If you have ever gone on a cruise, you know that the cruise companies do an amazing job of trying to make sure they make money off of everything you do. While you’re on that vacation. It starts with flights and transfers to the cruise terminal and into it then trying to plan out ground transportation and shore excursions at every port of call. On my first cruise, which was back when I was in my 20s, I took the cruise company up on much of what they had to offer. I use them for almost all my ground transportation at each board. And I use them to book all my shore excursions. But after that first cruise, I realized there was a big disconnect between what the cruise company was offering and what I wanted for my family.
First off, I realized there was a difference between the cost the cruise company was offering the products and services for and what I could buy the items for on my own, which wasn’t such a problem because I do realize that cruise companies did offer something I couldn’t get somewhere else. That was that guarantee that if there was a problem, they would make sure that I got back on the boat, or that I got to the next port of call.
But the second issue, which to me was a far bigger problem, is I realized the cruise company didn’t offer some of the top things my family and I enjoy doing because there just wasn’t enough money being charged for the event for them to offer it as an option and still be able to take their cut. Therefore, since that time, when I’ve gone on other cruises, I’ve taken it upon myself to book my own activities off the boat so that I know I can get the experience I want for my family. Why do I tell you this story? Because it relates so well to what many of you are experiencing with your retirement.
You’ve been told your whole life by financial advisors and large brokerage companies that you should only be investing your retirement money into certain types of assets because that is all they sell. That is how they make all their money. However, the reality of it is there are a bundle of other things you can invest your retirement money in that might be even a better option for your retirement.
But the large brokerage houses are not going to be the ones to help you do it because they’re not the ones that are making any money. I’m talking about the self-directed Roth IRA, and how you can use it to invest in nontraditional assets for your retirement and still be able to get to a tax-free and risk-free retirement.
A self-directed Roth IRA is a retirement plan that allows for alternative investments for your retirement savings. Although this type of retirement plan has been around for decades, they’ve struggled to gain popularity. There are many reasons for this, but the biggest one is because the big brokerage firms that spend billions of dollars marketing retirement investments have nothing to gain.
If you decide you want to do a self-directed Roth IRA, self-directed retirement accounts do come in various shapes and sizes.I’m only talking about the self-directed Roth IRA. I’m a strong believer that tax rates will have to be higher in the future, or the government will not be able to meet all of their liabilities. Therefore, it’s in the best interest of most Americans to pay the taxes. Now, while we have historically low tax rates, rather than waiting until a time in the future, when tax rates could double, and create major havoc on your retirement plan, it’s important to know that self-directed Roth IRAs are not for everyone.
If your retirement plan is structured in a way, where you’re not looking to invest in nontraditional assets, then just stick with the traditional Roth IRA that you have. If you are looking for a tax-free way to invest in things such as real estate or precious metals then a self-directed Roth IRA may be just what you’re looking for.
Self-directed assets are usually broken down into three main asset classes. The first class is real estate. This is going to include real estate you plan to buy and then hold for a long period of time, real estate you plan to flip—maybe you’re going to buy it, fix it up, and then resell it—and also rental real estate.
The second class of asset is what I call second tier investments. Second tier investments include items such as cryptocurrency, precious metals, tax liens, private companies and startups, private loans, and crowdfunding companies. There are other second tier investments that are not on my list, but this should give you a pretty good idea of the types of assets that I’m talking about.
That you can use your self-directed Roth IRA to invest in the third class are what I call exotics. Yes, these investments can be every bit as flamboyant as the name implies. Some good examples of exotics that other people include in their self-directed Roth IRA accounts are things like zoos, racehorses , and people. Yes, I did say people, but it’s not just any group of people.
What I’m talking about here are people who have an opportunity to make money based upon their talents. This includes individuals who may one day become professional athletes, professional models, or even professional influencers. As you can see, the door is pretty much wide open on what you can invest in, using your self-directed IRA. However, there are some no no’s that you must stay away from, or you’re going to have major problems with the IRS.
These no’s include S corporations, life insurance contracts, any investments with disqualified persons and collectibles. Collectibles would include things such as antique vehicles and artwork, where the main purpose of the investment is to profit on the rarity of what you’re investing in.
In regards to disqualified persons, the list includes you and your spouse, lineal ancestors, and descendants such as your parents or your children, anyone providing services to your self-directed plan, and an entity that is owned 50% or more by a disqualified person. You may be surprised to find out though that it does not include people like your brothers, sisters, aunts, uncles, and even your cousins. Now you know the basics of what you can invest in and who you can invest with.
Let me walk you through an example of what this might look like for you. I recently wrote a previous blog post on why you should not own rental real estate in retirement if you want to get to a tax-free retirement. The only exception I listed for owning rental real estate and retirement was if you put it into a self-directed plan.
Therefore, for our example, I’ll use rental real estate as the asset for the self-directed Roth IRA. In our example, I’m going to assume that Jim and Heather Larson are 55. They currently own their home, but they would like to be able to move closer to their children once they retire. They’re faced with two major problems though. First, the price of housing near their children is skyrocketing. They’re afraid they will be priced out of the market if they have to wait for 10 years to buy the house.
The second issue they have is the only place they have money they could use to buy the house is in their broker managed Roth IRA. What the Larson’s are wondering is if there is any way they could use some of the Roth IRA money to buy a property in the area they want to move into and just rent the house out until they retire. Luckily for the Larson’s, there is a way to do so.
This is by setting up a self directed Roth IRA. They will need to get the custodian involved in order to set up this new account. Once it’s set up, they can rollover money from their broker managed Roth IRA into their new self-directed Roth account, and then use the money to buy the rental property. Doing this transaction, the Larson’s do have two options. They can choose to let the custodian handle the finances and cut the checks that are needed for the rental property and be responsible for any deposits. Or they can set up what is called a checkbook controlled self-directed Roth IRA, where they would then use a new LLC that’s owned by the self-directed Roth IRA to buy the property.
This would then give the Larson’s the ability to write their own checks for repairs, taxes, and other bills that the rental property might have. It would also allow them to make and keep track of deposits. For investments, such as rental property where there are checks being written on a continual basis,most people choose to have checkbook control Roth IRA accounts. This helps them to reduce costs and to be more timely and makes sure bills get paid and that they can hire people to get the necessary repairs done in a timely manner. Once the rental property is purchased, the Larson’s then find a renter and use their self-directed Roth IRA to handle the collecting of the income and the paying of the expenses.
We then fast forward 10 years to when the Larson’s already retire. All they have to do is the paperwork to show the property was distributed out of the self-directed Roth IRA to themselves, and now they can move into the property, having accomplished everything they set out to do. They were able to buy the property at a reduced price. They were able to get tax free rental income each month, and they were able to transfer the property out of their self-directed Roth IRA to themselves without having to pay tax on the gain.
Hopefully by now, you have a good overview of how the self-directed Roth IRA works, so you can decide if it’s something you want to consider for your own retirement.
Remember, everything I write about is to help you get access to the knowledge and tools you need for a safe and secure retirement. It’s your job to decide whether or not you need to use the tools to improve your retirement.