Creative Realty  and Financing, LLC
Less Stress. Less Worries.

Donna Allison
Acquisition Manager

Self-Directed Retirement Funds

Self-Directed Retirement Funds By creating a self-directed IRA and 401(k) individual investors can take control of their accounts and capitalize on real estate investment opportunities that are made available from time to time. Most traditional IRAs and 401(k)s are limited to investing in traditional investments such as specific stocks, bonds, mutual funds, CDs and treasuries.

However, there are other investment choices and options that are not available through these conventional retirement means.  One such choice is focused on real estate investments and more specifically

Tenants-in-Common ("TIC") real estate transactions.  Frequently real estate investment opportunities are made available to individuals that are very attractive; however, all too often the primary source of capital available to those individuals is fully encumbered in a conventional IRA or 401(k) retirement account. 

Therefore, by creating a self-directed IRA and 401(k) those individuals can take control of their accounts and capitalize on real estate investment opportunities that are made available from time to time.

CRF may be in a position to assist individual investors with:

Determining individual objectives for self-direction;

Creation of a LLC or Corporate entity ;

Identify passive custodians that truly support self-directed retirement accounts that will assist with the:

Creation and set-up the 401(k) for the specific company;

Roll specific IRAs or 401(k)s into a new self-directed plan; Establish banking and investment accounts;   

Directing individual investments in the self-directed plan;

Assistance in filing annual 5500-EZ, as required.

CRF is in a position to assist our clients with strategies relating to self-directed retirement accounts for:

The purchase of real estate;

Use purchase options for the purchase of real estate;

Sell real estate:

The benefits of Self-Directed Retirement Accounts for individuals include:

Direct Ownership in Non-Traditional Investments;

Capital Gains Deferral or Elimination on Appreciated Assets;

Financial Control of all Plan Assets and Funds;

No or limited custodian or annual account fees;

Income and Tax Deferral for all growth on investments;

Make 401(k) Employee and Employer Contributions;

Eliminating Taxes on Debt Financing for Real Estate. 

More Specific A Self-Directed IRA allows you to invest in both "traditional" investments such as stocks, bonds, and mutual funds, as well as "non-traditional" investments, like real estate, mortgages/deeds of trust, private placements, tax liens, and mobile homes and other private placements and limited partnerships. 

A self-directed IRA enables you to use your personal investment knowledge and expertise in consultation with your trusted advisors to help you prepare for your future and your family's future. While some custodians claim to allow self-direction, most only make available proprietary investments such as CDs or an approved list of stocks, bonds and mutual funds while passive custodians help clients in making their own investment decisions within a wide range of acceptable investments. 

CRF clients are provided with our assistance in identifying qualified, passive custodians for true Self-Directed IRA accounts. Real Estate Historically, real estate has supplied individuals worldwide with a stable investment vehicle that provides both income and appreciation.

The greatest tools available to real estate investors in the United States are the government-sponsored retirement plans, and the tax-deferred and tax-free profits they provide.  Domestic real estate investors can apply all of the investment knowledge they can amass in areas where they are already successful (and comfortable) to their IRAs and other retirement plans. When you combine the advantages of an IRA with your accumulated investment expertise, you have the ability to grow investments tax-free or deferred.

The rate of return for real estate in your IRA, or for other specialized investments, will be based on your expertise and understanding in these specific areas and not on the volatility and perturbations of any specific market sector. Few Americans realize that they have the option to self direct their IRAs and other retirement plans into real estate and other assets. Most investors believe that their only IRA investment options are bank CDs or the stock market and mutual funds - because they may have been given this inaccurate information by their current IRA custodian.  Investments in IRAs benefit from tax-deferred profits or in some cases tax-free profits. Imagine not having to pay taxes right away, or ever, on your real estate transactions.

Instead of paying taxes of up to as much as 50% of your profits to the government, you can often retain it for yourself and your family.  If you are already a successful investor in real estate and are just looking to improve your retirement portfolio, the combination of higher (and more dependable) rates of return for your IRA can be very powerful.

The tremendous advantages IRAs and other retirement plans offer United States tax payers include, but are not limited to, the following: The power of compound interest Reduction of taxable income Asset protection Estate planning And, a partial list of real estate investments that are possible with a Self-Directed IRA includes: Tenants in Common interests Raw land Single family homes Apartments Mobile Homes Commercial Real Estate Real Estate Notes Mortgages Tax Liens It's nice to know that there is no downside to real estate IRAs. 

