IRA Investment Strategies by Walter Wofford

Strategies for Tax Free IRA Investing

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