A self-directed IRA gives investors freedom to invest in alternative assets tax-free or tax-deferred. Some examples of alternative assets are real estate, promissory notes, private placements, private stock, gold and silver, futures and forex trading, and more. When an investor uses the funds in their self-directed IRA they are enjoying the benefits of a tax-sheltered account, leaving you more money to diversify and to grow your retirement account. But what if you don’t have enough funds in your IRA to purchase the investment of your choice? Below are some strategies for investors with smaller amounts of money in their self-directed retirement accounts.
- Partnerships: Investors can partner their retirement account with themselves personally, with other IRAs, or with other investors to make an investment. There are several ways partnerships can be formed.
- For this example we will use real estate as the investment. Do you want to purchase real estate in your self-directed IRA but you don’t have enough funds? Your IRA can partner up with other investors to own a percentage of an investment property as “tenants-in-common”. You could purchase 50% percent with your IRA and 50% with your personal funds. Or you could purchase 75% with your IRA and another investor could purchase 25% personally or with their self-directed IRA. The deed would then be titled according to the percent ownership. All rental income, sale proceeds, and expenses would be split by the percentage of ownership and whatever percent is purchased with your IRA would be deposited back into your account tax-free.
- Another way to form a partnership with your IRA is by forming an entity. For example, an investor could form an LLC. The operating agreement dictates who the managing member of the LLC is and who the financial members of the LLC are. The LLC is funded by each member and then it takes ownership of the asset.
- Non-Recourse Financing: For investors that do not have a large enough retirement plan and would rather not “partner” with themselves, other IRAs, or other parties, a non-recourse loan could be an option. If you’re interested in using a non-recourse loan it must be the right situation, so you should consult with your financial advisor or CPA beforehand. The IRA owner cannot personally guarantee or sign on the loan. There are a limited number of lenders that do this and the asset must have cash flow. Investors could also be subject to UBIT or UDFI taxes (consult with your tax advisor) and the client must file IRS form 990T.
- IRA Lending: Individuals with smaller amounts of funds in their IRA might be interested in loaning money to others from their retirement account. The lender would be your IRA (Midland Trust. FBO Clients Name, IRA #12345) and Midland Trust is legally the holder of the note. The lender sets the terms for the note including the interest rate. The borrower pays all costs such as the appraisal, attorney fees, and doc stamps. All interest income and principal payments are deposited back into the IRA tax-free.
- Invest in smaller assets until you can afford a larger one: You don’t always have to “go big or go home”. If you’re interested in purchasing real estate start by purchasing a small lot. You could hold the lot until it goes up in value and the sale proceeds will be deposited back in to your IRA, or you could purchase a lot on the water and rent out a boat ramp or a boat dock depositing all rental income back into your account. Mobile homes are also an option for smaller IRA accounts. There are also investments such as trading accounts that typically don’t require a large amount of funds to get started. Once you invest in a few smaller things you’ll eventually have enough money to reinvest in a larger investment. Consult with your CPA or financial advisor to see what smaller investments could help you grow your retirement account. Midland Trust is not a fiduciary.
These are just a few strategies to help individuals grow and diversify their smaller retirement accounts. Everyone has to start out somewhere so don’t be deterred because of the size of your IRA. Midland is a nationwide IRA administrator. To learn more or to start investing call (239) 333-1032.
For questions, contact Midland today.