What Does the IRS Think of Investing in Real Estate?!

Posted on November 3, 2010 by John Park

Has anyone ever asked their financial professional (e.g., banker, accountant, broker, drinking buddy….just kidding on the last one) what types of assets their IRAs and 401Ks can invest in OTHER than stocks, bonds and mutual funds? Ever? I know you must care or are you one of the millions that believes that you can only invest in Wall Street products?

The simple truth is that most all of us have been brainwashed into believing that our only option is to invest in the world of stocks, bonds and mutual funds (i.e., traditional investments). Our brokers have convinced us that “diversification” is within traditional assets, not outside of it. I mean seriously….is this true diversification?! Others believe that only the very rich can set up plans to invest this way.

But, as many individuals are upset about their portfolio balances and exploring options for investing their funds, their “professional” typically continues to steer them in the market. And, sometimes, they make a pretty good “pitch” for the reasons why one should keep their funds in the market. But, let’s use common sense….is it potentially better to diversify in up to as many as 23 asset classes or 3?

Now, this post is not to criticize financial professionals…..many who are ignorant to the fact that retirement funds can be invested in sooo much more. Their financial stewardship “sermon” hinges more on how THEY were trained, educated AND paid. And, how are they paid? You’re right….based on what you buy from them! Think of it this way….how many people do you know who would actively encourage you to invest in something that they were not paid for?! (cheat sheet here…..in 2005 93% of ALL financial transactions on Wall Street were to BUY, not sell!)

So, for those of you that HAVE asked your financial professional if you can invest your retirement funds in assets such as real estate (and a plethora of other assets), you will typically hear some of the following:

Actual Financial Professional Statement – “You can’t do that (invest in real estate). There is no way the IRS will let you do that?”

Well, what does the IRS say? This is a statement from their website:

“…..because of administrative burdens, many IRA trustees do not allow IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

By the way folks, while the quote references IRAs, the same standards as to permissibility apply to 401K and other retirement plans as well. Also, with the above statement, the “trustee” is going to be your bank, trust, brokerage firm who is the one choosing what they wish to offer you. It is not the IRS that is saying that you cannot invest in assets such as real estate.

Actual Financial Professional Statement – “I heard somewhere that you can MAYBE do that (invest in real estate), but it is REALLY complicated. I also heard that you have to create a Trust with an attorney and, of course, that will be really expensive.”

Well, what does the IRS say? This is from the IRS website which defines what an IRA actually is:

“An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.
• The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
• The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
• Contributions, except for rollover contributions, must be in cash. See Rollovers , later.
• You must have a nonforfeitable right to the amount at all times.
• Money in your account cannot be used to buy a life insurance policy.
• Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
• You must start receiving distributions by April 1 of the year following the year in which you reach age 70½.”

Folks, where does it state that you cannot invest in real estate? You’re right, it doesn’t.

So, as I tell my clients, my job is to educate. An IRA or 401K can invest in a plethora of other assets other than stocks, bonds and mutual funds. Are we experiencing unprecedented times where investing in real estate may be ideal. Of course. Should you invest in real estate? Maybe yes, maybe no. The fact is that it is YOUR decision, not your broker’s. Would we all agree that having more options and choices with our investment funds is advantageous to us….ABSOLUTELY!

Take control of your finances. Don’t put your head in the sand and HOPE! Just like putting in some good sweat equity to achieve good physical health, you must put in some good educational equity to achieve good financial health. Don’t be afraid….cuz as is oft said but is so true…..

DOES ANYONE CARE AS MUCH ABOUT YOUR MONEY AS YOU DO?!

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Self-Directed IRAs and 401Ks — Ever Fall Over That Crack?!

Posted on September 7, 2010 by John Park

We’ve all done it…..that crack in the sidewalk that most people would have to intentionally attempt to trip over and still maybe not fall….but, we are the ones who do that trip and are always embarassed over it. When we trip on the crack, we look at the crack as if it jumped up and knocked us over when no one was looking.

