What is a Self-directed IRA?

Learn how this Wall Street secret allowed 3 investors to each create a tax-deferred or tax-free retirement nest egg of $100,000,000.    

A few years back the Government Accountability Office (GAO) did a study and found out that there are 314 people who have an IRA valued at more than $25,000,000. The GAO estimated that the average account balance for these 314 people is $258,000,000.

Yes, you read that correct, on average value of the IRA of these 314 people was $258 Million. Imagine what you could do with even 10% of that amount.

It is not luck that allowed these people to create a fortune.

These 314 people knew a secret. I am going to share that secret with you today.

Let’s take a closer look at three of the 314 investors who have used this Wall Street secret to each create a massive fortune which will not be taxed until they retire, or in some cases, it will never be taxed.

The $100,000,000+ Retirement Secret  

How would you like to have more than $100,000,000 in a tax-free account?

I don’t know about you, but I think this would be enough to retire on.

These 3 investors have different backgrounds, but each one of them has benefited from this secret. One is a tech startup investor, another is a presidential candidate, and the other is a good friend of a different presidential candidate.

Each one of these three investors has two things in common.

They knew this secret, and they invested in areas where they were experts.

The Presidential Secret     

Let’s look at the first one, Mitt Romney. It is reported that Mitt Romney had an IRA valued at more than $102,000,000 at the time he ran for president of the United States. In a matter of 35 years, he amassed over $100,000,000 in his retirement account. How was he able to do it?

He invested in areas he was an expert in. His area of expertise was in private equity.

Peter Lynch was a well-known mutual fund manager who was famous for saying, “invest in what you know.” This means that you should invest in areas that you are an expert rather than areas which you are not as familiar.

It is clear from Mitt’s $100 million retirement fortune that he followed this advice.

The Technology Investor     

The second $100,000,000 investor is Max Levchin. Max is a serial entrepreneur who was an early investor in Yelp, PayPal, and Slide. It is estimated that he also has a Roth IRA worth more than $100,000,000. His enormous tax-free wealth was created by investing in tech startups. It is clear from his repeated successes that he is an expert at finding successful startups.

The Friend of the President    

The third $100,000,000 Roth IRA investor is Peter Thiel. Peter is known for being a supporter of Donald Trump. Formerly, he was also known as a successful venture capitalist with initial investments in PayPal and Facebook. It is said that his initial investment in Facebook was held in his Roth IRA making the enormous gains tax-free. His multiple successes as a venture capitalist makes it clear that he is investing in his areas of expertise.

All three of these investors used this Wall Street secret to build legacy wealth in their retirement accounts which will shield them from taxes on a temporary or permanent basis as long as the assets are held in the account.

Since you are reading the Life, Liberty and Property website, you are probably an expert (or would like to become and an expert) in real estate. Many fortunes were created in real estate, including our current president.

I’m going to teach you how you can build your real estate fortune while using the same secrets as the three investors above.

What is a self-directed IRA?    

Do you have an IRA or a 401k? If you do, then you probably know how they work. A Traditional Individual Retirement Account (IRA) is a type of account that the government created in 1974 that allows you to contribute money each year on a pre-tax basis and that money will grow tax-deferred until you withdraw it in retirement.

A lot of bad policies are created in Washington DC, but they got this one right. The ability to grow your savings for decades without paying taxes, allows you to take advantage of the principal of compound interest. This is a very important concept if you want to maximize your retirement savings.

IRA vs. Self-Directed IRA    

If you have an IRA or 401k account, you probably have it invested in mutual funds. Most people do. However, most people also believe that it is their only option. The facts are quite the opposite.

The Internal Revenue Code does not tell you what you can invest in, it tells you what you cannot invest in. It clearly states in Publication 590-A that you cannot invest in life insurance or collectibles. This leaves the door open for you to invest in virtually anything else. You can invest in private company stock like Mitt, Peter and Max, or you could invest in horses, tax liens, franchises, or real estate. You have the freedom to invest in what you know.

Why have I not heard of this before?   

You have not heard about self-directed IRAs from your traditional broker because they probably do not provide this service… or because they are not aware that this option exists. The companies that do provide this service do not have large advertising budgets, like many of the larger broker dealers. It is unlikely that you would hear about self-directed IRAs unless you are looking for it, or you happen to know an expert who is willing to share this secret.

The statistics show that around 5% of the owners of IRAs invest in alternative investments. I would estimate that less than 10% of IRA owners are even aware that you are capable of investing in alternative investments outside the stock market. However, since you are reading this post, consider yourself informed.

How Do I Get Started with a Self Directed IRA?     

To get started, you need 3 things:

  1. a fully funded self-directed IRA,
  2. a self-directed IRA custodian or administrator,
  3. and an investment.

Fully Funded Self-Directed IRA      

You will need to start with an IRA that is funded. In 2017, you can contribute $5,500 to your IRA. You can also roll over a former 401k plan account into your IRA to fund it as well. While you can creatively invest smaller amounts of money, buying real estate typically takes larger amounts to invest. Make sure you have enough to engage in your investing strategy.

Self-Directed IRA Custodian or Administrator     

Every IRA is self-directed. You can invest in horses with your IRA if you choose, but your Fidelity, Schwab, or TD Ameritrade IRA may not allow it. While the IRS allows you to invest in virtually anything, your custodian may not. The choice of investments available to you is at the discretion of the custodian.

Many traditional custodians specialize in traditional assets such as stocks, bonds and mutual funds. If you ask them if you can buy a horse in your IRA, they would probably laugh at you and tell you that you cannot do that. A more accurate statement would be that “they” cannot do that.

Frankly, you should not want to use a custodian if they do not specialize in your type of asset, otherwise they could make a mistake that could cost you money.

It is important that you find a custodian or administrator that specializes in your type of investment. This is a complete list of all self-directed IRA Custodians and Administrators that specialize in alternative investments. It should make your search process much easier. From this list, you should research what company makes the most sense for your investing needs.

The Investment     

Life, Liberty, and Property focuses on real estate, so while you can invest in virtually anything with your self-directed IRA, let’s focus on real estate. If you want to build a massive retirement fortune like Mitt, Peter and Max, you will need to invest in what you know. If what you know is real estate, then you will need to figure out how to grow your wealth with preferential tax treatment on your real estate investments.

You should also understand that investing in real estate does not mean exclusively single family rentals. You could also invest in a huge list of alternative investments such as, private mortgages (hard money loans), farmland, timberland, raw land, water rights, airspace rights, mineral rights, tax liens, condo liens, and more. Some investors prefer buy and hold investments and some want to do quick flips. It doesn’t matter the path you choose, you just need to make sure you are making good investments with your retirement funds.

Take your existing knowledge of real estate and leverage it with this new knowledge about self-directed IRAs so you can amplify your returns by paying fewer taxes to Uncle Sam. If you want to build your retirement fortune, you will need to start today. These fortunes were not built overnight. It takes time to compound your capital, so make sure you make good investing decisions.

Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group (IAG), an independent Registered Investment Advisor. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and non-traditional investment markets. Kirk has an extensive understanding of the regulatory and financial considerations involved with investing alternative investments in self-directed IRAs and 401ks. He received a BA degree in Economics from Trinity College in Hartford, CT. For more information on Kirk or Innovative Advisory Group you can visit http://www.innovativewealth.com/

Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC.

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