Three ways to increase your IRA
I like solutions that give me maximum choice and control. I repair my own motorcycles and guitars. I do my own basic electrical and plumbing repairs. I file my own taxes…unless they get really complicated, in which case I know where to draw the line and call in an expert.
Along the way, I’ve learned to avoid large, remote institutions, as they don’t give me many options. Retirement planning is one such example. For a few years I had a 403(b) plan from a previous employer. Once I factored in the fees and costs, it became clear that I would be better off paying taxes on the salary that would have gone into contributions and investing it myself.
Many people are waking up to the fact that individual retirement accounts (IRAs) suffer from the same problem…but it’s one you can solve by moving away from the IRAs offered by large institutions and switching to a self-directed IRA.
The IRA released
Most retirement investment products are not designed with you in mind. Instead, they are designed to direct your retirement savings to the US stock markets. An entire “food chain” has grown up around the US retirement system, pumping money from Main Street to Wall Street. .as if I needed more.
The problem is the lack of investment options. Most institutional IRAs offer only a limited range of US stocks and bonds.
The truth is, your IRA can legally pursue almost any investment option imaginable: real estate, start-ups, intellectual property, precious metals, you name it. A “self-directed” IRA is perfectly legal and can be as simple or as complex as you feel comfortable with.
Is that how it works. By law, all IRA accounts must have a “custodian” in the US who is responsible for the custody of your IRA account, record keeping, transaction processing, filing of IRS forms, and other administrative tasks . Most large custodians keep things simple by offering a standard menu of US stocks and bonds. But there’s nothing stopping an IRA custodian from offering offshore investments, real estate, private mortgages, precious metals… and much more. In essence, some custodians allow you to manage your own IRA.
A self-directed IRA is like a conventional IRA: tax-deductible contributions; no income tax; distributions are taxed as ordinary income. The difference is that a dedicated IRA custodian allows you to actively choose your investments.
For example, your self-directed IRA might buy a house that you plan to use when you retire, but rent in the meantime. The tax-deferred rental income is used to maintain the property and to finance other investments. You can select the property and negotiate the terms of the deal yourself. (However, the custodian must be the legal owner, so all documents are in your name, even if they refer to you as the owner of the IRA, such as “Custodian of XXX Company for the benefit of (your name) IRA “.
When you take title to the home at retirement, you’ll pay regular income tax on the appreciation in value of the home since the IRA purchased it. For example, let’s say your self-directed IRA purchases a home for $100,000. You rent it and it appreciates at an average annual rate of 8%. After 20 years, your $100,000 investment will be worth $215,890, and when you move you’ll pay income taxes on the $115,890.
the golden option
Thanks to the Taxpayer Relief Act of 1997, a self-directed IRA can hold gold, silver, platinum, platinum and palladium, either as bullion or coins. In both cases, the metal or coin must be of a specific quality to qualify for an IRA. For example, an IRA may hold American Gold Eagle Coins, Canadian Gold Maple Leaf Coins, American Silver Eagle Coins, American Platinum Eagle Coins, and gold and silver bullion that are 99.9% pure or higher. (Some well-known gold coins, including the South African Krugerrand, are banned, as are bullion bars that aren’t pure enough.)
To meet IRS requirements, the precious metals in an IRA must be held by the custodian…sorry, you can’t keep them yourself. IRS Publication 590 specifies that “the trustee or custodian must be a bank, federally insured credit union, savings and loan association, or entity approved by the IRS to act as trustee or custodian.” Many trustees/custodians use private deposits to store IRA metals. Alternatively, your IRA can invest in COMEX metal futures or exchange-traded funds (ETFs).
The ultimate option on the high seas
There’s another IRA “trick” that can really open up the world of retirement investing. That is having your IRA custodian create and own a limited liability company (LLC), either in the US or abroad, which in turn can make the necessary investments, including gold and other metals. In this case, you can essentially manage the LLC yourself, bypassing the custodian for most matters.
However, the key to all of this is getting sound advice from an experienced and knowledgeable tax attorney. IRS rules for IRAs are pretty strict and mistakes can lead to “early distributions”… with the tax implications that come with it.
So go ahead, overload your IRA…but get help. After all, DIY doesn’t mean doing it alone.