IRA Investing: How Do I Find Alternative Assets?

Patricia McCrystal

August 17th, 2015

If you’ve decided to take the reigns of your retirement account by self-directing your IRA, you more than likely already have an alternative asset market in mind for your investments. However, if you’re ready to try your hand at a new market in which you have little knowledge or experience, it can be daunting to figure out how to shop for assets.

Below are some starting points to help you in your search for alternative assets for your IRA. You can always utilize your existing financial team, such as a CPA or financial planner, to receive advice about potential asset markets to pursue. Feel free to call New Direction IRA with any questions or for more information about your IRA’s investment options.

Precious Metals: Many investors who use their IRA funds to invest in precious metals are already seasoned coin/precious metals collectors. As such, prior experience in gold or silver can make investing your IRA account in precious metals a fairly familiar  process. You are free to use your IRA savings to purchase metals from any dealer that you may have a pre-existing relationship with. If you’re new to precious metals investing, you can shop online for dealers with the best prices. Because your IRA can only purchase bullion products, you may find it relatively easy to compare the over spot price for each dealer.

Real Estate: IRA account holders who already have experience investing in real estate can utilize their IRA funds to continue their investment ventures. You are free to use existing real estate professionals that you have used in the past to scope out new investment opportunities for your IRA. Like precious metals, you can shop online to buy real estate with your IRA.

Most real estate investors understand that you have to know people in the local market to find investing opportunities. There are typically real estate investor clubs in every big town; at which real estate professionals can provide you with information about local property for sale and can mentor you in the ways of savvy real estate investing. These real estate investor clubs are a low-cost or no-cost way to receive information for your IRA real estate investments. These clubs allow you to choose your role and level of involvement in your local real estate investing market.

Private Lending: Finding a private lending opportunity for your IRA is principally reliant on your personal knowledge of borrowers in the market for a loan. You can originate a loan for your IRA funds, or you can purchase an existing loan, usually at a discount. There are online markets for peer-to-peer lending, peer-to-business lending, and more. Some investors utilize a loan broker to partner their IRA money with a borrower.

You may find real estate borrowers through a real estate professional, or via online venues. You can also attend local real estate networking groups to scope out private real estate lending opportunities.

Private Equity: Private equity is the most individualized asset in which you can invest IRA funds. Finding private equity opportunities is largely dependent on your personal knowledge of promising new startup companies, or companies looking for capital to fund new products. You can take advantage of your connections and experience to identify auspicious private equity investments.

Although the asset types above are some of the most popular choices of our clients, they are far from exhaustive. Call New Direction toll-free today at 877-742-1270 to find out about the nearly endless list of investment choices you have with your self-directed IRA. Visit our website to access industry-best educational resources and learn more about the freedom and control granted with a self-directed IRA. Happy investing!

What is a Non-Recourse IRA loan?

Leveraging is a valuable tool to increase the buying power of an IRA. Leveraging means borrowing funds to increase purchase power and acquire a property that would otherwise be unaffordable. Surprisingly, many people aren't aware that their IRA or 401k funds can be leveraged and utilized as a down payment for a real estate IRA investment.

In order to use leverage, a non-recourse loan is required. The IRS restricts an IRA holder from personally guaranteeing the account or its assets. Consequently, lenders usually offer borrowers non-recourse loans with slightly different terms and loan-to-value requirements.

Key concepts for non-recourse loans

-    An IRA is its own legal entity, separate from the IRA holder’s personal finances.
-    Loan documents must be titled in the name of the IRA (i.e. NDIRA, Inc. FBO Client Name, IRA).
-    The personal finances of the IRA holder or other disqualified person can’t guarantee the loan.
-    The lender must be a non-disqualified person or entity.
-    Unrelated Business Income Tax (UBIT) on profits derived from the debt-leveraged percentage may be incurred by the IRA.
-    Terms of the loan are determined by the IRA holder and the lender.

