jump into this bull market.

However, thousands of investors are waking up to the reality of Wall Street - that it’s become more of a Vegas gamble than an investment based on fundamentals. Nothing is backing this latest rally, except for a few headlines swaying public sentiment.

When the media announces that Europe has found a temporary solution, stocks rise. Then when the uncontrollable debt inevitably rears its ugly head again, stocks plunge. Is this where you want your precious life savings?

Americans have lost over $6.6 trillion of their retirement savings due to the volatile stock market, according to a study commissioned by Retirement USA. Thousands of investors have had enough and are looking into alternatives to traditional tax-deferred retirement plans.

The dream of letting someone else manage their money and expecting it to be ready and waiting for them after 30 years is dead. One of the savvier investor’s best kept secrets is one you probably haven’t heard about from your traditional financial planner: the self- directed IRA.

With a self-directed IRA, you can take control of your retirement by choosing over 45 different types of investments outside of Wall Street - without penalties.  Here’s a partial list of what you can do with your self directed IRA:

•      Residential real estate, including: apartments, single family homes, and duplexes

•               Commercial real estate

•               Undeveloped or raw land

•               REITs (Real Estate Investment Trusts)

•               Real estate notes (mortgages and deeds of trust)

•               Private limited partnerships, limited liability companies, and C corporations

•               Tax lien certificates

•               Foreign currencies

•               Oil and gas investments

•               Private stock offerings, private placements

•               Gold bullion

The IRS actually only disallows two investments within the IRA: Life Insurance Contracts and Collectibles (www.IRS.gov Pub 590). Everything else is fair game so long as it’s for “investment purposes only.”

If you wanted to self-direct your IRA to buy real estate and take advantage of today’s bargains, you could not invest in a home for you to live in or a second home to use for vacations. However, you could buy a rental property, and all the rental income would flow back into the IRA tax-free or tax-deferred.

A great benefit of investing with money from your IRA is your ability to let money grow year after year, compounding faster without the loss of tax payments.  Real estate values have overcorrected in many parts of the US. If your IRA bought a discounted property that increased in value over time, all the profit upon sale would go back into the IRA - tax-deferred.

Some banks even offer financing for your self-directed IRA. However, to avoid paying UDFI taxes, use a self-directed 401K instead if you plan to leverage your real estate purchase.

A great benefit of a self-directed 401(K) plan is the large annual contribution limits allowed. Businesses with a spouse on the payroll can also contribute to the Solo 401k. Provided the business owner and spouse have sufficient income from the business, taxpayers may be able to contribute up to $49,000 each ($54,500 each if both are age 50+) in 2011.

That Solo K Plan would allow the taxpayer to contribute a total of $109,000 during the year, and save close to $50,000 in taxes. This is significantly higher than the IRA contribution limit of $6,000. You get a huge tax write off in the years of contribution, and the funds can be immediately utilized to invest into real estate and receive tax deferred treatment. (Verify with your tax professional.)

Most types of retirement accounts can be converted into a self-directed 401(k) plan. However, if you discuss this option with your traditional financial planner, you may be highly discouraged to proceed.

Remember, most traditional financial planners only get paid when your assets are under their management. Why wuld they encourage you to leave them, even if it’s a better deal for you?

 For a list of IRS approved self-directed IRA companies and CPA’s, contact info@realwealthnetwork.com

Kathy Fettke is CEO of www.RealWealthNetwork, the #1 resource for new and experienced real estate investors who want to take control of their retirement and build passive income through solid assets. Membership is free.