By J.P. Dahdah, Founder & CEO of Vantage
With a truly Self-Directed IRA, you can invest in almost anything. One alternative investment that is becoming more and more popular is fixed-income equipment leasing.
Let’s look at a fictitious yet instructive example.
Someone is looking to start a business traveling to doctors’ offices to offer ultrasounds for patients. This would save doctors time as they would not need to wait for results from a hospital or radiology center. It would also save the patient and insurance companies the cost of having to use a specialized facility.
But, to start the business, the entrepreneur needs to purchase an ultrasound machine.
The cost of the ultrasound machine is $100,000, and there’s no way the business founder can afford to buy the equipment. Indeed, you or anyone may not have the ready cash to help this person start their business. But, you or someone else may have the funds available in a retirement account. The solution? A Self-Directed IRA. The investor’s Self-Directed IRA could fund the cost of the equipment. The two parties would create a note with the relevant documentation needed to use the equipment as collateral. The business owner would then make payments at an agreed-upon interest rate and over an agreed-upon time frame straight into the lender’s IRA, thus creating a reliable fixed income stream.
What’s even better for the person funding the deal is that the interest payments are tax-free. Of course, there is an almost infinite number of opportunities to invest in equipment leasing, from leading-edge technology to industrial equipment to tractors and more. But, as with all self-directed investment, there are some rules to be aware of:
- The IRS prohibits your Self-Directed IRA from purchasing an asset, in this case, equipment, that you already own. This includes purchasing from a disqualified individual. Doing so constitutes a prohibited transaction, and your IRA may incur tax penalties.
- Secondly, you should always keep the equipment “at arm’s length.” For example, storing the equipment on your property might constitute a prohibited transaction.
- Thirdly, all expenses for the equipment are the responsibility of the Self-Directed IRA. For example, if you need to pay for storage or maintenance of the equipment, it must come directly from the lender’s Self-Directed IRA.
- And, finally, you cannot use or perform maintenance on the equipment yourself. You must hire a non-related party to your Self-Directed IRA to provide these services.
But, despite these rules, fixed-income equipment leasing can be very effective and should be considered as part of your self-directed investment strategy.
For more information on how you can discover your IRA investing alternatives, contact our team at (866) 459-4590 or ClientService@VantageIRAs.com.