Professional (CISP), Attorney and President of Fax: 281-646-9701

Entrust Retirement Services, Inc. Toll-Free: 800-320-5950

17171 Park Row, Suite 100 Email: QLong@EntrustTexas.com

Houston, Texas 77084

Walter R. Wofford, IRA Specialist Phone: 601-594-8300

1923 Spillway Road, #215 Fax: 866-587-3450

Brandon, MS 39047 Email: Walter@IraWealthEducation.com

There is a lot of confusion over self-directed IRAs and what is and is not possible. In this article we will disprove some of the more common self-directed IRA myths.

1) Purchasing anything other than CDs, stocks, mutual funds or annuities is illegal in an IRA.

False. The only prohibitions contained in the Internal Revenue Code for IRAs are investments in life insurance contracts and in “collectibles”, which are defined to include any work of art, any rug or antique, any metal or gem (with certain exceptions for gold, silver, platinum or palladium bullion), any stamp or coin (with certain exceptions for gold, silver, or platinum coins issued by the United States or under the laws of any State), any alcoholic beverage, or any other tangible personal property specified by the Secretary of the Treasury (no other property has been specified as of this date).

Since there are so few restrictions contained in the law, almost anything else which can be documented can be purchased in your IRA. A “self-directed” IRA allows any investment not expressly prohibited by law. Common investment choices include real estate, both domestic and foreign, options, secured and unsecured notes, including first and second liens against real estate, C corporation stock, limited liability companies, limited partnerships, trusts and a whole lot more.

2) Only Roth IRAs can be self-directed.

False. Because of the power of tax free wealth accumulation in a self-directed Roth IRA, many articles are written on how to use a Roth IRA to invest in non-traditional investments. As a result, it is a surprisingly common misconception that a Roth IRA is the only account which can be self-directed. In fact, there are seven different types of accounts which can be self-directed. They are the 1) Roth IRA, 2) the Traditional IRA, 3) the SEP IRA, 4) the SIMPLE IRA, 5) the Individual 401(k), including the Roth 401(k), 6) the Coverdell Education Savings Account (ESA, formerly known as the Education IRA), and 7) the Health Savings Account (HSA). Not only can all of these accounts invest in non-traditional investments as indicated in Myth 1, but they can be combined together to purchase a single investment.

3) I don’t qualify for a self-directed Roth or Traditional IRA because I am covered by a retirement plan at work or because I make too much money.

False. Almost anyone can have a self-directed account of some type! Although there are income limits for contributing to a Roth IRA (in 2008 the income limits are $169,000 for a married couple filing jointly and $116,000 for a single person or head of household), having a plan at work does not affect your ability to contribute to a Roth IRA, and there is no age limit either. With a Traditional IRA, you or your spouse having a retirement plan at work does affect the deductibility of your contribution, but anyone with earned income who is under age 70 1/2 can contribute to a Traditional IRA. There are no upper income limits for contributing to a Traditional IRA. Also, a Traditional IRA can receive funds from a prior employer’s 401(k) or other qualified plan. Additionally, you may be able to contribute to a Coverdell ESA for your children or grandchildren, nieces, nephews or even my children, if you are so inclined. If you have the right type of health insurance, called a High Deductible Health Plan, you can contribute to an HSA regardless of your income level. With an HSA, you may deduct your contributions to the account and qualified distributions are tax free forever! It’s the best of both worlds. All of this is in addition to any retirement plan you have at your job or for your self-employed business.

4) I can’t have a self-directed 401(k) plan for my business because I am self-employed and file a Schedule C for my income.

