Laura Harth Rodriguez inherited an IRA and is making renovations to a historic building as per Forbes’ Scott Goldsmith.
When the well known conductor and violinist Sidney Harth died at the ripe old age of 85, last year, he left his daughter Laura Harth Rodriguez, who is in her mid 50’s and is a pianist, assets worth $5 million which included some musical instruments, an apartment in New York City and a $2 million retirement account. Laura decided that she would use a portion of her inheritance to buy a three story building, that was historic and located in the East End of Pittsburgh, an upcoming part of that city.
She was worried that the investments made by her father in the stock market, which has shown a lot of volatility. Her worry was that this required $595,000 in a cash deal, and that when she withdrew this money from the IRA that she had inherited, she would have to pay tax on the income from her withdrawal. Her lawyer then came up with an alternative. He suggested that the IRA buy the property, and leave the retirement fund intact with its tax deferred status. This deal was concluded in February.
It is a fact, that an IRA can become the legal owner of real estate, and many other forms of investment, which can range from cattle, oil and gas, gold, promissory notes and private equity. It however cannot own stock in S corporations, collectibles or invest in insurance.
Does this whet your interest? Most custodians of IRAs are the bigger financial institutions and they limit their investments to bank CDs, mutual funds, bonds and publicly trade stock. This requires that you convert your IRA into a self directed one by moving it to some of the smaller custodians, about two dozen of them, who offer such IRAs.
This business has its own niche. A mutual finds trade group, called the Investment Company Institute, estimates that only a small 2 percent of IRAs, making up a sum of $94 billion were classified as self directed. Many very wealthy people hold investments in offshore accounts in the Cayman Islands, and Mitt Romney has $5 million in one and $25 million in another, as per the information in his financial disclosure forms.
A number of ordinary people have also taken similar action. John Mitchell who represent software manufacturing companies has his self directed IRA investing $50,000 in precious metals, notably silver and gold. While the custodian for his IRA is the California based Oakland company, the Entrust group, he has the gold stored with a bullion dealer nearer his home in Tampa, Florida. Mitchell, who is 37 years old, says he likes to admire his precious metals and drops in constantly at the dealer’s facilities.
The owner of a dry cleaning store chain, Matt Lutz from Bethel Park, PA used a self directed IRA, at Elyria,Ohio based Equity Trust Co to roll over $70,000 in 2006. He used this IRA to give loans to help car dealers in financing their inventory, and this helped him to triple the value of his IRA. Lutz then sold his dry cleaning business, three years ago, and now works full time to help other people use their IRA investments to give out similar loans.
These are all success stories, but you need to be aware that there are risks in being creative with IRA funds. Patrick J. Felix is the lawyer from Pittsburgh who helped Rodriguez, and says that self directed IRAs are not meant for people who do not have the courage. He says it is very essential that you are constantly aware of all the rules. The pointers given here can lead to safety in these investments.
Stay Away From Self Dealing
IRA owners are legally barred from making any investments that can lead to benefit them or their family members, even in an indirect fashion. You cannot also mix IRA with funds not earmarked for retirement. If you ever go against these rules, the chances are that your entire IRA can then be taxed.
This meant that Rodriguez would not have been able to issue a personal check for $10,000 as a down payment for the building her IRA was thinking of buying. She would have to transfer her father’s IRA account to Pensco Trust Co. in San Francisco, a trustee who handled self directed accounts, and then get the trust to issue a check to the seller, ensuring a transfer from trustee to trustee.
Rodriguez’s husband, Francisco could not use the second floor of this building for a recording studio,as her IRA owned the building. Felix worked around this by creating three separate liability companies, each of which owned one floor of the building.
So the IRA owns two floors, the first and the third , while Rodriguez and her husbands owned the second floor that has the recording studio. Each company paid one third of the price of purchase and kept a further $250,000 for expenses. Each floor has its own gas and electric meter, real estate taxes are split between the LLCs, as well as fees for the property managing firm and any bills for renovation that is now being carried out.
The first floor which is owned by the IRA will generate a yearly revenue of $40,000, while it is expected that the third floor which has views of the city can be rented out for parties.
Plan Fund Distribution
When the assets in an IRA are not liquid, this can make it difficult to satisfy the payout requirements of IRA. Once the owner of an IRA is an age of 70 1/2, and the IRA is not a Roth,there has to be a minimum distribution required (RMD), every year. When the heirs are not spouses, irregardless of their age, they have to make withdrawals before the end of the year following the death of the IRA owner. If you miss the RMD ,you may have to pay penalties that can be up to a half of the RMD, as per the rules of inherited IRAs.
This amount of distribution is based on the balance in the account up to the end of the previous year divided by the life expectancy as listed in the tables of the IRS. Rodriguez will have to calculate her RMD after having her building appraised, every year. At the moment, the inherited IRA has a lot of assets that are liquid enough to make the needed payout. Once the IRA runs out of cash, an interest in the IRA will have to be used for the RMD, and this can be a bit of a problem, as per Felix.
When you distribute funds from a traditional IRA, they get taxed as per federal income tax rates which are a maximum of 35 percent. This is inclusive of long term gains, which attract a top rate of 15% outside the IRA. This means that you may lose any benefits that you had gained because of the deferral of tax. When you opt for a Roth IRA all withdrawals by you or your heirs remain tax free. That is the reason that investments that appreciate a lot are better of in a Roth IRA.
Max R. Levchin, the chairman of Yelp, a social review site makes for an apt example. As per filings with the SEC, Levchin has 3.9 million shares of Yelp lodged with Pensco, in his self directed IRA with them. The present $18 value of each share makes this portfolio into a worth of $70 million.