The same can happen with our self-directed IRA and 401K plans. While the IRS rules related to what qualified retirement accounts cannot do are not difficult concepts to understand, almost like that crack in the sidewalk, they seem to creep up on some people and trip them up. And just like falling over that crack, some of us almost fall and then realize to our own embarassment that we almost entered into an IRS prohibited transaction without even intending to do so.

So, what are some common scenarios that can “pop” up and trip us all. Let’s look at a few that have been addressed with this author over the last few months.

<strong>1) </strong><strong>Qualifying for a 401K </strong>– Many people are enamored with the benefits associated with a 401K vs. its lesser counterpart, the IRA. In layman’s words, an individual who is establishing a self-directed 401K must qualify for the 401K. They are not allowed to establish the 401K unless they qualify for the plan. So, how does one qualify for a 401K? Well, an individual who is self-employed or a W-2 with a side business may qualify for the 401K. However, an individual who is strictly a W-2 and will never be anything but a W-2, simply does not qualify for the 401K.

Typically, a person will get confused with this simple concept and believe that as they may be utilizing their retirement funds to invest in assets such as real estate, that this endeavor makes them an entrepreneur and, therefore, self-employed. This is not the case. When serving as the fiduciary of your retirement plan you are making investments on behalf of the plan…..not being self-employed as a real estate entrepreneur.

<strong>2) Commissions, Commissions and More Commissions </strong>– Many a real estate agent who also holds a self-directed IRA or 401K believes that they can earn a commission for buying into or selling a property from their self-directed IRA or 401K. Such is not the case and it is clearly a prohibited transaction per IRS regulations.

Another example of where earning commissions is a prohibited transaction deals with serving as a fiduciary of other family members’ retirement funds. This may be a situation where several family members establish an LLC to pool their funds and elect one of the family members to serve as the manager of the LLC and be compensated for their time and investment advice on particular investments. The problem that can easily arise is that the individuals are disqualfied indivdiuals to each other and, therefore, the receipt of any commissions in this example would constitute a prohibited transaction.

<strong>3) Buying That Property? Don’t Fix It? </strong>– Unlike what the heading suggests, no one is telling the self-directed IRA or 401K participant that they cannot fix the property they purchase for their plan. However, all expenses and work on the investment property must be born and paid by the retirement plan (assuming non-recourse funding is not being utilized).

This is an easy trap to enter into when purchasing real estate with a retirement account. Many people know that all expenses for the property must be paid by the retirement account as it is the plan, not the individual, who owns the property. However, just as many individuals inadvertently enter into a prohibited transaction by performing some of the work on the property as compared to having other, non-disqualified individuals execute these activities. And, in most cases, their intentions are very innocent and well intentioned. For example, a person who is a handyman at heart or practice may think that he/she is “helping” their retirement plan if they can execute some of the work on the property in that it keeps more funds in the plan. While well intentioned or innocent in its focus, this type of transaction is clearly a prohibited transaction.

An easy concept to remember….an individual cannot enter into any activity that benefits the “plan” and the plan cannot enter into any activity that benefits the individual.

<strong>4) Loans to Another Individual With the Intent….. </strong>– We know that in almost all circumstances that engaging in “self-dealing” arrangements with your self-directed IRA will be a prohibited transaction (there is a great exception to this with a 401K). So, as a result, some entrepreneurial spirits will decide to have reciprocal loans with another individual who is not a disqualified individual. The logic is that IF they are unrelated parties to each other and IRS regulations would otherwise permit such a loan, then it is permissible. However, the very fact that they are “arranging” the loan would trigger the IRS’ “indirect” benefit. Obviously, without the “intent” to get around the regulations by entering into their agreement, the parties would not have otherwise made the loans.

So…..don’t do it!

<strong>5) Personal Guarantees to the SD IRA or 401K </strong>– While addressed briefly in another point, this one bears greater emphasis as it is probably the most violated prohibited transaction…whether with intent or not. And, it typically happens with the purchase of real estate.