False. You can have a self-directed SEP IRA, a SIMPLE IRA or a 401(k) plan even if you are self-employed and file your income on Schedule C of your personal tax return. With a SEP IRA, you can contribute up to 20% of your net Schedule C income (or 25% of your wages from an employer), up to a maximum of $46,000 for 2008. With the SIMPLE IRA, you can defer up to the first $10,500 of your income, plus an additional $2,500 of your income if you are age 50 by the end of the year, plus you can contribute an additional 3% of your income as an employer contribution. Beginning in 2002 even self-employed persons are entitled to have their own 401(k) plan. Better yet, in 2006 the Roth 401(k) was added, allowing even high income earners to contribute after tax dollars into an account where qualified distributions are tax free forever! With an Individual 401(k) you can defer up to $15,500 of your earnings, plus an additional $5,000 if you reach age 50 by the end of the year, plus you can contribute up to an additional $30,500 based on up to 20% of your net Schedule C income for 2008 (or 25% of your wages from an employer). This means that a 50 plus year old self-employed person can contribute up to $51,000 for 2008!

5) Because I have a small IRA and can only contribute $4,000, it’s not worth having a self-directed IRA.

False. Even small balance accounts can participate in non-traditional investing. Small balance accounts can be co-invested with larger accounts owned by you or even other people. For example, one recent hard money loan we funded had 10 different accounts participating. The smallest account to participate was for only $1,827.00! There are at least 4 ways you can participate in real estate investment even with a small IRA. First, you can wholesale property. You simply put the contract in the name of your IRA instead of your name. The earnest money comes from the IRA. When you assign the contract, the assignment fee goes back into your IRA. If using a Roth IRA, this profit is tax-free forever! Second, you can purchase an option on real estate, which then can be either exercised, assigned to a third party, or canceled for a fee. Third, you can purchase property in your IRA subject to existing financing or with a non-recourse loan from a bank, a hard money lender, a financial friend or a motivated seller. Profits from debt-financed property in your IRA may incur unrelated business income tax (UBIT), however. Finally, as mentioned above, your IRA can be a partner with other IRA or non-IRA investors.

6) If I want to purchase non-traditional investments in an IRA, I must first establish an LLC which will be owned by my IRA.

False. A very popular idea in the marketplace right now is that you can invest your IRA in an LLC where you (the IRA owner) are the manager of the LLC. Effectively you have “checkbook control” of your IRA funds. Providers generally charge thousands of dollars to set up these LLCs and sometimes mislead people into thinking that this is necessary to invest in real estate or other non-traditional investments. This is simply not true. Not only can an IRA hold title to real estate and other non-traditional investments directly with companies such as Entrust Retirement Services, Inc., but having “checkbook control” of your IRA funds through an LLC can lead to many traps for the unwary. Far from protecting your IRA from the prohibited transaction rules, these setups may in fact lead to an inadvertent prohibited transaction, which may cause your IRA to be distributed to you, sometimes with substantial penalties. This is not to say that there are not times when having your IRA make an investment through an LLC is a good idea, especially for asset protection purposes. Nonetheless, you must educate yourself completely as to the rules before deciding on this route. Having a “checkbook control” IRA owned LLC is kind of like skydiving without a parachute – it may be fun on the way down, but eventually you are likely to go SPLAT!

7) I can borrow money from my IRA to purchase a vacation home for myself.

False. Although the Internal Revenue Code lists very few investment restrictions, certain transactions (as opposed to investments) are considered to be prohibited. If your IRA enters into a prohibited transaction, there are severe consequences, so it is important to understand what constitutes a prohibited transaction.

Essentially, the prohibited transaction rules were made to discourage disqualified persons from dealing with the assets of the plan in a self-dealing manner, either directly or indirectly. The assets of a plan are to be invested in a manner which benefits the plan itself and not the IRA owner (other than as a beneficiary of the IRA) or any other disqualified person. Investment transactions are supposed to be on an arms length basis.

As a result of these legal restrictions, a loan from your IRA or staying at a vacation home owned by your IRA, even if fair market rates are paid for interest or rent, would be prohibited.

With a self-directed IRA, I can borrow my IRA funds to purchase real estate and then put all the profits back into the IRA.

