Entrust New Direction Blog

The self-directed IRA is a wonderful vehicle for diversifying IRA or other qualified funds into ‘alternative’ assets like real estate, private placements, notes, precious metals, and more. The whole structure of a truly self-directed plan is different than what most people are accustomed to with their current bank or brokerage company. Most people are more familiar with working with an advisor or appointed financial representative. With that structure, the advisor/representative helps the client determine what the IRA is going to invest in and when. With a truly self-directed IRA there is no advisor or representative. You take on that responsibility as the ‘self’ in the self-directed IRA.

You are the one in control of everything that happens with your IRA. We need your initiative to do anything with the account. We can’t (and won’t) do anything without your direct, written authorization. We are here and accessible to do whatever you need us to do. However, in order to ensure the full security of your account, we do not take any action except upon receiving your direct written request.

As a general rule, if you are a client and you are thinking to yourself: “I wonder who is doing such and such?”—the answer is probably YOU! You decide what your IRA is going to invest in. You put together the details of the investment. You provide us with the investment direction forms, and you approve everything before we process it.

The great thing about working with a local company like Entrust New Direction is that we are available when you need to reach someone. We always answer the phone when you call, and you are able speak with a representative in the appropriate department to help with whatever you need.  Additionally we have a wealth of really good information on our website.

I am a visual person and I like analogies, so here’s an analogy for the self-directed IRA structure: Think of the IRA as a bus. You are the driver of the bus and Entrust New Direction serves as the wheels and sometimes the brakes. A bus without wheels is not going anywhere (you need a self-directed IRA administrator to provide recordkeeping and administration for the IRA), and a bus without brakes is extremely dangerous. Thus, our two roles are essential to the IRA. We will move when you direct the steering wheel of the bus in a particular direction and hit the gas. If you are clearly going the wrong way (i.e. towards a prohibited transaction) we will stop you. 

If you are not an Entrust New Direction IRA client and are working with another self-directed IRA company that doesn’t utilize their brakes, you may want to ‘trade in’ for a better bus. If you find a company that blindly does whatever you ask, without requesting documents or asking basic questions, you may want to separate yourself from that company. Unfortunately there are companies in our industry that operate without ever utilizing their brake system.

It is important to note that, at the end of the day, you are responsible for your self-directed IRA. Entrust does not approve or endorse any investments. We are capable of telling you what the rules are, however when it comes down to it, it’s your IRA and you are responsible for it. We’ve been doing this a long time and we are very knowledgeable of the rules for self-directed IRAs.

We can’t give advice or ‘approve’ your investments, however, if you are forthcoming and honest with all the information and you have a general question about whether something that you are looking to do is a prohibited transaction or not, we can generally answer your questions (or at least direct you to the appropriate section of the Code to research the issue). If we happen to see that the investment you are trying to make is clearly a prohibited transaction, then we won’t fund that transaction (i.e. we will use our brakes). We don’t want our clients to get into trouble with the IRS, that’s not good for anyone. We don’t want ‘bad assets’ in our system, and we certainly don’t want our clients getting into trouble and telling their friends what a terrible experience they had with one of those ‘self-directed IRAs.’

Our goal is to provide our self-directed IRA clients with the broadest spectrum of investment options while at the same time helping them stay out of trouble and maintain their IRA’s tax deferred status. If you know what you want to do with your IRA, and need an administrator that will allow for the flexibility to do it, give us a call. We would love to work with you. 

Photo Courtesy of Bill Ward.

Decreased returns coupled with concerns about inflation have investors seeking alternatives, especially with regard to retirement investments. Retirement losses over the last several years are estimated at $2 Trillion. As a result, investors are seeking creative ways to boost and stabilize 401k values. Some turn to gold and other metals investments to accomplish these goals. Others invest in gold or silver purely as a way to diversify an investment portfolio that has historically not included metals investments.