Typical scenario — An individual is purchasing property for their IRA or 401K and need a loan to complete the investment transaction. While at their local bank securing a loan, the loan officer will advise the SD participant that they can secure lending by providing a personal guarantee on the loan based on their credit, or collaterol. This is clearly a prohibited transaction. Remember, you cannot benefit from the plan and the plan cannot benefit from you…a simple but oh so true statement.

Remember, this information is provided for educational and informational purposes and should not and is not intended to be relied upon as any form of tax, legal or financial planning advice. Always consult with your respective legal and tax advisors for specific advice related to your financial planning goals.

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Thoughts on Wall Street — and Control — YOURS!

Posted on August 31, 2010 by John Park

I know BawldGuy (www.bawldguy.com) has preached about this for years so what I am about to say probably won’t shock anyone, but I couldn’t resist anyways. So, BawldGuy, here’s to you!!

Sooooo, is Wall Street a scam?! Well, actually, while we might believe it is at times, most likely it is not. But, with all the rash of problems in the market that has surfaced and continued to hold high its ugly head over the last couple of years, one does definitely wonder. Since, there are many articles and posts devoted to the woes or Wall Street, let’s take a higher road and just provide some good, basic education to those of us who are interested in protecting, nurturing and growing OUR retirement accounts.

It is amazing that most of us have, collectively, done a poor job in taking care of our financial assets. Many individuals incorrectly believe that the only assets their retirement assets can invest in are stocks, bonds and mutual funds. Recently, it was estimated that 98% of individuals DO NOT know that they can control their own retirement accounts. What is not amazing is that there are many professionals in the financial advice world who do not believe that it is in THEIR best interests to advise their clients of this option….and we all know why they may feel that it is not in their best interest$$$!

Now, yes, there are exceptions to individuals not being allowed to self-direct their own retirement assets –- chiefly, that most individuals cannot withdraw funds from a current plan they are participating in with their current employer.

So, what is a self-directed IRA or 401K? Well, let’s use simple terms. It is merely the opportunity to invest you retirement account assets into practically anything YOU feel is a good investment. Are their rules that govern these transactions…of course. But, they are the same rules that affect any retirement account. The IRS identifies Prohibited Transactions and does stipulate what types of assets cannot be purchased from a retirement plan, which individuals cannot participate in these investments, and restrictions placed on the plan’s fiduciary (you) from benefitting other serving as the fiduciary of the plan.

BUT, here are the simple facts…if YOU could direct your own retirement assets into a plethora of investment opportunities, wouldn’t you at least wish to consider this??!! Also, if your retirement account was established where from one account, you still had the ability to invest in both “traditional” and “non-traditional” assets, wouldn’t this be the cat’s meow! Not only is this possible, but it is legal as long as the plan is established in compliance with IRS and ERISA regulations and does not violate IRS Prohibited Transactions.

A great quote from Tama McAleese, CFP in Get Rich Slow, notes The Million(s) Dollar Mistake that most individuals can make.

She states, “As a result (of others controlling your money), you’ve been lulled into a sense of security; believing someone else is standing guard over your hard-earned money and, thus, guaranteeing your financial future.”

To demonstrate this further, one only need look at a gentleman who recently called our office with a very sad story. Now, before I tell you his story, I will predict that many if not all of you will say this gentleman was stupid, crazy, insane…and you may be right. But, the real story here is that he is a normal person who got caught in the Wall Street “game” and no matter what he did, things got worse. You see, this gentleman had an account of $150,000 with a well-known financial planning services company. By the time we spoke, the balance had dropped down to $53,000. How sad is that?! Now, being true, had this gentleman self-directed his IRA it wouldn’t have necessarily meant that he wouldn’t have lost more! But, the fact was, he thought he had no other choices. Right or wrong, good or bad…had he known he had other choices, he could have at least explored them…right?! And, how does one lose nearly two-thirds of his assets and his financial planner still says with a straight face that they are “looking out” for him?

