| If you are interested in purchasing real estate, | | | | directly back to Steve's IRA as a return on |
| private stock or a private note for investment | | | | investment. His IRA uses a portion of that income to |
| purposes, but don't think you have enough cash on | | | | pay off expenses related to the running and |
| hand consider the following. The Internal Revenue | | | | maintenance of the building, such as the monthly |
| Service has an Internal Revenue Code regulation that | | | | mortgage payment to the seller, insurance coverage, |
| allows all Americans to invest their IRA funds, or | | | | property taxes, snow plowing and so forth. At the |
| 401(k) funds rolled into a Self-Directed IRA, in a wide | | | | end of the year, Steve's IRA will have a net income |
| variety of non-traditional investment types. With a | | | | of $20,000, after all expenses are paid. |
| Self-Directed IRA, retirement account funds can be | | | | However, since Steve's IRA used financing to make |
| invested in such non-traditional assets as mortgages, | | | | the purchase, the portion of the income that is |
| raw land, commercial buildings, vacation rentals, and | | | | attributable to the financing is subject to Unrelated |
| multifamily homes, just to name a few. | | | | Debt-Financed Income, or UDFI. In Steve's case, |
| Keep in mind that you do not have to "cash out" | | | | since his IRA financed 50% of the purchase price, |
| your IRA to do this type of investing - these | | | | then 50% of his net income, or $10,000, would be |
| investments are made within a Self-Directed IRA. | | | | subject to UDFI tax. Since UDFI taxed at trust rates, |
| Rolling current retirement funds from an existing IRA | | | | generally around 40%, he will end up paying |
| for 401(k) account into a Self-Directed IRA to do this | | | | approximately $4,000 in UDFI taxes. However, his |
| type of investing is penalty-free. Additionally, the | | | | IRA will still end up with a net gain of $16,000 for the |
| taxes due on the growth of the investments are | | | | year. Even though his total IRA income was impacted |
| deferred until distribution begins at retirement. If the | | | | by the UDFI tax, his net gain is still much more than |
| Self-Directed Roth IRA is involved, the principal and | | | | his annual contribution of $4000 would have added, |
| earnings are tax-free when distributed at retirement. | | | | or even the return on most publicly-traded |
| I spoke to executives at PENSCO Trust Company. | | | | investments. Twelve months after the debt is paid |
| PENSCO Trust is a regulated IRA custodian that | | | | off, UDFI ceases to apply to rental income |
| exclusively focuses their services on the | | | | generated. Steve's IRA will then continue to earn |
| administration and custody of non-traded and | | | | rental income and years down the road, when he is |
| non-traditional assets, such as real estate and private | | | | ready to retire, his IRA can sell the office building for |
| placements. | | | | a nice profit and all capital gains from the sale flow |
| They gave me an example of how investing directly | | | | back to his IRA as a return on investment. When he |
| into Real Estate within a Self-Directed IRA can be a | | | | retires, his IRA distributions are taxed at his lower, |
| lucrative retirement strategy: | | | | retired tax bracket. If he makes this investment with |
| Steve is interested in purchasing an office building | | | | a Self-Directed Roth IRA, all of the return on |
| with his IRA funds. He has found a building in a | | | | investment is tax free upon distribution. |
| growing executive park, which is 100% occupied. The | | | | As we now know, beginning in March 2000 the stock |
| asking price is $400,000 but he only has $200,000 in | | | | market began its bear market that lasted for over |
| his IRA. The current owner of the office building is | | | | two years. At the same time the real estate market |
| willing to do seller carry-back for the balance of the | | | | began its bull run for almost five years. This proves |
| loan. Therefore, Steve's IRA has directly funded 50% | | | | that diversification in all asset classes should be |
| of the purchase price and has financed the remaining | | | | considered. Make sure you ask your financial advisor |
| 50% with the seller carry-back mortgage of | | | | about alternative investments and self directed IRAs |
| $200,000. | | | | for your retirement. |
| Rental income from the office building now flows | | | | |