The lender and non-recourse loans

The non-recourse lender determines the criteria that they wish to use to qualify an IRA (borrower) and the terms that they are willing to offer that IRA. It is common for the terms of a non-recourse loan to an IRA to be different from the terms that a lender would offer to an individual whose personal assets are available in the case of default. For example, non-recourse lenders may require 30 to 40 percent down or more.

The non-recourse lender may offer a percentage rate that is higher than they might offer for a personally secured loan. The IRS does not dictate to the lender which IRAs qualify for a loan, nor do they prescribe any terms of the loan except the concept noted above that disqualified persons cannot guarantee the loan.

The IRA provider and non-recourse loans

The IRA provider does not negotiate the loan for the IRA. It is also not the role of the provider to evaluate or approve the loan. Even though the loan is negotiated between the lender and the IRA holder, all legal documents associated with the loan are signed by the IRA provider, not the IRA holder.

Top 5 alternative investments for Self-Directed IRAs

1) Real Estate IRA
Investing retirement money in real estate can take many forms – a rental apartment which pays your IRA monthly, a house which is held in an IRA until you decide to sell, even your dream home, which you can live in after you retire. This real estate can even be in a foreign country, which opens your options greatly.

2) Land
Raw land can be purchased and held until the time is right to sell or build, purchased and leased for farm land or oil or cell towers – the possibilities are limited by your imagination. As someone famous said, they’re not making any more.

3) Gold and other precious metals
Your IRA can purchase gold coins, gold bars, electronic shares of gold. Buy now, sell when the time is right, and you’ll never have to worry about or pay for storage.

4) Loan
Your IRA can provide loans for friends, businesses, or non-profit associations. If someone you know is paying 20% interest on a credit card, your IRA can loan them the money for 15%! As long as a person is not a direct lineal descendent (or yourself), your IRA can loan them money.

5)Private Stock
Find the next Microsoft, Apple or fill in your own successful business, and your IRA can buy some shares in them before they go public. Nanotechnology, biotechnology, or your next door neighbor’s fledgling cookie business, your IRA gets in before the world knows the true value of a start-up company.

Why did I get a 1099-R? I didn't make a distribution.

This discussion is relevant to those of you who receieved a 1099-R without making a distribution and/or anyone who rolled over funds from a 401k to an IRA. This post is designed to help you learn about how 1099-R and 5498 forms.

There are several reasons why people receive 1099-Rs. You will receive a 1099-R if you:

-          Take a distribution from a retirement account.

-          Make a conversion of a Traditional IRA to a Roth IRA.

-          Devalue an asset to zero.

-          Roll funds over from a 401k to an IRA or other retirement plan.

-          Roll funds over from an IRA to an HSA.

Depending on the reason you receive a 1099-R, you may or may not have tax consequences (see the discussion of the 5498 form below), but it is still good to understand the form and why you received it.

If you did one of the first two items on the above list, your reported income will increase by the amount on the 1099-R form. If your asset was devalued to zero, you essentially are paying tax on a distribution that has zero value. Tax on something worth nothing is also equal to nothing.

If you received the 1099-R form for one of the last 2 reasons listed above, another reporting form becomes relevant, form 5498 which is also filed with the IRS by New Direction IRA as part of our annual IRS reporting. The 5498 will reflect the results of any rollovers you made to accounts held by us.

For example, if you rolled funds from an IRA to an HSA, the 5498 will reflect that the amount reported on the 1099-R was rolled over into an HSA and not received by you personally (the IRS only allows that once in your lifetime). The same is true if you rolled funds over to an IRA from a 401k plan. The net result is that the 5498 will indicate that the amount reported on the 1099-R did not result in increased income for the current tax year.

Your first statement of the year serves as your substitute form 5498. You can reference this form for your records. As long as the amounts on the 1099-R match the amount listed as the rollover which funded your account on your statement from us, the net resulting tax is zero. Keep your statement (substitute 5498) and the 1099-R form with your tax files for documentation.