Self Directed IRA and 401k - Checkbook Control | PGI

Legally speaking, a self-directed IRA is no different than any other IRA. Having a self-directed IRA simply means that you are allowed to direct the investments of the IRA. Many custodians claim that they allow you to self-direct your IRA investments but then turn around and restrict what you can invest in. A truly self-directed IRA allows you to make the decisions without restriction.

What is a TRUE Self-Directed IRA?

It is a step further towards putting you in full control of your IRA. You don't have to go to your custodian to get approval of the investment and get a check written. You truly have a self-directed IRA because you have checkbook control.

What can I invest in if I have a Self-Directed IRA?

The investments that you make outside your IRA can now be made within it. You the investor have tremendous flexibility to make the investments of your dreams. Wouldn’t you love to be able to invest your IRA in:

Residential Real Estate

Commercial Real Estate

Raw Land

Trust Deeds / Mortgages, and Mortgage Pools

Private Notes and Loans

Private Stock Offerings

Limited Liability Companies (LLC)

Limited Partnerships (LPs)

Tax Certificates

Receivables

Stocks, Bonds, Mutual Funds

Annuities

Options

Currency

Futures

Commercial Paper

And MANY other investments!

What types of retirement accounts can be moved into Self-Directed accounts?

Traditional IRAs

Sep IRAs

Roth IRAs

401(k)s

403(b)s

Coverdell Education Savings (ESA)

Qualified Annuities

Profit Sharing Plans

Money Purchase Plans

Government Eligible Deferred Compensation Plans

Keoghs

Is this new?

No. There are two TRILLION dollars held in retirement accounts; however, only about 3% of retirement accounts are self-directed and only about 2% are invested in Real Estate. But what most people don’t know is that the stock market isn’t your only investment choice for your IRA. You have been able to invest in Real Estate since the day IRAs were created. That was about 30 years ago!

Why haven’t I heard of this before?

Who would tell you? Your stock broker? They will only let you invest your IRA in investments that their firm offers. At a bank you will be limited to CDs. At a brokerage firm you will be limited to stocks and bonds. As a consequence, and unfortunately for many investors, it has been a well kept secret that they have other options for their IRAs. The traditional investment community has had control of over 97% percent of retirement accounts, and they have been making a great living off your accounts. Why would they want to let you know of alternatives that they wouldn’t benefit from?

As investors have become more disillusioned and frustrated with traditional investment choices, they have begun looking for alternatives. After the steep stock market decline, corporate scandals and corruption (e.g. Enron, ImClone, Worldcom) and many investors seeing their retirement accounts cut in half, they are ready to take control of their own investments. They often want more tangible investments such as Real Estate.

However, when they ask their current custodians / brokers, they are typically told that such investments are illegal, too complicated or that it can’t be done. But those are ignorant and self-serving responses. Although those custodians / brokers may not allow it, it can be done. It is just likely you can’t do it through your current custodian so they financially suffer if you make a move. They aren’t going to tell you about it.

Are there downsides?

The only downside is that some people don’t want to be in charge of their own retirement investments. They are happy having someone else make all the decisions. A self-directed IRA is not right for them.

For the rest of us who want to be involved in our retirement investments and make decisions that will affect our retirement, there are no downsides. Just be aware of the prohibited transactions / restrictions (no self-dealing). We firmly believe that you are the best steward for your money. Nobody cares as much about your retirement as you do.

Why is there so little information available on Self-Directed IRA options?

The traditional investment community has control and is making money of over 97% of the retirement accounts. Why would they want you to know that you had other options, and risk losing the commissions on your retirement accounts?

How are custodians different from each other?

The government allows certain institutions to handle the accounting and reporting of IRAs. Under the law, all custodians can allow you to invest your IRA in the same types of investments (stocks, bonds, real estate, notes, tax liens, etc.). However, the majority of custodians have made the decision to restrict the types of investments you can make. This is not based upon law, but it is based upon what the custodian wants to offer. However, there are a handful of custodians who allow non-traditional investments. Please contact us for a special report on self-directed custodians.

Do I get complete control?

Having a self-directed IRA is one step toward obtaining complete control. To obtain a truly self-directed retirement account you need PGI Self-Directed. This is the structure that gives you checkbook control. When you simply establish an account with a self-directed custodian, you are still required to get permission from the custodian before making each investment. This is time consuming, cumbersome and more expensive than it needs to be. With PGI Self-Directed you are then able to make investments the minute you decide to without getting permission from anyone. You have the checkbook. You are in control of your retirement money. We firmly believe that you are the best steward for your money. Nobody cares as much about your retirement as you do.

