Supercharge Your Roth IRA!

"You can't do that!" Supercharge your Roth Solo 401(k) with International Real Estate!

After over a decade in the 401(k) plan industry my favorite phrase has always been "you can't do that!" Many investment professionals have been incorrectly answering the following question from investors "Can I invest in Real Estate in my IRA or 401(k)? YES is actually the correct answer.

After the worst stock market the US has seen in 50 years, an ailing bond market, historically low consumer confidence, a burst US real estate bubble, and no great traditional investments in site many people are looking at international real estate as an investment alternative to diversify their portfolio. Any investment advisor worth his salt will tell you that diversification is a good thing. While real estate is a good diversification away from stocks and bonds, international real estate is another non correlated asset class that, when used properly, can increase a portfolio's returns while decreasing risk.

As of October 1, 2009, the S&P 500 had a negative 10 year historical return of -0.193%! First of all, that's astounding that if you had invested your money in the US stock market over 10 years you would have LOST money! Then, compare that to S&P US Home Price Index over the same time period with a 10 year return of a positive +4.6%. Maybe not exciting, but it beats the heck out of stocks! Then realize that those home returns were achieved with much less risk and you start to wonder why you listened to your broker in the first place.

Now, wouldn't it be great if the real estate you purchased and profited on was in a tax shelter? From the IRS's standpoint, when it comes to your retirement plan, there is little difference between a stock, bond, and real estate. Once you realize that, and also understand how inexpensive and simple it is to set up your own Roth Solo 401(k) plan, you have to ask yourself, "Why haven't I heard of this before?" The simple answer is your broker doesn't get paid to tell you about the rules of retirement plans. In fact, if you were to put money in to real estate in your retirement plan instead of investing in their commissionable mutual funds or stocks, they will be loosing business.

So how do you do it? There are many companies in the US that specialize in Self Directed retirement plans. You simply open an account with one of these companies, and complete a tax-free rollover of your existing IRA from your current retirement account custodian to an IRS approved custodian that allows you to have a Self-Directed IRA. These custodians are commonly called "Self Directed IRA Administrators"

PENSCO Trust, is a very popular company with a low cost structure and solid customer service. Guidant financial is one company of note, Equity Trust company is another self directed retirement plan player, and Entrust is the largest in the marketplace.

Investing in real estate within an IRA is not a new concept. Investing in real estate in your 401(k) has been around since the Employer Retirement Income and Security act of 1974 (ERISA). In fact, there are more than $7 trillion dollars held in retirement accounts with 3% of those retirement accounts currently in Self-Directed IRA's with real estate holdings. Real estate investment within your IRA is a viable, productive alternative to mutual funds, stocks, bonds and your typical brokerage accounts.

Which kind of retirement accounts can be moved into a Self-Directed IRA or 401(k)? After the Economic Growth Tax Relief Reconciliation act of 2001 (EGTRRA) it's easier than ever; Traditional IRA's, SEP IRA's, Roth IRA's, 401K's, 403B's, Coverdell Education Savings, Qualifed annuities, proft sharing plans, money purchase plans, Keoghs, government eligible deferred compensation plans. In other words, virtually any and every retirement account! Once you have opened your Self-Directed IRA, you are free to use those funds to purchase raw land, improved real estate or a variety of investments previously unavailable to you with your traditional retirement accounts. ?

A good question to ask yourself when deciding what kind of investments to choose in your self-directed retirement plan is "What can I NOT invest in?" The rules governing allowable investments by Self-Directed IRA's preclude an IRA's investment in life insurance, collectibles (artwork, antiques, coins, gems etc.) and S-Corporations. Virtually, all other types of investments are permitted, and thus the range of possible investment choice is nearly unlimited. The Wall Street Journal reported that people invest in everything from Cypress farms to Alpacas. Consequently, your Self-Directed IRA or 401(k) can purchase any form of real estate, even international real estate.

There are a few important straight forward, reasonable rules and regulations to follow. Some of the most notable are:

  1. The real estate must be an investment property, not a personal residence for you or family members.
  2. You are not allowed to personally guarantee a loan for your Self-Directed IRA; you can however use a commercial non-recourse loan.
  3. When you buy real estate the seller cannot be a disqualifed person. A disqualifed person is yourself, your spouse, your children, your parents or a corporation in which you or any other disqualifed person owns a 50% or greater benefcial interest.
  4. The Self-Directed IRA is responsible for all expenses related to the asset for the life of the investment, additionally, any income generated by the asset must be received by the Self-Directed IRA. Although some additional rules apply, the aforementioned are the most pertinent. Not to worry however, a good Self-Directed IRA Custodian will ensure that you are always in compliance with IRS rules and regulations.

Some additional features of a Self-Directed IRA include the ability to partner with other individuals, their IRA's, any other qualifed or disqualifed individual, and even yourself (with your personal non-retirement funds). The Self-Directed IRA is responsible for all expenses related to its asset for the life of the investment.

If your Self-Directed IRA is partnering with another investor, each bill must be paid according the initial established ownership ratio. As previously stated, it is acceptable for your Self-Directed IRA to partner with personal funds or disqualifed persons. However, it is extremely important to remember that the ownership percentages must be kept constant throughout the deal and all expenses as well as income must be split according to that ratio. It is also important that the dollar amounts be proportional to percent ownership among all qualifed and disqualifed persons. Because all property expenses, including taxes, insurance and repairs, must be paid from funds in your Self-Directed IRA, you'll need liquid funds available in your account. All income generated from the property will be deposited in your Self-Directed IRA account so you can use that money to cover costs. Additionally, you can make annual contributions to your Self-Directed IRA according to federal guidelines.

In addition, investing in real estate for your retirement may serve as a means to diversify your retirement portfolio. You now have a way to hedge against the cyclical changes in the stock market, bonds, the economy, and bank and government based investments. Land and property are loosely correlated to the stock market; the value of real estate tends to rise when stocks are going down. Real estate is the ultimate hard asset. There is great downside protection because real estate inherently maintains value, as contrasted with stocks, where the entire investment could go to zero!

Now consider all of these factors, the current domestic and economic data, the Baby Boomer demographics and the need to diversify out of the falling dollar and into appreciating hard assets. The choice is clear. Investing in the right international real estate is a smart way to diversify your retirement portfolio!

There is nothing that gives more pleasure than taking on a challenge such as "you can't do that!" When it comes to helping the millions of Americans who have been wanting to invest their retirement plans in real estate "Yes you can" is the answer of the day.

This article does not constitute advice. When making investment and tax decisions make sure to speak with your tax advisor or a qualified retirement plan administrator for details.

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