Entrust New Direction Blog

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

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.

Many self-directed IRA administrators have exclusive arrangement set up for storage of their clients’ IRA-owned precious metals.  In the event that you want move your IRA-owned metals to a new precious metals storage depository, you will most likely need to find an IRA administrator that allows the use of that new depository.  Luckily there are IRA administrators that allow flexibility in choosing the precious metals storage company.  Entrust New Direction IRA, Inc (gold.newdirectionira.com) allows their clients to choose where their IRA metals are stored. 

If you have metals held with another precious metals depository and you would like to move them to a different depository you will take the following steps: 

1. Set up an IRA with Entrust New Direction IRA Inc. All forms and information can be found at: gold.newdirectionira.com
   
   
2. Submit IRA transfer forms to Entrust New Direction. The IRA transfer forms can be downloaded from gold.newdirectionira.com. On the transfer forms you will indicate that you are performing an ‘in kind' IRA to IRA transfer (in kind means you are moving the metals without selling them). Along with the IRA transfer forms it is a good idea to include a letter to the current IRA administrator/depository explaining what you are doing and authorizing the movement of the metals.
   
   
3. Once Entrust New Direction IRA receives your transfer request they will forward the request to your current IRA administrator with delivery instructions and a packing slip. Your current IRA administrator will coordinate with their depository and instruct them to ship the metals to the new depository. Additionally, the IRA administrator will remove the assets from their records and show them as transferred out to your IRA with Entrust New Direction IRA, Inc.
   
   Note: if both depositories are in Wilmington DE then you can instruct the current custodian to authorize the depository to release the metals for personal pick-up by a representative of the new depository.
   
   Note: it is also a good idea to get a medallion signature guarantee on the IRA transfer forms before mailing them to Entrust. A medallion signature is similar to a notary but stronger. It is a guarantee that your signature is genuine. You can generally obtain a guarantee from a bank officer at your local bank. The guarantee is not always required; however, some IRA administrators require it before they will honor the transfer request.
   
   
4. Prior to the arrival of the metals you should sign the account agreement for the new depository and submit that to Entrust New Direction IRA Inc. The new depository should notify Entrust New Direction and you when the metals are received.
   
   
5. Entrust New Direction will post the assets to your IRA.

Recent surveys from Wells Fargo/Wachovia and The Center For Retirement Research indicate that Americans, including people who should be pretty close to retiring (ages 50-59), are nowhere near ready to retire.

Of course, it's in Wells Fargo/Wachovia's best interest to scare people into using their retirement vehicles, but the numbers of many surveys are similar.  

The Wells Fargo report indicates that pre-retirees (ages 50-59) estimate that they'll require $800,000, but they've only saved $300,000 (median).  They plan on spending 10% of their retirement total each year, which is over double what most advisors recommend.  So not only will this group have not enough money upon starting retirement, they'll also spend it quicker than most experts say they should.

With an organization like the Center for Retirement Research of Boston College, which has no obvious benefit from indicating a dark and stormy retirement outlook, I'm more likely to pay attention. 

Their "National Retirement Risk Index: After The Crash" reports that 51% of households are now at risk of not retiring with a reasonable amount of retirement income.  This is pretty scary, especially considering the many estimates that indicate social security's limited life span and the dearth of real pension plans.

To me, this is motivation to ensure my and my family's retirement comfort, because it tells me that the government will be no help.  Even if the government wanted to help, they'll likely be helping the folks who starting planning for retirement too late, if at all.  

Now my wife has been working on my inherent cynicism, which I consider, of course, realism.  So I'll try to reframe this in a positive light.  Hmmm.  Hardly anyone has enough money saved for retirement.  Many less companies are matching retirement funds.  The folks in 401(k)s who had saved for retirement lost huge amounts in the stock market crash.  Let's see... I got it!  The beach will be empty because everyone but us will still be working!

Photo courtesy of jmenard48.

It is with great joy that I am able to report that over $2 Million in commissions have been paid to real estate professionals through IRA investments administered by our office.  Real estate professionals who know about self-directed retirement plans have been brokering deals involving IRAs purchasing or selling real estate for their clients for years.

Entrust New Direction has overseen over 900 real estate transactions for clients. With each deal paying an average of 4% to the buying agent and 3% to the selling agent, that adds up fast.

As a self-directed plan administrator, we are not allowed to give investment advice, make recommendations, or sell any products. Being a marketing person, our limitations put me in an awkward spot at times. Potential clients call, are excited, and want to know how to find that first piece of real estate for their IRA. I can’t help them with that. That’s why we spend so much time building relationships with professionals who can.

The key for professionals is just letting clients know that they can make these investments and then following up with listings of available investment properties. Knowing how to analyze the investments for the client’s retirement plan is key. This education can be a cornerstone to building sales and catering to investor clients.

Many professionals are just starting to realize what this growing market of investors could mean for their business. We continue to try to reach these professionals through continuing education and other events in the metro area and teach them how to use the tool to build sales. Entrust offers education both online and in their on-site classroom and has several events planned for this fall. For a full list of upcoming events, visit our self-directed IRA events page.

Agents and brokers can take the MRE approved course online through Van Education at www.vaned.com. Entrust New Direction will also be the featured course author in Van Education’s booth at the Colorado Association of Realtors convention in Colorado Springs from 11am - 3pm at the Broadmoor on October 19^th in the 'Africa' zone in booth #551.

Two follow-up classes are planned after this event and qualify for 2 hours of Continuing Education credits. The Introduction to the Real Estate IRA offers an overview of how it all works and how professionals can incorporate self-directed investment tools into their business to help sell properties. It will be offered on October 28^th from 8:30am – 10:30am and again on November 12^th again from 8:30am – 10:30am. Both classes will be held in Entrust New Direction’s classroom, registration is available online through vaned.com.

Some brokers argue that 401(k) holders need all the help they can get.  It's true that some people with 401(k) accounts have little knowledge of finances and little interest in stocks, bonds and mutual funds.  But this regulation was like the fox guarding the hen house. 

It's possible that the advisers would direct the 401(k) holder independent of the possible commissions earned by the adviser, but an independent adviser is more likely to provide independent advice.

Phyllis C. Borzi, assistant secretary of the Department of Labor's Employee Benefits Security Administration, said, "Today's workers will benefit from quality investment advice - advice that is both affordable and unbiased."

Maybe if this sort of common sense continues, there will be a provision allowing more choice among retirement investment providers.  Sure, the 401(k) is the best option for the company, but what if they're no longer matching?  In my opinion, the employee should have more choice.  Likely if the average 401(k) holder knew that had choices, they would be motivated to educate themselves so they wouldn't need any adviser, independent or affiliated.

Photo courtesy of skedonk