Are all of your stocks tied up in your IRAs? Did you know that you can buy real estate, including vacation properties, with your IRA? Jeffrey Desich is a vice president with Equity Trust Company and a registered principal with Mid Ohio Securities. He is actively involved in real estate and the financial service industry, and an expert on real estate investing with self-directed retirement accounts. This is what he said on the subject.

With a self-directed IRA, you have the ability to take control of your retirement savings. A self-directed IRA is an Individual Retirement Account in which you call the shots, and you choose your own investments. By investing your IRA in real estate you have the ability to shelter you profits from taxes! Both rental income and appreciation of the property grows either tax-deferred or tax-free!

With these self-directed accounts you have the ability to invest in stocks, bonds, mutual funds, and special assets, such as vacation properties. If you choose to use your IRA to purchase property, you must select a custodian for your self-directed IRA. When selecting a custodian for your self-directed IRA, you want to make sure you ask a few questions:

• Does this custodian offer one low flat fee with no hidden costs?
• Am I allowed to invest in non-traditional assets like vacation properties?
• Does the custodian have experience and knowledge in real estate?
• Is the firm federally regulated?
• Will I have the ability to speak with knowledgeable individuals and not just an automated service?

Once your IRA owns the property, all expenses related to this investment will be paid from the funds in your self-directed IRA, per your direction. In addition, all income made from the investment will be sent into your IRA, where it grows tax-deferred or tax-free depending on the account type. **Note: This loan also has strict government guidelines.

Leveraging: You can indeed leverage (mortgage) with a self-directed IRA. Although it is difficult to obtain a mortgage, it's easiest when you have the full price of the property available in your IRA fund. If you do want to obtain a mortgage, you are forced to obtain non-traditional mortgages because the mortgagee cannot hold lien to the property (your IRA must hold full title). You have two choices: you can obtain an unsecured loan, or secured loan. If you use a secured loan (which 99.9999% of all mortgages are secured to the property you are purchasing) you'll have to secure the loan though other means (other properties, stocks, CD's, bonds etc). Most often you'll have to turn to smaller banks for such loans. If you have ever obtained a secured irrevocable letter of credit (used for pre-construction purchases), the process for a loan inside your self directed IRA is quite similar.

Deprecation Deductions: You cannot take deprecation deductions, but you can defer the taxes on the rental income and appreciation. Often this is best for people in certain income brackets when they cannot (due to their income level) itemize deductions.

Sell: You do hold the risk that the market may or may not be at it's highpoint, but the same risks are applied to any IRA's. The stock market can be at a low at that time too. The best way to avoid this is with sound planning. Knowing that the real estate market historically goes through 7-10 year cycles, you should always start looking at your IRA investments closely around age +/-58.

**Note: You can sell the property at anytime and transfer your self-directed IRA funds into traditional IRA investments (stocks, bonds, t-bills, etc).
Are trustees costly? Yes, the trustee fees can get expensive. But I wonder how they compare to fees or commissions within traditional IRA's.
It's very important to choose a custodian wisely because there are a few companies out there who nickel and dime the fees out of you. (custodian fees may be tax deductible.)

Personal Experience: My experience is that many CFP's are not in favor of self-directed IRA's. I asked one CFP the question, "why are you against self directed IRA's?" and he said, "Candidly, Christine... Because my firm does not handle self-directed IRA's and if my client wants to utilize them, they have to take money out of my company's accounts and then I stop making money." Remember most CFP's work on commissions from buys, trades and sells with-in your portfolios. They may do a good job for you and your portfolio, but they don't do it out of the goodness of their hearts. They make money too.

© Christine Karpinski 2006