An amazing statistic from the Investment Company Institute and the Internal Revenue Services Statistics of Income Division found that at the end of year 2004, there was in excess of $3,475 TRILLION in retirement plan assets. Of this money, 83%…yes, 83% of those funds were invested in stocks and mutual funds…now that is true diversification (sarcasm is drooling from my mouth). LESS than 1% was invested in Real Estate even though much of the self-made wealth in this county was a result of investing in and owning real estate. Oh, and whether people made money, lost money, made and lost money, etc….do you think that significant commissions were paid to brokers?! I think you know the answer to that. Hey, fun fact…do you know that in a recent year (2006) only 7% of all the transactions that occurred in the market was to SELL??!! Think about it. Really, think about it.

Okay, so you may be thinking that the aforementioned statistic goes back to end of the 2004 year and things have drastically changed. Well, consider this statistic as noted by USA Today which stated in 2008, the market had lost 2.1 trillion dollars in value, $1.4 trillion in the month of June, ALONE. Now, that represents stability and diversity, right (sarcasm oozing again)!

Finally, if anyone believes that the “average” retiree is retiring with financial dignity (which I don’t think most of you do…but just in case), consider this important statistic as first published in the November 27, 2005 edition of the Christian Science Monitor. This article identified the median income of individuals 65 and over as just $15,199!! And, unfortunately, a large portion of this income came from social security.

Let’s face it…Hope is not a Strategy! If you are an individual who has done well with the traditional offerings of stocks and mutual funds…congratulations! But, for those of you who haven’t and may be looking for additional options and further diversification strategies to the “traditional” world of investing outside these assets, just know you have options to control your own retirement funds and take control of your assets. It MAY just be more lucrative for you, and at least you may not be relying on someone else to control YOUR MONEY.

John R. Park is President of PGI SelfDirected

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Self-Directed 401Ks — A Mini B.O.Y.?

Posted on August 30, 2010 by John Park

Don’t know what a B.O.Y. is…don’t feel bad.  Many of you do not know what a B.O.Y. is and many of you do.  For those who do understand B.O.Y., you may be wondering why a post on self-directed 401Ks would also be talking about B.O.Y. (hereinafter referred to as just BOY)?  Good question as sometimes the basic tenets of a BOY plan is to dump your 401K plan….well at least a traditional 401K plan that holds stocks, bonds and mutual funds only.

So, what is a BOY and why are we speaking about a Mini Boy?  Well, in layman’s terms, BOY refers to Bank On Yourself and is a strategy that emphasizes purchasing a specific type of life insurance policy that is overfunded to achieve, over time, higher cash values within the policy.  The owner of the policy has a smaller death benefit, but is using premiums paid to grow the cash value of the policy as much as legally permitted.  Then the intent is to take out policy loans from the plan to pay for major purchases, etc. with the loan repayment being returned to the plan with interest.  The concept is using your own money to purchase “things” you want and repaying the loan principal with interest back to yourself plan as compared to a credit card company or other financial institution.

Please Note:  This post does NOT take any position on whether a BOY strategy is either good, bad or indifferent.  Nor does this post take a position on whether purchasing life insurance as an investment vehicle…generally viewed with skepticism by mainstream financial “experts”…is equally beneficial or not.

However, there is a very simple concept that BOY preaches that can be equally applied to one’s 401K plan and should be considered by many in reducing debt while growing the assets of their plan at the same time.  All you really need is your self-directed 401K plan, some debt you want to eliminate or purchases you want to make, and the ability to repay loan principal and interest.

So, what is the strategy?