However, there are certain types of transactions that you can not conduct through an IRA. In general, the IRS prohibits "self dealing," which are investments in which you or your family members of lineal descent have prior ownership. Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your self directed IRA. A prohibited transaction can bring into question the tax-deferred status of your account, potentially resulting in the disqualification of your IRA and severe tax consequences. Prohibited transactions fall into two general categories: Prohibited Investments and Prohibited Transactions. Below is a list of Prohibited Investments and Prohibited Transactions.

However, this is a general overview and should not be construed as legal advice. We have included references to Internet links of the authorities on matters concerning IRAs, including publications and codes released by the Internal Revenue Service. Prohibited IRA Investments The Internal Revenue Code does not approve any investment made inside an IRA; rather the code specifically outlines what types of investments are not permissible or prohibited which include, but may not be limited to: Antiques Artwork Beverages Certain tangible personal property Coins Gems Metals Rugs Stamps In addition to Prohibited Investments, 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 of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant)."

It is also important to know what a Disqualified Person is and understand why the individual that owns the IRA is also a disqualified person.  What and why?   After viewing the list of disqualified persons, the answer requires an understanding of one important distinction: in the eyes of the IRS, you and your IRA are not one and the same. Although the IRA is established to benefit you and your beneficiaries, it is in reality, a separate "trust." That means that you can (and should) self direct your IRA by instructing the custodian for your IRA how to handle its investments; however, you personally are not permitted to actually "touch" or have actual control of the funds in your IRA account.

Further, neither you nor or any other disqualified person may personally benefit from the investments in your IRA, beyond the inherent retirement benefits for which the IRA was established and intended. The sole purpose of an IRA is to provide for the owners retirement.  It is not intended to benefit the owner or any other disqualified person in the present tense.

A quick reminder, disqualified person(s) include you and your family members of lineal descent (i.e., grandmother/daughter, mother/father, and son/daughter).  Some quick examples of Prohibited Transaction/Self Dealing include, but are not limited to:  With yourself - having your IRA purchase real estate that you already own. With a family member of lineal descent - having your IRA purchase real estate that is owned by your father.

Personal use of IRA property - using real estate purchased through your IRA as an office, personal residence, vacation home or retirement home. Receiving personal benefits from your IRA - lending yourself money from your IRA or paying yourself, or a company that you own, to do work on a home purchased by your IRA. Roth Individual Retirement Account (IRA) Since its inception in 1997, the Roth IRA (named after its sponsor, Senator William V. Roth, Jr. of Delaware) has become a hugely popular investment vehicle.

Like the Traditional Individual Retirement Account, the Roth IRA is a personal savings plan that offers tax advantages to set aside money for retirement.  Investments in a Roth IRA compound tax-deferred, but what provides a unique advantage for the Roth IRA is that, once an individual has reached the age of 59½, and his/her account has existed for more than five years, all withdrawals are TAX FREE. Anyone who has earned income and falls within the MAGI (Modified Adjusted Gross Income) limits can establish a Roth IRA.

Unlike the Traditional IRA, the Roth IRA has no age limit for contributions, so individuals can continue to contribute as long as they like. (Note: In a Traditional IRA, an individual can only make contributions for the taxable years prior the year in which he or she reaches the age of 70 1/2.) Contributions to a Roth IRA are not tax deductible. Your contribution is made with after-tax dollars. But the advantage of the Roth IRA is that you will never pay taxes on your earnings or withdrawals ever again (as long as you have reached the age of 59 ½ and your account has been open for at least five years), and there are no mandatory withdrawal requirements, as there are for Traditional IRAs.

All earnings in a Roth IRA are TAX-FREE, because contributions are made with after-tax dollars. The only requirements necessary to receive these benefits are that the IRA owner must have reached the age 59 1/2 and had his or her account established for at least five (5) years. Annual contributions can be taken out at any time with no tax consequences. Funds that have been converted can be taken out after the account has been established for five (5) years without penalties, regardless of age. Non-contribution funds taken out without meeting these requirements are taxable and subject to a 10% penalty.

