Disclaimer: Please understand that this article is not written to provide tax or legal advice and I am not providing any such advice. In fact, it disgusts me to think that you need to “figure out the system” to secure what is already yours. This article simply describes my quest for information and knowledge about IRAs and how this information could help me and my father.
A few weeks ago, my father mentioned to me his disgust with the performance of his IRA. My response: “You still have an IRA?? And it’s not in Silver? Are you crazy?!”
So I set out to help him get out of his “paper investments” and into something real – like silver. What I found during the process was outright shocking and critical for every person who has any funds for investments to understand and learn.
But first, I decided to take a quick peek at the history of the Individual Retirement Account (IRA). Here is what I discovered:
The IRA was first introduced in 1974 as a way to reduce taxable income on funds allocated for retirement savings. The maximum allowed contribution in the early days was set at $1,500, and has risen steadily over the years to a current maximum annual allotment of $5,000. Beginning in 2002, those 50 yrs. of age or older were permitted to make additional contributions known as “catch-up contributions”. (Please note that contributions are also limited by the amount of taxable income amount and of course, as always, certain income limits apply).
There are 5 basic IRA programs: Traditional, Roth, SEP, SIMPLE, and Self-Directed. Of the various types, the total market valuation of IRA assets is estimated to be $4.9 trillion (and this does not include the trillions in 401ks and other employer sponsored retirement accounts).
Over the last few years, gold and silver IRA’s have become quite popular, and most of the people reading this article have probably heard of (and, if participating in a qualified IRA, have probably taken advantage of) a precious metals IRA.
To get started with a precious metals IRA, the process is pretty simple: find a reputable precious metals dealer, coordinate the appropriate changes to your retirement account, work out a purchase for “qualified” bullion, and have them ship it off to a “registered” custodian where they will have it stored in one of the major storage facilities located in the United States.
This understanding left me with two questions: first, if the government decides to seize bullion again, as they have done in the past, will they search door-to-door or simply stop by one of the major bullion banks? Of course, a large bullion storage facility may be one of the first places they may look. Thus, what is the best way to hold precious metals through an IRA account where they are “safe and secure”?
The second question is a little more complex: If you can have a precious metals IRA, what other types of investments are possible with an IRA? And that’s where the story got more interesting.
According to IRS rules, approved IRA assets seem to fall in to two broad categories: traditional and non-traditional. Traditional assets are things like publicly traded stocks, mutual funds, and other securities, while non-traditional assets are things like real estate, precious metals, promissory notes, and other private placement offerings. Thus, it appears that the decision between the two asset classes really boiled down to determining whether to trust someone to make investment decisions on your behalf, or make investment decisions yourself. Obviously, each person needs to determine if they trust the “wise” people of Wall Street to make investment decisions with their hard earned currency or if they feel they are smart and knowledgeable enough to determine the best places to invest their resources. For me, I believe that my father was smart enough to earn it and should be smart enough to invest it wisely. Thus, I really wanted to understand more of what he could or could not invest in through a Self Directed IRA.
In a self directed IRA, there appears to be an important, but strangely short list of things that can’t be done. These are called prohibited transactions (such as collectibles and life insurance) and prohibited parties (immediate family members), and you should consult IRS Publication 590 and the related regulations, private letter rulings as well as professional advisors to understand exactly what the rules provide for with respect to your specific IRA.
What’s important is this: First, your Self Directed IRA is your money, and you are allowed to act as your own fiduciary to select and manage the investments and related value thereof. Second, and possibly even more important, is that your Self Directed IRA is treated as its very own entity, kind of like a trust. It can make a loan, it can invest in various types of non-traditional (non-Wall street) investments, and it can earn returns though dividends, profits, etc. that are non-taxable because they are held within the Self Directed IRA structure.
So, this understanding raised some interesting and exciting ideas for me. Let’s suppose for a moment that you want to invest in precious metals, but did not want to utilize a third party storage company to hold them. Many experts suggest and advise that you can form a special customized type of LLC that is owned by your Self Directed IRA. You can then appoint yourself the manager of the LLC, transfer the funds from the Self Directed IRA to the newly formed LLC and direct, as a fiduciary, the assets or investments that the LLC purchases or invests in for the benefit of the Self Directed IRA. The key tenet of the Self Directed IRA seems to be increased flexibility and control.
Does this seem impossible? Far from it in my mind. This is precisely the type of flexibility and control my father and I were seeking.
What other options are available for a Self Directed IRA? Suppose gold and silver bullion isn’t your thing, and instead, you like the idea of buying foreclosed homes, remodeling them, and selling or renting them out. It’s the same plan. Form a new special customized LLC, have your IRA purchase the ownership interest of the LLC, send the funds from the IRA to the LLC’s account that you control and manage, and use the funds to invest in buying and selling/renting properties. It’s just that simple.
Again, there are definitely some things you can’t do. For example, you can’t live or vacation in the remodeled house. You cannot use personal funds to furnish it, repair it or pay for any upkeep on the property. In fact, you (personally) cannot have any direct or immediate gain from your property speculation. All profit is returned to and owned by the LLC, which is owned by the IRA. Thus, there are things you have to watch out for and avoid. But simply stated, play by the rules, you can get direct access to your assets and keep them right under your nose.
Both of these previous examples are commonly known in the tax world as Self-Directed IRA’s. A Self-Directed IRA is not a loop-hole (waiting to be closed), or considered by the IRS an abusive tax-avoidance scheme. It is a perfect legitimate investment vehicle, and it’s something the big brokerages don’t want you to know anything about. Every dollar you take out of the system is another dollar they don’t control. They know it, and hope you never find out. In fact, they try to scare you out of them with the fear of “complex” IRS rules that can get you in trouble and question your knowledge of how to properly make investments (because they have done so well managing your money). Why? Simple: they want all those great fees off your investment funds (which are paid regardless of whether you make money or not) so they can go play golf at their private club while you keep working 10 hours a day to give them more money!
Think about it. When the markets crash (as they inevitably will), do you want to be waiting on hold with your broker hoping to cash out of your securities, or even make the trek to your IRA storage vault on the other side of the country just to find out you cannot take possession (or it has to go through your IRA service provider) or worse, that someone already stopped by to pick up your property? Or would you rather be in total control of your retirement assets and sell your real estate holdings as and when you see fit and go to your selected location and inspect the precious metals held by your LLC for the benefit of your IRA?
The question is: Who do you trust more – your broker or yourself?
For my father, he determined that he trusted himself much more than anyone else. So, we found a reputable IRA service company that assisted in rolling funds over from his employer’s program. Then, we set up a Self-Directed IRA account, and in just a matter of days the cash showed up. He decided to turn his IRA into silver and invest it in a new business, hopefully earning himself a great return in the future in ounces of silver. His investment fit his understanding of the world and his personal risk tolerance, but you may choose many other types of permitted investments. The benefit is more flexibility and control. In today’s world of daily scandals, it definitely seems wise and prudent to do so.
I was so impressed with the benefit of the process that I asked Kenny “Johnny Silver Bear” Parsons, a wise and trusted friend, if he would like to help those that want to take advantage of a similar solution. If you or someone you know wants greater control over and access to IRA funds (and even 401k funds in some instances), and you don’t want to get hit with tax consequences, contact him, and for a reasonable fee, he will help get you control of your money NOW, while you still can. You’ll be glad you did.
Disclaimer: Kenny is not a licensed financial adviser, broker, dealer, attorney, or CPA. He’s just a good guy that knows how to perform a particular function that you can also figure out how, with the time, energy and research, to do yourself.