The Blanchard Economic Research Unit lists six reasons why investors own gold: as a hedge against inflation and/or a declining dollar, as a safe haven in times of geopolitical and financial market instability, as a commodity based on gold's supply and demand fundamentals, as a store of value, and as a portfolio diversifier. Blanchard also notes that the price of gold increases in market situations where the value of traditional paper investments like stocks and bonds decrease. This tendency for increase is one reason that investors cite for choosing gold as a diversification tool for investment portfolios.

What's an investor to do with a room full of proverbial straw and no Rumplestiltskin-style heroes in sight? It turns out that investing in gold and other precious metals is relatively straightforward once investors choose the type of metal investment that fits their goals best.

Gold and silver investment come in several forms. Two possible ways to approach a Gold 401k include:

1. Gold-Exchange Traded Fund (Gold ETF) - Shares in these funds are publicly traded via any major stock exchange. The fund itself is not made up of physical gold, but rather gold derivative contracts backed by physical gold. Since derivative contracts do not represent the exchange of any real assets, even if the investor sells the shares in the fund no actual physical gold would ever be received. Shares are sold for cash equivalent value.

2. Gold or Silver Bullion or Coins in an IRA (Precious Metals IRAs) - Actual bullion and/or coins are purchased with retirement savings and held as a plan asset. Precious metals can be sold and liquidated to cash form or distributed in lieu of cash to the investor without penalty at 59 ½ or older.

For investors interested in purchasing physical gold or silver with their 401k funds, the first step is to open a self-directed IRA account. Then 401k funds can be rolled into a self-directed IRA for purchasing precious metals. Only Self-Directed IRAs can purchase physical gold or silver as an IRA investment. The investor then works with their dealer of choice to negotiate the investment purchase for the IRA. Investors should be aware that collectibles are not eligible for IRA investment and consult a list of gold and silver investments allowed for IRAs before making a final choice. Once purchased, the physical gold or silver bars or coins must be stored with a depository company not with the investor. At Entrust New Direction, the IRA investor can choose to work with any depository of choice. The gold, silver or other metal will be stored at the depository for the IRA until it is sold or distributed from the account.

For investors that seek assets that can be held in hand, precious metals IRAs offer a clear advantage. For more information on how to purchase gold or silver with your 401k, visit Gold.NewDirectionIRA.com.

Self-directed IRA holders have discovered gold - in the trash. Some of our clients recently found out how to invest in gold while also being environmentally responsible.  There may be more options for recycled gold, but the one that was brought to our attention, Ohio Precious Metals  extracts the metals from electronics, jewelry, the banking industry (not sure why the banking industry would give up the goods), photographic equipment and other industries.  Gold IRA and Gold Health Savings Account (HSA) owners have been buying recycled gold bars and coins.   If I was allowed to ever have any opinion on an investment, which I'm not, I'd think it was pretty cool.

You probably already know that some other self-directed IRA custodians choose the gold dealer for the IRA holder, but our clients use their gold IRA or gold 401(k) or gold HSA to buy gold (or silver or platinum or uranium) from any dealer. And of course, our clients can pick anywhere to store their gold (as long as they're an authorized storage facility). Again, I'll repeat: We never give our clients investment advice. We never tell anyone where to buy or where to store their gold. 

As long as I'm repeating myself, let me say again that when it comes to a gold ira or a silver ira or any other precious metal ira, you're only investing in the metal itself, not the pretty coin.  No matter what image is on the coin.  No matter what kind of bar.  Gold IRAs, Silver IRAs, etc are only investing in the metal - never collectible coins.

Form more information, register for the 1 hour Recycled Bullion IRA webinar, first available June 23, 2010 6:00pm MDT.

Photo courtesy of bogenfreund.

A risk management technique that mixes a wide variety of investments within a portfolio. It is the spreading out of investments to reduce risks. Because the fluctuations of a single security have less impact on a diverse portfolio, diversification minimizes the risk from any one investment.

Most everyone is familiar with the concept of investment diversification. Any financial planner worth his/her salt will recommend that you refrain from putting all your money into one investment or one type of investment. Spreading wealth helps reduce overall loss potential.