How do I know that this is legal?

This is a question that is frequently asked by investors who have never heard that they could invest in anything other than stocks and bonds. They have no idea that they can invest in Real Estate and many other investments. However, Real Estate has been an allowed investment since the day IRAs were created almost thirty years ago.

Find out for yourself by going to the Internal Revenue Service’s website www.IRS.gov. Request Publication 590. On pages 40-41 you will see what investments are not allowed (see below – collectibles, life insurance, s-corporation stock, etc.). Real Estate is NOT mentioned as a disallowed investment just like stocks, bonds, mutual funds are not mentioned as a disallowed investment.

Can I transfer funds from a 401K, IRA, Sep IRA, Roth IRA, or 403b and direct investments myself?

Yes. You can self direct all of these types of accounts. They can all be invested into a self-directed IRA or 401K for truly self-directed investing.

Can I invest my IRA in Real Estate?

Absolutely. Although less than 3% of retirement accounts are invested in non-traditional investments (anything other than Dow & Nasdaq stocks, bonds, CDs, etc), and less than 2% are invested in Real Estate, that is changing. More and more individuals are becoming more and more frustrated with the options offered by their current custodians. Individuals are exploring investments that they can see and touch and that have some tangible value such as Real Estate. They have seen the outstanding returns that investors have historically received in Real Estate and want to move all or part of their retirement money into various Real Estate investments.

Within the broad category or Real Estate there are many options for investment:

Residential Rentals

Commercial Properties

Condominiums

Mobile Homes

Raw Land

Real Estate in Foreign Countries

Trust Deeds / Mortgages, and Mortgage Pools

What does the IRS think of investing your IRA in Real Estate?

The IRS makes the following statement on 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.”

Can my IRA purchase Real Estate I already own?

No. This would be considered a prohibited transaction (see IRC 4975). You many not purchase property which is currently owned by you or any other disqualified person (see below). You would need to find another piece of Real Estate that you don’t already own to purchase.

Why does my current broker say I can’t buy Real Estate in my IRA?

Likely because your current broker won’t let you invest in real estate through their custodian. Just because that isn’t something they offer doesn’t mean that you can’t do it; It just means that you can’t do it through them. It is a limitation that your broker is placing on your IRA NOT one that the IRS is placing on your IRA. Or your current broker may just be ignorant. Either way, you can invest in Real Estate.

What is the easiest way to buy Real Estate using my IRA?

PGI Self-Directed is the way to get checkbook control over your IRA. A self-directed IRA account isn’t enough. You will still need to get permission and have someone else sign off on all investments you want to make. If you are ready to be in control of your IRA, you need PGI Self-Directed.

If I buy an income producing rental property, what happens to the rent income?

The income goes back into the your self-directed IRA or 401K, and you retain the tax deferred or tax free status of the investment.

I don’t have enough money in my IRA to purchase a piece of property outright. Can my Self-Directed IRA or 401K get a loan and use my IRA money as the down payment?

Yes you can use your IRA money as the down payment and then have your Self-Directed IRA or 401K get a loan for the balance. However, you will not be able to personally guarantee the loan. It must be a non-recourse type of loan which means that if your IRA fails to make payments, the only recourse the lender has is against the property itself. Further, there will be tax ramifications to doing so; UDFI (unrelated debt financed income) tax applies when a loan is obtained so you would want to confer with your tax professional about what forms would be necessary.

My IRA is small. Can I personally co-invest with my IRA?

It is not a prohibited transaction for you to co-invest with your IRA. However, there are certain formalities that need to be adhered to, and there are some situations where it isn’t advised.

Can my IRA co-invest with friends?

Yes. IRAs may purchase an undivided (and proportionate) interest in Real Estate.

Can I be the property manager of the Real Estate?

That depends. With just a self-directed IRA the answer is no. But with the a self-directed 401K you have the ability to manage the property, collect the rent and pay the bills. Unlike just having a self-directed IRA which put restrictions on what you can do, the PGI Self-Directed structure allows you to perform maintenance on the property, advertise for renters, collect and deposit the rent checks, pay the real estate bills, etc. This saves your IRA a lot of money and helps provide a more comfortable and prosperous retirement for you.

May I use my IRA funds to make improvements or renovations?

Yes. In fact, you must use IRA funds to make the improvements and pay all expenses associated with the property. All expenses of the property are paid with IRA funds, and all profits made on the property are returned to the IRA. This makes sense because it is an investment of the IRA.

