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Kaplan: What most IRA custodians don't want you to know

Published: Friday, May 2, 2014 5:30 a.m. CDT

Many of our clients have planned for retirement by investing in traditional IRAs, 401Ks or SEP IRA’s.

Most of these vehicles are composed of mutual funds, stocks or bonds that are recommended by your custodian (stock broker). If you’ve been paying attention to the progress or growth of your retirement account, you may not be too impressed given the historic ups and downs of the stock market.

You may not be confident that your money will be available to you when you need it most.

You may be surprised to know that you can diversify your retirement accounts and buy real estate using a perfectly legal tool called a self-directed IRA. Self-directed signifies that you, and not some distant stock broker, choose your IRA’s investments. Most investors are unaware of this opportunity because their IRA custodians do not offer anything other than traditional investments. Most of these custodians do not want you to know you have an option to buy real estate (and even businesses) for your IRA and enjoy all the benefits real estate has to offer.

Now I know some of you are going to say that real estate has not been such a great investment over the past six years or so. Like the stock market, the real estate market really took a hit. However, right now, there are some extraordinary opportunities in commercial real estate because of bank foreclosures and short sales. These can become part of your retirement portfolio using a self-directed program.

If you are so inclined, you can look up Section 408 of the Internal Revenue Code, which permits individuals to purchase land, commercial property, condos, residential property and a few other things with funds currently held in many common forms of IRA, including traditional IRAs Roth IRAs and SEP IRAs. You cannot, however, use IRA funds for your personal residence or vacation home.

We have seen clients who are not happy with their traditional IRAs or 401Ks find a specialized custodian and rollover their accounts to allow for direct purchases of commercial real estate such as office buildings or retail centers. One such client bought a foreclosed multi-tenant office building in Cary. The income and appreciation accumulate tax deferred until it is taken out. If the real estate is held in a Roth IRA, all proceeds are tax free when taken out at retirement.

If you don’t have enough cash in your self-directed IRA to buy an entire property by yourself, you can co-invest with friends and relatives as tenants in common. The property deed would specify what percentage of ownership your IRA held in the property. In addition, if the group doesn’t have enough cash to buy the property outright, your group, usually operating under an LLC, can obtain a loan. You are not permitted to personally guarantee that loan, however.

It must me either a nonrecourse loan or be guaranteed by one of the others in your group who is not buying as part of his retirement plan.

Depending on the self-directed IRA plan you choose, there is an initial out-of-pocket fee of $495, and the total set up fees range from $1,200-1,700. You set up an account at a local bank of your choice and have complete control over the checking account.

More and more people are taking advantage of this self-directed retirement plan. You owe it to yourself to take a closer look.

• Bruce Kaplan is a senior broker associate with Premier Commercial Realty in Lake in the Hills. Reach him at brucek@profit-success.net or www.profit-success.net.

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