Many people diversify their retirement wealth into different growth funds, balanced funds, index funds, small cap, large cap etc. There is a problem however with this view of diversification.....yes it is diversified....but only within securities and security related investments. But what happens when the stock market crashes? Did anyone's IRA stock portfolio feel strong in March of 2009? Did you experience some portfolio volatility on May 6th 2010 when the market dropped nearly 1,000 in less than ½ hour?

Would a car salesman sell you a bike?

There is a world of possible IRA investments outside of publicly traded securities. ‘Alternative' assets like real estate, private equities and notes are allowable investments for retirement plans and are essential to a truly diversified portfolio. The problem that most people run into is their current IRA administrator won't allow them to invest in alternative assets within their retirement plan. Quite frankly, why would they? A stock broker makes money by selling stocks. So if you call your stock broker and ask what you should invest your IRA into.... they will probably say stocks. If I go to a car dealership and tell them I want to buy something.... they will probably try to sell me a car. There are two reasons most banks and brokerage companies don't allow alternative assets within retirement plans:

1. They can't earn commission from selling ‘alternative' assets like real estate, private placements and private notes. If they can't make money off these investments they won't promote the fact that they are available. Unfortunately for us everyone knows what the big banks and brokerage companies do... not everyone knows how self-directed plans work.

2. They are not set up administratively to hold alternative assets. A real estate closing is quite a bit more involved than a simple stock or mutual fund investment. To make it work you need to have your IRA with an administrator that is specifically set up to hold alternative assets.

Obviously, securities are the biggest piece of the investment pie for most portfolios. There are roughly $4 trillion in IRAs currently in the US and the vast majority of those funds are in securities (in particular mutual funds). Alternative assets like real estate will never dethrone securities as the primary IRA investment. However, if you want a truly diversified IRA, you can't have everything in the securities market.

As a self-directed IRA administrator we cannot tell you what to invest your IRA or 401(k) into; however, we can provide for you the broadest spectrum of investment options. If you have IRA or other qualified funds, you can move a portion of those funds to an account with Entrust New Direction IRA and invest them in non-security related investments. Most of our clients don't move their entire portfolio into alternative assets.... because then they are losing the securities component of diversification....rather, they move a portion of their funds so they have some money in the market and some in alternative investments.

These are strange times we live in, both financially and otherwise, and now more than ever you need to know what your investment portfolio looks like and make sure all your proverbial eggs aren't all in one basket. If you have questions about what types of investments are permissible or how alternative assets can be incorporated into your IRA portfolio, please call our office or attend one of our upcoming events.

Many of us have plugged our personal numbers into various online retirement calculators.  How much do I make?  When do I want to retire?  How much do I want to spend after I'm free?  And maybe the most difficult question - How long will I live after I retire?

Unless you're an ostrich (with head-in-sand) about your retirement options, we all want to see how close we are and how long we have to go.  Maybe we want to play with the variables and see if we can quit tomorrow, next year, next decade.  I have tried many, even played with the programming code of one, and I thought they were all pretty much the same, and pretty much accurate. 

Boy was I wrong. 

According to a report by the Society of Actuaries, online retirement calculators may create more harm than help in your quest for golden Golden Years.

(this MAGIC-BRAIN is simple to operate, like an online retirement calculator)

The Actuaries looked at twelve different retirement calculators.  Five free online calculators for laypeople, one which charges a fee, and six which are specifically for financial planning professionals. 

What's the problem with these retirement calculators?

First and foremost, they disagreed with each other on not only what to calculate, but also on the final results.  Even some basics like life expectancy and social security benefits were in dispute between calculators. Some of the calculators didn't account for investment fees (which can be substantial if you're not using a self-directed retirement option), and some gave unrealistically high "typical" rates of return on retirement investment.  In addition, spouses and houses (in all their potential glory and otherwise) are rarely considered.  