Well, I promised I wasn’t going to make or provide any commentary on the value of the BOY plan….and, I am sticking to that….but, as mentioned, the BOY concept preaches taking policy loans from a specific life insurance policy that has been purchased which increases cash value.  In increasing the cash value, you are encouraged to make major purchases that you want by using the cash value from the policy and repaying these purchases (principal) back to your plan with interest.  Easy of enough of a concept when you think about it.  The benefit, in its simplest of all terms, is instead of paying back a loan/credit card company, etc. for these purchases/debt reduction activities, why not pay back the loan to your plan and grow the value of your plan at the same time.  The ole why pay someone else for their money when you can pay yourself back with YOUR money.

Well, this isn’t a difficult concept to grasp onto, but if you can do this type of activity within the confines of a life insurance policy, you can certainly do this same type of strategy within your 401K.  Obviously, IRS rules must always be followed and adhered to related to loans from a 401K, but if one qualifies for a self-directed 401K, they are permitted to exercise loans from the plan and these loans can be used for any reason whatsoever.

Remember I mentioned IRS rules.  Well, the basic ones are that you cannot have a loan that exceeds 50% of the account balance or $50,000, whichever is less.  Also, you have a maximum 5 year repayment schedule with quarterly amortized repayment schedule that must be adhered to and you must pay a legitimate interest rate.  Further, you cannot have more than one outstanding loan at any one time.  But, who are you paying back?  Well, technically, your plan, but who is your plan?  That’s right….you.

So, as we can see, the concept between the BOY program and the 401K loan provisions is similar in concept….thus, the name Mini BOY.  The BOY plan uses life insurance and the Mini BOY uses the 401K in a permissible manner.

Now, without going into math calculations….it’s too early for that….let’s keep the concept simple and also use a REAL PERSON who utilizes this strategy with his 401K plan.  You will see that as long as you can re-pay the loan and interest (to yourself) there is great power and simplicity to this concept in reducing your debt and making major purchases….all the while increasing the value of YOUR 401K plan.

Let’s use James.  He is 47 years old and lives in North Carolina.  Let’s examine how using this simple concept benefitted him and his 401K plan.  Please remember for this type of strategy to work, one must have employment earnings which provides the individual the ability to pay the loan principal and interest back to the 401K plan.

James had a credit card with a debt of approximately $10,000 and 12% interest.  Like most Americans (unfortunately), he was pretty much paying the “minimum” payment amount on his credit card each month.  Well, all of us are smart enough to know that if we do that, the debt continues and continues to build and we end up being chained to the debt….for what may be forever.  Sound familiar?!

With the Mini BOY concept, James (who had a self-directed 401K balance of $131,000) was permitted to take a loan of up to $50,000.  What James chose to do was to take a loan for the payoff amount (10K) and repay the loan back at 10% interest.  What he did immediately was payoff his credit card debt to get that monkey off his back.  Let’s face it, what otherwise would have been a debt that he most likely would have kept for years and paying huge finance fees along the way….he now had eliminated.

While paying off his credit card was a great removal of this cumbersome financial barrier, where James equally benefitted was that he was now paying back the principal and interest to his 401K plan….and with a good return (10%).  He was truly benefitting by removing debt AND having an effective strategy to increase the value of his 401K.  Oh, and while sad to say, in current economic times, might this in some ways be considered a good investment?  Sure….when you consider that with what has happened in the market, he may not have had a 10% return on his money and he certainly could have lost 30 – 40% of the value of this money.

But, here is where the “miracle” happened….and you may not think this happens until you do this yourself.  You see, we all know how easy it is to get in that financial rut and pay back the “minimum” amount on debt we accumulate, right?  The cycle just continues and usually spirals out of control for many.  The “miracle” for James was that since HE was now holding the debt through his 401K plan, he formulated a detailed plan to pay off his loan with 10% interest in two (2) years.  You see, he got so excited about putting the interest back in his retirement account and the ability to make a loan for the next debt payment/purchase, that he executed a repayment schedule to repay the debt sooner rather than later.  It’s a simple concept of taking responsibility for YOU.  No one else will do it.