Can I buy vacation property?

Yes. Doing so would not constitute a prohibited transaction. However, you cannot vacation there.

Can I buy my dream retirement home with my IRA and then live in it when I reach the age of retirement?

Yes. Your IRA would be the original owner. You would use your IRA money to make the purchase and maintain the property. Any rents generated would be returned to the IRA. However, upon reaching retirement age, the property could be distributed out to you. Of course, you would have to pay taxes at that point but without penalty.

What are the advantages to using aa PGI Agency when investing my IRA in Real Estate?

You can only receive true checkbook control with PGI Self-Directed. With a self-directed custodian, you get more control than you get with a traditional custodian, but you still have to get permission from the custodian for every little thing you do. This is problematic, unnecessary and annoying. Further, with any time sensitive investment it puts you at a huge disadvantage. And what Real Estate deals aren’t time sensitive. If you don’t move quickly, you will miss out on the best deals. And think of tax liens and tax deeds sold on the courthouse steps; you need to have checkbook control or you miss out. With true checkbook control you have the checkbook, authority to write the checks and can make an investment without time delays. This ensures that your IRA is able to make the best investments at the best prices.

With the true checkbook control your IRA will be subject to fewer and lower fees from the custodian. Thus, there is more money for your retirement, which is the whole goal of an IRA.

You obtain the ability to manage the property, collect the rent and pay the bills. Unlike just having a self-directed IRA which put restrictions on what you can do, the PGI Agency structure allows you to perform maintenance on the property, advertise for renters, collect and deposit the rent checks, pay the real estate bills, etc. This save your IRA a lot of money and helps provide a more comfortable and prosperous retirement for you.

Can my self-directed IRA or 401K get a mortgage on a piece of property?

Yes. The mortgage would need to be a non-recourse type of loan, meaning that if your IRA fails to make the payments, the only recourse the lending institution has is the property itself. Also, be aware that if your IRA obtains a loan, unrelated debt financing income tax will apply.

Can my self-directed IRA or 401K make loans to other individuals who want to buy Real Estate?

Absolutely. And this is done frequently, and it is a great investment for your IRA because the loan can be secured by the property.

Can I make a loan to my brother so that he can use the money as a down payment on a home?

Yes. According to IRC 4975, siblings are not included in the definition of disqualified persons. Thus, a loan to your brother would not be a prohibited transaction. Although some suggest that it was an error on the part of the IRS to omit siblings from the definition, they, nonetheless, were omitted and to the best of our knowledge, there has never been an IRS ruling to the contrary.

Can my self-directed IRA or 401K make loans to a friend?

Absolutely. Friends are not disqualified persons under the Code, and therefore, your IRA can make a loan to them for any purpose whatsoever (boat, airplane, hot tub, home improvements, etc.). Of course, you want to make sure that there are proper formalities and reasonable terms to the loan.

Can my self-directed IRA or 401K make loans to a Real Estate developer?

Yes. Your IRA can loan money to a Real Estate developer to finance the purchase of property or the development of property. Developers often look for private financing so it is a great way to get your IRA involved in Real Estate development. And because developers often pay an above market interest rate, the loan can be a great investment for your IRA.

Can my self-directed IRA or 401K make loans to businesses or companies?

Sure. Your IRA can make a loan to any type of business. However, be aware that there are some restrictions on loan money to any business that you or any other disqualified person has an ownership interest in.

Do taxes and penalties apply when I take money out to buy Real Estate?

No. You DO NOT take money out to purchase Real Estate or anything else you want to buy. It is just a purchase of your IRA LLC. There are no taxes or penalties. Instead of buying 1000 shares of Microsoft or any other typical stock, your IRA is just making a different type of investment. The method of doing so is different but the tax ramifications are the same.

Are the gains that my self-directed IRA or 401K makes taxable?

Not in most cases. If an IRA buys a piece of property and then sells it at a profit, the gains stay within the IRA. If you have a traditional IRA, the gains are tax-deferred. If you have a Roth IRA, the gains are tax free. Note, you alter that result if you use leverage.

Are there any special taxes that apply when I use leverage?

Unrelated debt financing income tax would apply.

Does it still make sense to use leverage?

Absolutely. Because of your increased buying power when you use leverage, the profits you make from the ability to use leverage can greatly outweigh the tax associated.

Can I invest outside of my state or outside the country?

Yes! Your IRA can invest outside of the U.S. States. There are many great investment opportunities in other countries.

What are Prohibited Transactions?

Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your IRA. The IRS defines a prohibited transaction as follows:

“Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant).” IRS Publication 590

IRC 4975 is the section that lays out the rules on prohibited transactions. Prohibited transactions generally involve one of the following: (1) doing business with a disqualified person; (2) benefiting someone other than the IRA; (3) loaning money to a disqualified person; or (4) investing in a prohibited investment.

In plain English, prohibited transactions are those transactions that violate the basic intent of the IRA. Your IRA must benefit rather than benefiting you personally. In other words, there can be no “self dealing” transactions. However, there are many ways in which you can invest your IRA and not be in violation of the prohibited transaction law. And when your IRA benefits, you benefit because it is for your retirement.

What are Prohibited Investments?

The Internal Revenue Code does not specifically authorize investments within an IRA; rather, the code outlines what types of investments are not allowed. The Prohibited Investments include:

Artwork

Rugs

Antiques

Metals

Gems

Stamps

Coins

Beverages

Stock in a S-Corporation

And certain other tangible personal property

Who is a disqualified person?

the IRA holder and his or her spouse;

the IRA holders ancestors, lineal descendants and their spouses;

investment advisors and managers

any corporation, partnership, trust or estate in which the IRA holder has a 50% or greater interest; and

anyone providing services to the IRA such as a trustee or custodian.

How am I a disqualified person? It doesn’t seem to make sense.

There is a clear distinction between your IRA and you individually. You and your IRA are not the same. Your IRA is a separate Trust for your benefit when you retire.

What would be classified as Self Dealing?

Self dealing is using your IRA in transactions that in some way benefit you (or other disqualified persons) individually. The purpose of your IRA is to provide for your retirement. It is not intended to benefit you prior to retirement and distribution of the funds.

What are some types and examples of Prohibited Transactions and / or Self-Dealing Transactions?

Self dealing with a family member (having your IRA purchase a home from you father).

Self dealing with yourself (having your IRA purchase a home from yourself).

Personal use of IRA property (buying a rental vacation home with IRA money and then staying in the home when on vacation).

Receiving personal benefit from your IRA (paying yourself for work that you do on the property such as repairing the roof).

What are Exemptions?

Exemptions are permission to invest in something or in some way that is technically a prohibited transaction. For example, it is a prohibited transaction to rent property owned by your IRA to your child. An exemption would allow you to do so.

Can I buy a business with my self-directed IRA or 401K?

Yes you can buy a business with your IRA money via the self-directed status. Please contact us for details.

Can I invest in an existing business?

Yes. This can be done as the purchase of stock as a loan to the business.

What about S-Corporations?

S-Corporations do not allow IRAs as investors; they only allow individuals as investors. Therefore, it isn’t so much that IRAs are prohibited from investing in S-Corporations rather that S-Corporations don’t permit having an IRA as a shareholder. It is likely that the investment of the IRA would revoke the sub-s status of the corporation.

Can I buy Stocks, CDs, Bonds, Options, etc.?

Yes. You can invest in any IRS permitted investment. That includes publicly traded stocks, CDs, mutual funds, annuities, bonds, stock options, futures, etc. In fact, if you are an active swing trader or day trader, you will be able to trade your IRA in a manner that your current broker does not allow you to trade using your self-directed IRA assets. For example, you probably have asked your broker if you can buy or sell Options (Calls and Puts). Or maybe you would like to write Covered Calls or do Spreads and have been told no. The your self-directed IRA allows you to trade your way.

I have a 401K with an old employer. Can I move it into the a self-directed IRA or 401K?

Yes. You can move these 401K funds into either a self-directed IRA or 401K. You can start controlling this money yourself rather than letting your old employer control your future.

I have a 401K with my current employer. Can I move it into a self-directed IRA or 401K?

The 401K plan documents will specify what you can do but most of the time you cannot move money from a 401K plan if you are currently working for the company.

I have several IRAs and old 401Ks. Can I combine them?

Yes. The can all be combined and then invested into either a self-directed IRA or 401K so that your buying power is maximized. The only restriction is on 401(k)s; at is is that you generally must no longer work for the employer. You can usually combine multiple retirement accounts into one account. Or in the event that they can’t be combined, such as the case of a traditional IRA and a Roth IRA, they can still be invested into the same self-directed IRA or 401K so that you still have maximum buying power.

How can I get more information?

email at john@pgiselfdirected.com.

How do I get started?

email John Park at john@pgiselfdirected.com. We will get you on the path to optimizing your IRA or 401(k).

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Self Directed IRA and 401k - Checkbook Control | PGI Agency

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