Should you try a retirement calculator, be sure to try more than one and cross-reference the information.   Mark Miller, a journalist who specializes in retirement planning and just published a book, The Hard Times Guide to Retirement, recommends one online calculator in particular - the ESPlanner.  Miller gets points from me because he also recommends a non-commissioned financial planner, which only makes logical, and common, sense. The ESPlanner was designed by Boston University prof Laurence Kautlikoff and has free and paid versions. 

Do you have a favorite retirement calculator?  Do you trust it?

Photo courtesy of get directly down

And in financial news from earlier this merry merry month of May, Fox news reported:

"A computerized selloff possibly caused by a simple typographical error triggered one of the most turbulent days in Wall Street history Thursday and sent the Dow Jones industrials to a loss of almost 1,000 points, nearly a tenth of their value, in less than half an hour. It was the biggest drop ever during a trading day."

The biggest drop ever thanks to one fat finger.

You may consider this old news (2 weeks ago is old news now), but the stock market is still where 98% of America's retirement dollars precariously reside, so until either the amount of cash or the amount of precariousness changes, this news won't get old.

Some dude fat-fingered my life savings away.

Let's backtrack for a moment. Fat-finger: When a typist mistakenly types a wrong or additional keystroke, thereby taking down the world's financial markets.

Okay, that last part was my own extrapolation. Anyone who works or plays on computers knows how easy fat-fingering is. Whether your fingers are, in reality, quite lithe, is irrelevant. The fact is, mistakes happen. Fat-fingering happens.

It happens so often, we have internet memes and cliches based on fat-fingering. Who hasn't typed teh when they meant to type the?

But when your retirement money is self-directed, YOU can catch the fat-fingering on a contract or other document. YOU decide whether to spend YOUR retirement money on whatever YOU choose in whatever amount YOU choose. YOU tell us if, when, and how you want to invest in your real estate IRA investment or your HSA gold investment or your whatever alternative investment. We do what YOU tell us. You are not dependent on a stranger a thousand miles away who doesn't care (or know) as much as you do. You only rely on YOURSELF.

Even though this specific day's disastrous plunge was supposedly not a fat finger, according to the SEC, this is a realistic, even likely possibility. People make mistakes, and in this era of huge numbers and speed-of-light transactions, wouldn't you rather make your own mistakes, with pen and paper? I know I would.

This most recent stock market plunge is yet another reason why I'm glad I have my retirement money in a real estate IRA investment and a gold investment. Find out how to move your retirement money to a self-directed retirement account and start making your own success (and your own mistakes). And please, if friends or family are still under the shadow of a potential fat-finger disaster, let them know they have another option.

We find that many of our event attendees know very little about self-directed IRAs before they find Entrust New Direction and start asking questions. As someone that teaches a lot of these classes, I often have the pleasure of seeing the excitement our prospective investors have when they learn about all the neat things you can do through a self-directed plan.

Several of our competitors have picked up on the fact that the ‘idea' of self-directed IRAs can attract a crowd. A couple of these companies have recently promoted investor boot camps or destination weekend workshops for which they charge a sizeable fee. The problem is the information they provide is the same information that we provide for free!

Many of these companies will get you started by answering your basic questions for free but then tell you that you need the boot camp to take your knowledge to the next level. There is no hidden or secret information in respect to self-directed IRAs. The answers are what the answers are....the issue is whether the company you are working with will give them to you. Admittedly sometimes things do get complicated with this industry, and questions get a bit more in-depth, but that is all the more reason to work with a company that you can call for free to get answers to those questions.

Another frustrating thing that we've found is some of these companies, even after you've paid to attend their event, won't give you the information you seek. Instead they will try to sell you a book or a CD or a ticket to another event! How frustrating is that? You take the time, energy and money to get yourself to an event to learn about self-directed IRAs, and you walk away with nothing but an opportunity to invest more time, energy and money.

Just to be clear, I think generally speaking, investment bootcamps can be great. I've been to several and I always walk away with good information and new contacts. It is important, however, that you don't pay for a bootcamp when you could get the same information free somewhere else. The bootcamps that I've attended and enjoyed "sold" information that I otherwise couldn't get my hands on... and thus they were worth it.