But it did get better for James.  Instead of taking two years, he is now approaching having the loan paid off in full in 18 months.  He has already called me to tell me that he is going to be taking out another loan for his wife’s credit card, which has a debt of about $8,000 at 14% interest.  Again, he will get rid of debt to a credit card company and the feeling of being enslaved to such debt.  He will transform into that new feeling of paying off debt while INCREASING the value of his 401K plan.

Can we do this for most debt or purchases.  Yes.  Obviously, one needs to follow all IRS regulations in the establishment of the loan from the 401K and repayment schedule and terms….but, the benefit to you is available and permitted.  Is there not a better feeling than no longer owing and paying more money to a credit card company while at the same time increasing the value of your 401K plan?!  And, don’t lose sight of the fact that the 401K plan may be making a better return off the loan it has executed with you than it may have made in the market.

Self-directed 401K plans offer individuals the flexibility and freedom to invest in assets they wish to invest in as long as they follow all IRS rules.  This is just a brief example that as part of your investment strategy, the permitted use of loans to reduce or payoff debt may be worth considering.  You have to decide if this kind of a tool is of benefit to you…but isn’t it nice to know you have options?!

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Self-Directed IRAs & 401Ks – Who the Heck are Disqualified Individuals?!

Posted on August 30, 2010 by John Park

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Self-Directed IRAs and 401Ks — Oops, My Broker Wouldn’t Like This!

Posted on August 30, 2010 by John Park

It doesn’t take empirical research to know that many people are currently losing value in their revered IRA and 401(k) accounts due to the current economic instability. While the “good times” in the markets should certainly return to some degree, many people are looking at what they “think” is a new and better alternative. What is this “new” alternative? Well, it isn’t new at all…..individuals taking charge of their own retirement assets by self-directing. And, the ability to use these self-directed accounts to invest in traditional (e.g., stocks, bonds and mutual funds) and non-traditional (e.g., real estate, hard money loans) assets from ONE account.

Self-directed IRA and 401K accounts let individuals determine what, when, and where to invest their retirement money. And all you have to do to see if they are catching on is visit your computer and google away. The ability to self-direct truly gives you what all financial “experts” always preach…..being diversified. Why only be diversified withing traditional assets…shouldn’t you be diversified among all assets classes?!

Some would argue that even when, for example, the real estate market is not experiencing riches, there is great validity in investing in non-traditional assets. Not only is such an investment a truer diversification of one’s assets, but most people will experience that assets, such as real estate, has been a significantly proven commodity in long-term investing.

Interestingly enough, real estate as well as other non-traditional assets have always been a permissible asset which can be held within an IRA or 401(k) plan. The problem is that most institutions and brokers that are selling the IRA and 401(k) investments are selling only stocks, bonds and mutual funds where they receive a commission….so, while it would be nice to think that they would direct you to such an opportunity, many in the financial services field either do not know that this is permissible OR have a selfish interest in not advising you about this possibility.

But what about if the individual is still employed at their company where their 401(k) currently sits? If your IRA is held in a company plan through your job, the plan’s guidelines may specify what type of investments can be made — and real estate is rarely among them. But this may be starting to change. If, however, this is the case, establishing a self-directed IRA or 401K isn’t an option until you and your employer part ways. Once you leave, you can roll over the funds in your IRA and 401(k) to a self-directed IRA or 401K.

This is very true. Typically, most employer (there are exceptions with some larger employers) 401(k) plan documents do not allow non-traditional asset investments, as a general rule, one cannot take current 401(k) assets and self-direct these investments. However, once you have left employment, this opportunity certainly exists for you. And, if you are self-employed (even IF you are also a W-2 employee elsewhere) you have, in my opinion, a better advantage….the opportunity to create a self-directed (traditional or Roth) 401(k) plan. This type of plan will give an individual more options than an IRA.

And, while this is a growing trend, it will only continue to grow as an option to individuals. A recent financial planner informed me that he has turned the corner, so to speak, and is now informing his clients about self-directed options. He was blunt when he stated that his clients had lost so much money in their accounts that he felt he needed to advise doing some self-direction JUST to maintain and keep his clients. He figured that his clients would still keep some money in “traditional” offerings of stocks, bonds and mutual funds, but he admitted that people want options…..and they need options.