There are some exceptions for premature distributions that include: death; disability; education expenses; unreimbursed medical expenses that exceed 7.5% of your adjusted gross income; medical insurance premiums; expenses associated with buying or building first home; and the payment of any IRS levy. Unlike the Traditional IRA, where minimum distributions are required beginning at the age of 70 1/2, there are no mandatory distribution requirements for the Roth IRA. In the event of your death, your named beneficiary(ies) will receive the entire proceeds of your Roth IRA. The manner in which your beneficiary(ies) will receive the funds is determined by the election made by your beneficiary within the guidelines of the law. And finally,

Roth IRAs for the taxable year can be opened and/or funded any time between January 1 and the date your tax return is due for the year, excluding extensions. The due date is always April 15 of the following year. In Summary The IRS does not publish a list of what investments or transactions you can make in your IRA; however, it does state what investments are prohibited and what makes certain transactions prohibited. As long as investors follow Internal Revenue guidelines, they are permitted to self direct their retirement accounts in areas in which they have knowledge and expertise. Further, no investment (aside from FDIC-insured deposits) is guaranteed and real estate or other investments are no exception. 

Moreover, self-directed retirement accounts are not for everyone. However, relating to real estate, most successful real estate investors feel that the investment risk of a real estate IRA is much less than that associated with investing solely in the stock market. With a self-directed retirement account, you are in Complete Control of Your Retirement Accounts; therefore, the most important things to remember are that: With a self directed real estate IRA, the type of investments you make will be exactly the same kind you presently are making for your personal account. The only difference is that the profits in your real estate IRA investments are tax free/deferred. Further, you need a highly qualified, knowledgeable custodian to serve as your real estate IRA custodian because the IRS does not allow you to personally "touch" your self-directed IRA account.

CRF can assist you with information regarding retaining a high quality, passive custodian to insure you have a truly self directed IRA program that gives you complete control and flexibility.   As a passive custodian, your custodian does not sell investment products or give investment advice, so you will never have to worry about conflicts of interest or high-pressure sales tactics with the proper custodial relationship. No matter what your age, it is never too late (or too early) to begin planning for the future.

The longer retirement plans are put off, the more money it will take to fulfill those plans. With Americans in general living longer, planning for one's retirement becomes even more crucial. In addition to longer life expectancies, Americans must deal with inflation. In general, prices for goods and services upon retirement will likely be higher due to inflation, which in turn could affect retirees and their families.

Another point that must be emphasized is that, for most individuals, Social Security and employer-sponsored retirement benefits may not provide the level of financial independence and comfort desired in retirement. Social Security has not been, and never should be thought of as, the lone source of retirement income. Americans need to take their financial future into their own hands. By saving and investing while they are working, everyone can achieve the level of comfort desired in retirement. To encourage this type of saving and investing, the United States government created the Individual Retirement Account (IRA). 

God Bless America! Self-Directed IRAs & the "Power of Compounding Interest & Taxes" Albert Einstein called it "the most powerful force on earth" and, more than 200 years ago, Benjamin Franklin defined the concept of compounding interest as "the stone that turns all your lead into gold."  But, how does it work? The power of compounding interest comes from the fact that the original investment, as well as the income derived from that investment, is re-invested. Compounding interest can be especially dramatic when the effect of taxes is removed from the equation. Using a self directed IRA as an investment vehicle allows investors to benefit from the full power of compounding interest. This is due to the fact that investments made within a self directed IRA are tax-deferred, or in the case of the Roth IRA, tax-free.

However, not all self directed IRAs are the same due to the custodian of your retirement funds!  In any event, the Effect of Taxes on Your Money is astounding. Remember, not all self directed IRA custodians are the same!  Let CRF assist you with a review of your custodian and other available IRA custodians that support true self-directed accounts.  

Disclaimer:  The information contained herein is not intended as legal or financial advice and is subject to change without notice.  It has been provided by sources deemed reliable by the CRF.  Further, this document does not constitute an offer to buy or a solicitation to sell any securities or real estate interest in the United States or any foreign country.  Such offers or solicitations will be made, if any, through an Offering Memorandum or other such Document as appropriate. 

Please call us at 720-331-8630 or email us at ira@crfllc.com or fill out the form below for more information:

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