It should be noted as well that just because you pay for an event doesn't mean the event is better. We will take the Pepsi Challenge with any self-directed IRA company when it comes to educating investors and providing in-depth information. And we will do it without charging and without forcing you to fly to Florida for the weekend boot camp. Our endgame is the self-directed IRA client that sets up an account and purchases an asset like real estate, precious metals, hard money loans, or even publicly-held stocks. Everything that we do leading up to that point is just part of the business.

We realize that there is a gap between what people currently know and understand about self-directed IRAs and what they need to know and understand to be comfortable enough to open an account and move forward. We try to fill that gap with free education and employees on staff that are available to answer your questions.

I should mention that I am not opposed to a company selling their product and making a buck. Good for them. Yea Capitalism! But for you, the individual that wants to learn about self-directed IRAs, do your homework up front and you can probably save a few bucks and get things started on the right foot. If you have questions, call your local experts here at Entrust New Direction IRA, Inc. We are here to help.

Image courtesy of Tobyotter

10 Million Americans are enrolled in Health Savings Accounts as of January, 2010, according to a new poll released by America's Health Insurance Plans.  10 million Americans with an HSA represents an increase of 25% in one year, with big increases in large group coverage (33%) and small group coverage (22%).

According to the report, Colorado was among the highest percentage of HSA users by state with 9.2%.

Considering the economy, many small businesses are choosing HSAs to save on healthcare costs for employees and the compnay itself.  Any healthcare change can be difficult, but many employees have discovered their HSAs can be as good as, or better than, their previous health care.

Many of the 10 million have discovered that they can use an HSA to save for future health expenses after they retire. Self-directed HSAs can provide a unique investment opportunity in the healthcare arena. Anyone with a self-directed HSA can invest the funds in real estate, precious metals, or many other investment alternatives. If the HSA holder has investment success, the funds will be tax-free to pay for qualified medical expenses.

HSAs can be used as an investment tool, or just as a savings account and tax break.  Especially with the healthcare overhaul, HSAs will continue to provide many options for Americans in all tax brackets.

We have many prospective clients who call to ask about a ‘checkbook control
IRA-LLC'. When these people call, we generally spend quite a bit of time with them explaining what a self-directed IRA is and what a ‘checkbook control or single member IRA-LLC' is -- because there is a difference. If you want to invest in alternative assets like real estate, private stock, notes, gold, etc - you don't need an LLC. Some of our clients do elect to invest their IRA into a LLC. However, the vast majority of our clients hold their IRA investments directly in their IRA.

There are many companies which push the LLC structure; some will even go so far as to say you need an LLC. The fact is, your IRA is fully capable of holding alternative assets directly without the addition of an entity like an LLC. If a company tells you that you need the LLC, chances are that company is making money from some aspect of the sale of the single-member LLC. The structure is known by various names - the Checkbook Control IRA, the single-member LLC, the IRA-LLC - but they're all the same structure.

1) The IRA-LLC may not even be legal.

Many companies will try to convince the investor that an LLC makes investing simpler and easier. We've found that in some cases, the LLC involvement actually complicates matters. It is still unclear if it is even permissible to own an LLC with your IRA AND control that LLC personally (as the manager of the LLC).

There have been court cases and private rulings that somewhat cover the issue of funding a new entity with an IRA. However, none of these cases clarified what (if anything) the IRA holder can do as manager of the IRA-owned LLC.  For this reason, self-directed IRA companies require an independent attorney opinion letter specifically stating that this arrangement is not a prohibited transaction before they will fund the investment. The issue is a grey area at best.

We at Entrust New Direction IRA, Inc are not advocates of the IRA-owned single-member LLC structure, and won't be until the Department of Labor or the IRS come out and specifically state that the structure is permissible. Like I said it is grey... and we don't like to work in grey areas.

2) Checkbook Control IRA Costs more money to open.