But, people should be urged to consult a professional adviser before moving their money to see if self-direction makes sense for them, but to also be educated on IRS rules governing such investments….whether self-directed or not. Mistakes can be costly and no one wants to face a 10% excise tax for early distributions.

Welcome to the world of self-directing…..it is a journey that, for some, will be an extremely gratifying experience.

John R. Park is President of PGI SelfDirected.

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Spoof on Brokerage Firms

Posted on August 29, 2010 by John Park

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Sesame Street vs. Bernie Madoff

Posted on August 29, 2010 by John Park

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SD IRAs & 401Ks — Beware of the Dreaded Transactional Fee!

Posted on August 28, 2010 by John Park

While not necessarily endorsing “>Southwest Airlines, this cute little video does explain how some people feel when they work with a self-directed custodian or administrator.  All humor aside, enjoy the blog.

There are many articles written about the permissibility of self-directing one’s retirement assets….this author included. It is still amazing that while the process of self-directing is in its relative infancy, the vast majority of individuals in this country don’t understand that you can self-direct your own retirement assets. Of course, IRS and Department of Labor (specifically, pertaining to self-directed 401k accounts) rules must be adhered to and met, but the opportunity for many to self-direct is not only inviting but, in many people’s minds, necessary to some degree.

As the old saying (or maybe it is my saying) goes: “Who is a better steward of your money, the person who needs it (you) or the person who is paid to invest it?”

One interesting point always comes up with individuals looking to self-direct but not wanting to place all of their retirement assets in non-traditional assets investments. They typically ask the question about how they can keep a portion of their assets into traditional offerings (e.g., stocks, bonds, mutual funds).

A word to the wise when going down this path….ask this question to either the custodian, administrator or facilitator who is assisting you in setting up either your self-directed IRA or 401k. With many custodians, administrators or facilitators, they will assist the client in setting this up, but the client has to pay a transactional fee, account maintenance fee, or both just to perform this function. This does not have to occur and, if it does, it should be a very modest fee.

Individuals enter into agreements to establish self-directed IRA or 401k accounts because: 1) they feel they can do a better job of investing the money than who they are currently paying (e.g., broker), and 2) they feel they can minimize their expenses. Why should they move their retirement assets and pay some other entity a transactional fee or account maintenance fee just to buy the same stocks, bonds and mutual funds they may have owned before going self-directed?

If truly self-directed, an individual should be able to take control of the transactions and the investments they may make without paying additional monies for transactions. Individuals should be and are able to only pay for the transaction of establishing the self-directed accounts within IRS regulations on a one-time basis, not incurring a charge every time they conduct transactions within their self-directed account. This is typically referred to as a “true checkbook control” of their account. Even though some of these “true checkbook control” custodians, administrators or facilitators levy additional fees just for the execution of transactions by the client.

Self-direction? A great idea for many. However, one should conduct their due diligence on who they may utilize to assist them in setting up this account, but also feel comfortable that they are not “pumping the meter” every time they conduct business.

John R. Park is President of www.pgiselfdirected.com and contributer to many blogs including www.bawldguy.com.

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Self-Directed IRAs and 401Ks – You Don’t Have Be All-In — Playin’ the House’s Rules

Posted on August 27, 2010 by John Park

I play recreational poker about once a year usually with the nephews for braggin’ rights. The game can be fun to play and, even playing with nephews, it can increase the heart rate a bit. Thank goodness they fall for my incredible theatrical talents at the table and I usually collect all their chips.

Well, while poker may be fun to play and tell stories about, it only serves in this article as an analogy with what may be happening with many individuals who are setting up self-directed IRAs and 401Ks. Many people are tired of the Wall Street yo-yo of up and down performance. And, it certainly can’t make one’s heart or stomach feel any better.

Consider some facts.