When you have a Roth IRA you are also not bound by any need for yearly distribution after the age of 70 1/2. If you do not use the money this leaves your beneficiaries with more money, and if the assets are not liquid, this also saves the calculations that need to be made to decide on RMDs, as Rodriguez will have to do.
There are income limits to making contributions to Roth IRA, but you can consider converting a traditional IRA into a Roth. You pay taxes on a traditional IRA, but once you shift it to a Roth, all future increases in the funds are free of taxes. If however, you have inherited such IRAs this option is not available.
Be Careful You Are Not Snookered
State and federal regulators have noticed an increase in complaints against investment schemes that have self directed IRAs, but are fraudulent in nature. Con men in these schemes deliberately steer investors to self directed IRAs.
Between the years 2005 and 2010, a Ponzi scheme that gave out promissory notes issued by USA Retirement Management Services led to 120 investors being burned. They were sued by the SEC to recover the 20 million dollars plus interest, and did get a judgment in their favor in April from the California courts. Whether the scammers will pay the amount is another matter altogether. A number of the investors have also sued Entrust.But it is not the right thing to do to have custodians to recoup any losses that you make, and contracts made with them will have you responsible for any bad investments you make.
Gold IRA Investing
Gold IRA investing is done through an individual retirement account in which precious metal like gold are stored, as different from currency or other paper based assets. It works in the same way as a regular IRA, but instead of having any paper assets will have bullion in the form of coins or bars. There are companies that sell precious metals and also act as custodian for the metals when they link up with private IRA services. They have their own restrictions on accounts and charge fees for their services. Precious metal IRAs are self directed and this allow the holder control over the investments made in them. The majority of gold IRA investing is in the form of self directed IRAs, but there are also other retirement accounts that are eligible to be converted to gold IRAs, and this includes 4011(k)s, Thrift Savings Plan (TSP) and Roth IRAs.
An individual retirement account can have four precious metals, like palladium, platinum, silver besides gold, as long as they are in the form of coins or bar products that are approved by the IRS. Of all these metals, the one most commonly purchased is gold and that is why precious metal IRAs are referred to as gold IRAs. The portfolio contained in an account can also have it being referred to as palladium IRA, platinum IRA, silver IRA or precious metals IRA.
Precious metals make for an addition to a retirement portfolio, which is quite attractive, because it acts as an hedge against inflation. To create a gold IRA, you must go through a process of rollover of the original portfolio, which has to be one that is approved by the IRS and is tax free. An individual will need to qualify and ensure that all rules and regulations have been complied with. The gold in this IRA is tax free if its stored in a depository that is approved by the IRS. Investors in the IRA can have the precious metals they buy shipped directly to the depository or liquidate them for cash, when needed, though this would depend on the depository and the company through which the plan is bought.
IRA Accepted Metals for Gold IRA Investing
The forms of bullion and other precious metals for IRAs have to be approved by the IRS. It is better to hold gold coins in an account instead of bars, as they are easier to liquidate. Gold bars have a higher value and can also be easily counterfeited. They also are difficult to deliver because of their weight and require greater security during transport. There are a number of precious metals that do need to have purity requirements that are acceptable for their inclusion into a Gold IRA. Many people contend that coins are better for including in gold IRA investing. Companies have been investigated by the authorities for customers being misled into choosing coins instead of bars. It is a a fact that makers of numismatic coin manufacturers pay higher commissions to gold companies, which leads to this bias towards them. Bullion bars directly reflect the spot price of the precious metal. Both coins and bars make for smart investment opportunities in gold IRA.
IRS requirements mandate that all IRAs which will include precious metal IRAs have to be in the possession of a custodian or trustee. So for all legal purposes, rather than the owner of the IRA, it is the trustee or custodian who has custody of the precious metals. This custodian or trustee has to be a bank, a credit union insured by the federal authorities,a loan and savings association or any other entity which is approved by the IRS to act as custodians or trustees. These custodians or trustees can use depositories that have been approved for the storage of IRA metals. These depositories need to have safety features in the form of motion sound and vibration detectors, round the clock monitoring, automatic re-locking and timed locks. They need to have large insurance policies which can have a cover of as much as a billion dollars. These depositories have two forms of storage for their IRA accounts. They can either be segregated from other people’s assets or be non segregated, in which cases the assets of all people are mixed.
You can turn your retirement funds into gold by adding a gold IRA in your investment portfolio, but whether this is the right thing for you do, is something you will have to decide for yourself.
Gold IRA investing allows an investor to have palladium, platinum, silver or gold in physical form instead of the normal paper based assets like bonds, stocks or cash. The bars or coins must meet the fitness standards laid down by the IRS and have to be held by the trustee and not the owner. They have to be stored in a depository that is IRS approved, and investors are not required to keep this in their safes at homes.
Why the Need for Gold
Traditional IRA funds are held in stocks and mutual funds and these instruments are no hedge against inflation. Gold serves as an insurance against inflation as normally gold prices move in the opposite direction of paper based assets. This helps to smooth out risks and make gold an ideal choice for retirement investments.
Initially there was little demand for gold, because the transactions were complicated and required persistence on the part of the investor. You also had to find a trustee and a depository and then buy the gold and transfer it to them. Many companies have now come into existence and this has helped to ease the processes involved.
Gold IRA investing needs a self directed IRA, a custodian to create and administer the account, a broker to buy the gold from and a depository that accepts the physical form of the gold or precious metal.