And then there is an issue with costs. I've heard the argument that our IRA administration fee is too expensive and that the SMLLC structure somehow saves the clients money. Let's examine the details. Our annual administration fee is $250 per asset, per year. Most companies that push the ‘checkbook control IRA-LLC' charge a sizable up-front fee to open the LLC. These fees can be anywhere from $2,500-$5,000, before any investment is made.

Let's take the low end of the LLC startup costs - $2500. That means without an LLC, your IRA can purchase 10 different assets before you equal just opening the LLC.

3) More difficult to find a custodian.

It is important to note that even with a SMLLC, the client still needs a self-directed IRA company to provide custodianship of the IRA that holds the LLC. We've found recently that fewer and fewer companies are willing to provide custodianship to IRA LLCs. The ones that are still willing to hold them are charging higher fees because these investments are considered ‘high risk' investments and the banks don't like holding assets that don't have clearly established values.

4)Annual Valuation can be expensive and annoying.

That brings us to another huge issue...valuing SMLLC investment. The custodial bank that holds your IRA is responsible for getting an annual valuation of the assets your self-directed IRA holds. We've found that banks are requiring more and more information from clients; particularly clients that have single member LLCs in their IRA. We will elaborate more on this issue in a future blog so stay tuned (hint: you are probably going to have to pay someone to appraise the LLC every year).

5)You might as well become a CPA.

If you elect to structure your investments through a SMLLC then you (as the manager) are 100% responsible for making sure every aspect of the company is handled appropriately. Don't underestimate the responsibilities that come with managing a company (particularly when you consider the company is owned by a tax-deferred or tax-free IRA). It is extremely important that you keep the IRA/LLC assets separate from your personal assets. You must understand that the rules which apply to the IRA also apply to the LLC.

A violation of the prohibited transaction rules can result in huge penalties to your IRA, or a complete distribution with the associated tax hit.  A self-directed IRA client working directly with Entrust New Direction IRA, Inc (no LLC involved) has the benefit of working with our asset acquisitions department when making investments. We see thousands of transactions a year and can assist in explaining what the IRS guidelines are for self-directed IRA investing.

The bottom line:

If you are an expert in self-directed IRAs AND you know how to manage the recordkeeping for a business AND are capable of keeping IRA/LLC assets separate from personal assets AND you've talked to your attorney and they are willing to provide an opinion letter specifically stating the entire thing is okay AND you want to pay 10X the starting costs.... then you might want to consider the ‘checkbook control IRA-LLC'. Anything short of that and you are most likely better offer working with the experts here at Entrust New Direction IRA, Inc. We've been doing this a long time and we can help you better understand the rules and protect your IRA's tax-deferred status.

Buying a short sale home has never been easy.  I've heard many real estate agents over the years say, "The banks take forever to get back to you, and they are completely inflexible regarding the deal.  If you have plenty of time to wait, and plenty of patience, go right ahead."  Often I heard people say that the bank would rather hang onto that property until it falls down.

No more. Thanks in part to the troubled economy, most banks are becoming more flexible and almost eager to sell their short sales to your self-directed real estate IRA.  Catherine Wynne, real estate investor for many years said, "I've never seen so many short sales move so quickly through the banks.  They clearly want to get real estate off their books." 

And now the Home Affordable Foreclosure Alternatives (HAFA) will hopefully make short sales even easier and faster.  The HAFA provides financial incentives: $1,500 to help relocate the borrower, $1,000 to the bank, up to $1,000 to investors who share a total of up to $3,000 of the profit with subordinate lien holders.

That last one could be especially helpful.  Often a junior lein holder will stop a transaction if they think a short sale isn't profitable enough or profitable at all.  The extra cash may help move that short sale into fruition. 

Another very helpful new aspect: Lenders must approve or deny the offer for the home within 10 business days of receiving the offer.

With your real estate IRA and mine buying up foreclosures and short sales, there will be less on the market, thereby strengthening the real estate market in general.  If your IRA can buy a short sale or foreclosure, and hold it as a rental property long enough to wait for the likely gradual upswing in the real estate market, your road to retirement can become a little shorter and a little more comfortable.