We must understand that while the S & P 500 has made a rebound of sorts in recent months, the market is nearly 25% less than it was 10 years ago. Also, when taking accounting for inflation, these numbers are even more disconcerting. In addition, many people who were counting on home values as part of their “assets” have seen their homes, on average, dip 30 -40% in value. Foreclosures are at a record high and…does anyone remember the days of equity in their home??!! Possibly the saddest aspect, however, is that this happened to many, many people and these individuals had no plan or call to action to take control of their retirement assets.

So, what does this have to do with poker and going “ALL IN”? People have severe angst with Wall Street and want options. They are tired of losing money, feeling like they literally have no control and are further infuriated when they know that their broker still makes commissions…whether their account gains or loses in value. They are desperately searching for options. Like in poker where the player has the smallest and dwindling pile of chips, they tend to take the approach of “ALL IN” as they feel they have no other viable options. In many cases, they are desperate and are searching for options.

This anger, worry, sadness…whatever words you want to attach to it…instinctively leads people to react in two very common ways. First, they may resign themselves to the attitude “woe is me” and that there is nothing they can do other than try to ride out the storm and hope for better days. The “put your head in the sand” approach is easy to fall into. A second approach may be to develop an “ALL IN” mentality and completely reverse their course of action and invest in assets which will lead to a more stable end game.

Most people are not aware that they can self-direct their retirement assets. Or they may know that this option exists, but have been scared to take that step. When the individual DOES take that step to self-direct, many take on the “ALL IN” mentality and forgo and forsake the “traditional” investment world’s view of “what works”.

Just like poker, an individual can go “ALL IN” or make other types of bets (options with investments). But the moral of the story here is that one doesn’t have to go “ALL IN” with their self-directed IRA or 401K. They have the ability and option to do so. They have the option to figure out what the “advisor” at work wouldn’t tell them because it simply didn’t fit with what they had to offer.

Now, it is true that many companies who assist individuals in establishing self-directed IRAs and 401Ks have imposing fees. These fees may make it difficult for the typical individual to justify owning several or multiple assets. They question their ability to achieve a good ROI when significant fees must be paid just for the ability to self-direct. They tire in their research and are disgusted that companies charge fees for practically everything. When spread out over many years, individuals can easily spend tens of thousands of dollars in fees just to self-direct…all this and still not actually have true control of their retirement assets.

What to do?

Determine IF you want to self-direct your retirement assets. Get educated on the process and difference in companies (i.e., custodians, administrators, facilitators) that assist with establishing self-direction for their clients. If you choose to self-direct, your eyes will be opened to a world of potential investment opportunities…but you have to make the choice that you want those options.

IF you do want to self-direct, determine if you want to hand over checkbook control to someone else or do you want control of the checkbook.

Understand the fee structure of the companies.

One company may have a one-time fee. Another company may have annual, on-going fees. But compare apples to apples. The company charging a one-time fee may charge a fee that represents 3 years of fees with another company. But, will you be self-directing for one year — ten years — 20 years? Bottom line is to consider working with a company/individual whose fees will not penalize you for: 1) growing your plan (why should you pay more in fees for increasing the value of your plan?); 2) owning multiple and several assets within your plan; and, 3) owning both “traditional” and “non-traditional” assets within your plan.

Education and Support -– Do you feel the company has a strong knowledge base in this field and will they be there to assist you in the future with questions you may have. Do they provide this assistance, do they charge for this assistance, etc.?

Trust -– An oft-used and sometimes lightly regarded word. Do you trust the company/person with whom you’re working? Are they interested in education and assistance or making a sale? In establishing this trust, it is always okay to ask for testimonials and the ability to speak with current clients.

Self-direction allows you the ability to go “ALL IN” but, more importantly, it gives you the ability and option of choosing in what you want to invest, when you want to invest, where you want to invest, how much you want to invest, etc. If structured correctly, you will have full control and you just may not have that fearful thought that your only option is to go “ALL IN”.

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