False. When real estate or any other asset is purchased within a self-directed IRA, the money never leaves the IRA at all. Instead, the IRA exchanges cash for the asset, in the same way that an IRA at a brokerage house exchanges cash for shares of stock or a mutual fund. Therefore, the asset must be held in the name of the IRA. For example, if Ira N. Vestor were to purchase an investment house in his self-directed IRA, the title would be held as “Entrust Retirement Services, Inc. FBO Ira N. Vestor IRA #12345-11.” Since the IRA owns the asset, all expenses associated with the asset must be paid by the IRA and all profit resulting from that investment belong to the IRA, including rents received and gains from the sale of the asset.

9) If my IRA buys real estate, it must pay all cash for the property. An IRA cannot buy real estate with debt.

False. An IRA can own debt-financed property, either directly or indirectly through a non-taxed entity such as an LLC or partnership. Any debt must be non-recourse to the IRA and to any disqualified person. An IRA may have to pay Unrelated Debt Financed Income Tax (UDFIT) on its profits from debt-financed property. In general, taxes must be paid on profits from an IRA-owned property that is debt-financed, including profits from the sale or disposition of the property, in the same proportion that it had debt. For a simplified example, if the IRA puts 50% down, then 50% of its profits above $1,000 will be taxable. Although at first this sounds terrible, in fact leverage can be an extremely powerful tool in building your retirement wealth. The same leverage principle applies inside or outside of your IRA. You can do more with debt-financing than you can without it. One client was able to build her Roth IRA from $3,000 to over $33,000 in under 4 months even after paying the taxes due by taking over a property subject to a debt and selling the property to another investor!

10) An IRA cannot own a business.

False. A self-directed IRA is an amazingly flexible wealth building tool and can own almost anything, including a business. However, due to the conflict of interest rules you cannot work for a business owned by your IRA and get paid. Some companies have a plan to start a C corporation, adopt a 401(k) plan, roll an IRA into the 401(k) plan and purchase employer securities to effectively start a new business, but this is not a direct investment by the IRA in the business and is fairly expensive to set up. Also, if your IRA owns an interest in a business, either directly or indirectly through a non-taxed entity such as an LLC or partnership, the IRA may owe Unrelated Business Income Tax (UBIT) on its profits from the business. A solution to this problem may be to have the business owned by a C corporation or another taxable entity.

H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Entrust Retirement Services, Inc., with offices in Houston and San Antonio, Texas. He may be reached by email at QLong@EntrustTexas.com. Nothing in this article is intended as tax, legal or investment advice.

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Buying

This article is written to introduce IRA owners to the concept of truly self directing investments for Retirement accounts.

Most everyone is sick and tired of the gyrations in the stock market.

Let me ask you a question that your stock broker would never ask . . . How would you like a return of your money as well as a return on your money?

Did you know that there are at least 8 different Retirement Accounts which can be truly self-directed available for you and your clients for both traditional and non traditional Investing? These accounts include both Qualified Plans and Non Qualified retirement plans. These 8 truly self-directed include both Traditional and Roth IRAs, SIMPLEs, SEPs, 401(k)s and the newly created Roth 401(K)s plus the HSAs (Health Savings Account) and the Coverdell Education Account. And if you have more than one of these accounts, they can combine forces to make a single jointly owned investment. Have I gotten your attention?

These retirement accounts mentioned above can be self-directed to invest in many interesting ways including . . . Buying Real Estate in your local market or in foreign countries, investing in a start up business or an existing business, lending both secured and unsecured money from your IRA, buying foreclosures, optioning, building houses or commercial building for resale or rental, buying timber and timber land, farm land, hunting land, joint ventures with other IRA owners, rehabbing a “fixer upper” house and then selling it to an owner occupant, buying a condo on the beach for rental, buying oil and gas leases, royalty and even working interest in oil & gas wells, buying structured settlements plus much, much more! This is just the tip of the proverbial iceberg!

