What is a Self-Directed IRA
Self directed IRA basics 101
A self-directed IRA allows investment portfolio diversification as you supervise your retirement objectives. Self-directed IRAs can be an excellent vehicle to invest in real estate. Real property can offer the investor significantly higher yields than CDs or stocks and bonds. And, investing in real estate can be much less risky than other forms of investments. Think about it, some of the wealthiest companies in the world are insurance companies. Where do they put those billions of dollars generated from our health, automobile, homeowners, and life plans each and every year? You guessed it. They invest in real estate, both for its yield and its safety. Insurance companies are, by nature, risk averse.
Why is a self-directed IRA an important investment vehicle? Because of its flexibility of use and yield profitability.
Let’s look at some recent history of retirement in the U.S. After World War II a generation of workers returned home from war and laid the foundation for the world market. Those workers would look forward to a retirement based on their company’s defined retirement benefit plans. The plans were, for the most part, based on years of service and pay scale. The company would administer their own retirement plans. All an employee had to do was keep an eye on the years of service and pay increases.
As the baby boom generation came of age, globalization took over and competition increased worldwide. Companies needed to get leaner and one of those ways was to shift the burned of retirement responsibility back onto the individual employee. Thus was born the defined contribution retirement plans. 401 (k)s and IRAs came into being.
Employees, however, needed to feel they had some feeling of control over their new retirement destiny and were given a handful of choices to allocate their savings and, perhaps, matching funds. And whether those options were aggressive or not with their respective risk-reward ratios, they are all relegated to the stock and bond markets. The stock market has a volatility issue. This certainly isn’t where the insurance companies invest their earnings.
In the days of corporate defined benefits, employees were insulated from the day-to-day fluctuations of the stock market. Corporations administered diversification strategies internally. Whole departments were dedicated to the direction of the tactics involved. Yet, the overhead costs involved were significant and began to be perceived more and more as a non-contributing expense to the corporation’s overall core competencies.
With the advent of employee involvement in the retirement planning process, came the realization of the roller coaster effects of investing in the stock market. Employees not only had to be competent in their jobs and professions but they also needed to develop some sophistication in retirement matters. This involved developing a new skill set. An increased awareness in the erratic vacillations of the stock market was inevitable and proved surprising and sometimes painful to many. Still, there was precious little one could do to balance the ebb and flow, except incorporating some bond diversification.
Enter the self-directed IRA. The self-directed IRA was initially developed as a retirement vehicle for contractors and other real estate professionals. These individuals already understood the benefits of real estate investment. They understood real estate yields, rates of appreciation, mortgage interest rates, loan amortization, income streams, depreciation rates, stability and so forth. It was only a matter of time before some ingenious individual integrated the IRA concept with investment real estate practice.
The true self-directed IRA has now been in practice for at least 34 years. It has stood the test of time. It has been tried and proven in the courts. It is a viable, reliable retirement investment vehicle. Yet, it is virtually unknown outside the ranks of the very successful real estate investment community. But word is getting out. This investment retirement vehicle can be used to fund real estate projects without you having to understand the real estate industry itself. In one of the more simple strategies, funds from a self-directed IRA can fund building loans and mortgages. And everybody knows that mortgage rates are higher than Certificate of Deposit rates or the paper profits of stocks and bonds!
How does a self-directed IRA work? There are several answers to this question. An existing IRA or 401 (k) can be rolled over into a self-directed IRA. Once the self-directed IRA is funded there is no limit to the yield return it can earn. In other words, while there are limits to how much can be contributed to your IRA each year, there are no such restrictions as to how much the IRA itself can earn per year. And, if it is a Roth IRA it is tax free, which means that you can live tax free if your IRA is large enough.
One way to have greater earnings is to invest in real estate building loans at, say, 10% interest. These could be to contractors like Home Equity Management, LLC that buy and renovate homes for re-sale. The rule of 72 says that a portfolio will double each 7.2 years at loans lent out at 10% interest. Another strategy would be to loan an investment company like Home Equity Management, LLC the down payment for an apartment building project for up to 100% of the building’s equity.
A real estate self-directed IRA is one way for an individual to diversify their retirement and investment portfolios. To learn more about this fascinating and profitable investment vehicle log on to www.EquityTrustCompany.net, www.trustetc.com, or www.theentrustgroup.com.
This article was provided by:
Steve Walsh
Home Equity Management, LLC
7431 Rochester Road | Lockport, NY 14094
(716) 434-0116
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