HOW CAN A SMALL BALANCE IRA BE SELF-DIRECTED?

By J.P. Dahdah, Founder & CEO of Vantage

As the CEO of Vantage, I have the unique opportunity to speak in front of scores of CPAs, attorneys, registered investment advisors, real estate professionals, and individual investors just like you about the power and virtually unlimited investment choices offered through Self-Directed IRAs. One of the most common questions I get is this: “I only have a small amount of money in my IRA. What are my alternative investment choices for self-direction, and how can I get started?”

As most small investor’s frame of reference is the stock market, it can be intimidating to discover the entire menu of alternative choices truly available within Self-Directed IRAs. Vantage never provides investment advice, endorses, or offers any investment products to our clients, hence the term “self-directed.” However, we can certainly share the types of investments our clients make with our audiences and are permissible within IRAs, especially those with relatively modest balances.

Five Self-Directed IRA Choices that Don’t Require a Large Bankroll

• Lend Out Your IRA Savings – This can be a 90-day loan secured by automobile paper, a first or second mortgage on real property, or an unsecured note. Keep in mind, the IRA account owner (AKA you) determines the rates and terms of the loan, and all principal and interest payments are made directly back into your Self-Directed IRA account on a tax-favored basis.

• Buy a Real Estate Option – A Self-Directed IRA can purchase an option to buy a parcel of real estate before a prescribed date for a fixed purchase price. Later, suppose the terms of the option permit and the value of the property is greater than the optioned purchase price. In that case, the option can be resold, and all the proceeds and profits are returned to the Self-Directed IRA without tax ramifications. This is a great way to make profits on real estate strategies without purchasing the property. In this example, you are essentially trading paper for a profit. It’s cool stuff.

• Tax Liens – Many clients like to buy tax liens at the county courthouse as they generally provide a higher level of safety than other types of investments. The liens may be removed and the interest paid in as little as ten days or as long as six months or more. In rare instances, if the landowner does not pay the property taxes, the tax lien holder (i.e., the Self-Directed IRA) may end up with the title to the property.

• Partner With Others – Partnering is a powerful tool to empower a small IRA holder to get a piece of a more significant investment. This can be accomplished within a limited liability company (LLC), limited partnership (LP), private stock, or simply with fractional ownership at titling on the asset. For example, your Self-Directed IRA can own an undivided 5% interest in an investment property and participate in all profits and expenses derived from the property at the 5% ownership proportion.

• Leverage Your IRA – Yes, you can indeed have your Self-Directed IRA borrow funds in certain situations. The loan must be non-recourse (secured only by the IRA-owned property) and be paid by the Self-Directed IRA. Thus you would typically use this device if your IRA owned revenue-producing property. Be aware there may be additional taxes within your IRA for gains on the leveraged portion of the investment, called the unrelated debt-financed income tax (UDFI).

Yes, all the investment choices we administer can cause you to feel information overload if you are new to alternative investing. You must surround yourself with trusted advisors who can assist you in making your investment decisions. Whether you start with a $10,000 or $500,000 IRA balance, as our clients would attest, there are opportunities for everyone.

If this small sample of alternative IRA choices sparked your interest, be sure to educate yourself more about the investment freedom and control offered by Self-Directed IRAs via our free educational workshops.