In this article, you will discover several investment models utilized all around the county. This article is intended to be a “pass along” to others to determine if there is any interest in learning more.

By the way, 97% of all IRA investments are in traditional Stock and Mutual Fund accounts. This article is for the remaining 3% who want better control over their financial destiny.

(WalterWofford@Gmail.com-601-594-8300)

In fact, the IRS only prohibits three types of investments for your IRAs & Retirement accounts. On the IRS’s no-no list are . . . (1) Investing in collectables such as coins or artwork, (2) buying a life insurance policy with your IRA funds (that would give you too much incentive to cash in when the insured checks out!) and (3) Investing in an S Corporation.

Everything else is allowed by the IRS subject to the disqualified party rules which basically say you can’t invest your IRA funds with yourself or other close family members.

What’s the difference between a Prohibited Transaction and a Disqualified Person? A Prohibited Transaction is any improper use of an IRA or plan by the owner or any disqualified person. Such improper use might be investing in collectables or an insurance policy. A Disqualified Person is a person, defined by the IRS, who is disqualified from completing a transaction within an IRA or Qualified Plan. Common disqualified persons are spouses, lineal ascendants and descendants and their spouses, etc.

What’s the difference between Self Directed vs. Truly Self Directed? There is no difference between the two in the eyes of the IRS but company policy of your custodians may restrict certain types of investments. All large Stock Brokerage Firms have self directed IRA accounts, but most selections for investments are limited to stocks, bonds, money market accounts, etc. The Brokerage Firms cannot make money if you invest in something they don’t sell. By the way, many Brokers at these large Brokerage Firms don’t know you can invest in real estate with your IRA because it isn’t part of their training. To make truly self-directed non traditional investments, you must make a non taxable transfer of all or a portion of your IRA funds to another Custodian. Currently there are about 20 companies in the US specifically chartered to handle non traditional investing.

Hold on a minute . . . how come I don’t know about this you might ask? The reason is that most of the information about IRAs and other Retirement accounts are distributed from the traditional investing world of stock brokerage companies and financial institutions. The reality is that the financial institutions choose not to allow these types of non traditional investing even though they are permitted by the IRS. It takes more hand holding to complete a real estate purchase as compared to buying shares of stock within your IRA or retirement plan. There are many more moving parts to buying and fixing a house owned by your IRA, for example. By the way, non traditional self directed IRA investing has been allowed by the IRS since 1974! We’ve all been in the dark.

Here are my top 3 models for IRA investing that folks use in the non traditional world. Focus on the concept. I will explain the details and the mechanics of the transaction if you want more information. Here are my top 3 models.

• Assigning of a Contract to Purchase Real Estate
• IRA Lending
• Buying Real Estate to hold for the long term

Let’s start with the first model . . . Assigning of Contracts to Purchase Real Estate. This is nothing more than the IRA owner negotiating, on behalf of his or her IRA, the right to purchase any of the following . . . .a residential house, lot, condo, hunting land, car, duplex, apartment complex or commercial building and then finding a buyer for the investment. He would have a Contract to Purchase naming his IRA as the buyer with the right to assign to someone else before closing. This might seem a bit strange but it is done every day in every business. Find something to buy at wholesale pricing and sell for more. Yes, you can do this in your IRA!

So, you hear that your neighbor is moving out of town to take a higher paying job. He is willing to sell his house at 80% of value for a quick sale. Let’s use numbers easy to calculate. The house appraises for $200K and he agrees to sell for $160K today. Your IRA is the buyer and your neighbor is the seller. You get busy and find some one who will buy it for $170K and close quickly. Your IRA now assigns the contract to the new buyer for $10K which is paid at closing. Pretty sweet! Your IRA has made a $10K profit which is TAX FREE forever if it is Roth IRA and Tax Deferred if it is a Traditional IRA or plan taxed like a Traditional IRA. Now you have $10K in your IRA to go and do it again! The money will build up quickly since no federal income or state taxes are deducted.

Model #2 is IRA lending. This technique keeps your IRA money working all the time at a predetermined interest rate. I find that most people like the idea of making a loan with their IRA funds to a trustworthy individual which is secured by real estate at a safe loan to value at competitive interest rates.

Here are two ways to utilize the IRA lending model. Both will have a deed of trust (mortgage) and a promissory note signed personally by the borrower. Both will have a current appraisal to verify value. Both will have an insurance policy naming the IRA owner on the policy as loss payee in the event of fire or loss. Both will have a loan to value of 70% or less which means, that if the property is appraised for $100K, the IRA loan will not exceed $70K. In most cases, it will be less than 70%. The only differences between the two are the interest rates and the term (years of the loan or number of payments).

Take a minute to read the financial section of any newspaper to give you a reference point to compare our numbers. www.BankRate.com published these rates recently.

I often ask folks what the difference is between 4% interest and 8% interest. Almost always the answer is 4%, but it is also true that there is a 100% difference between 4% & 8% interest. To say it another way, how would you like to get 100% raise without increasing your workload? The difference for many on a fixed income is the difference between going out to eat once a week or every night! After all, a person with $1 million dollars receives $40K per year at 4% and $80K per year at 8%. Here are some examples of the types of returns in today’s market.

For loans of 5 years or less, the rate is 8%, with interest only payments. For example, if the loan is for $50,000 for 5 years, you would receive $4,000 annually or $1,000 quarterly interest only. At the end of the 5 years, you would receive the initial amount of $50,000. Over the 5 year period, you would receive 5 years of $4,000 or $20,000 plus the return of the $50,000.

For loans of 15 years, the rate is 7%, with monthly interest & principle payments. For example, if the loan is for $50,000 for 15 years, you would receive $449.41 monthly. At the end of the 15 years, you would have received the initial amount of $50,000 plus the interest of $30,893.80 for a total of $80,893.80

We found that our IRA lenders like the idea that the funds are invested for longer periods of time with a certain payment amounts. It allows easier income projections for the IRA owner. Also, many like the idea that their beneficiary(s) will receive the same payments in the future. This plan also limits lump sum distribution temptations for the IRA owner’s beneficiary to blow the money.

One more thing, if the payments stop coming, the lender can always foreclose. The process of foreclosure in Mississippi takes about 45 days and costs about $800. The IRA lender may actually be in a better position if they get the property since the value is much higher than the loan amount. You can’t say that about many other investments!

Now for model #3: Buying Real Estate to hold for the long term

This 3 bedroom 1 bath house near 1-55 North in Jackson, MS appraised for $80K after a $5000 repair. It was purchased for $35K from a homeowner moving to a nursing home. Total invested by the IRA is $40,000 with additional $40,000 equity in this investment. There is no loan on the property and a lot of upside potential for appreciation over the long term. $700 rent.

Keeping this IRA investment as a rental should net at least $450 monthly after vacancies, repair, and management expense. $450 x 12 = $5400/$40,000=13.5% cash on cash return.

Plus, if the tenant buyer has the ability to purchase the house with a new loan, there will be a big payday for the IRA account. There is no limit to the number of houses your IRA can own.

Most people don’t know that your IRA can borrow money to buy real estate allowing your IRA to enjoy the same leverage as you the IRA owner might have. The loan must be non-recourse to the IRA which can be accomplished in a variety of ways. There are several national banks that make non recourse loans to IRAs and Retirement Accounts.

So here is what I propose . . . If you have any interest in Tax Free IRA Investing personally or if you have someone in mind who might want to hear more, please call me for a telephone meeting. I will explain the mechanics in 48 minutes or less and point you where you can obtain more educational material to get you started. By the way, these techniques work well outside the Tax Free IRA world also.

Thank you,

Walter R. Wofford 601-594-8300 office and Email: Walterwofford@Gmail.com