Among those seeking to hedge against market volatility, fresh opinions flow as alternative investing with self-directed IRAs draws attention. You’re already well aware of the virtues of originating private loans, but have you considered implementing this familiar strategy with your IRA, 401(k), or health savings account (HSA)? If you haven’t, were you somewhat deterred by someone who may not have fully understood the nuances of self-directed investing? In the marathon of retirement, we believe you should know your full spectrum of options and make educated decisions. Below, we’ll discuss three common misperceptions about self-directed IRAs.
The Rules Are Too Strict
The IRS requires distance between an individual and his or her retirement assets, but self-direction affords a greater deal of flexibility than you may think. You cannot “self-deal” with your IRA, nor may disqualified persons (direct family members like your parents or children, their spouses, your spouse, etc.) derive direct benefit from your IRA investments. You must also maintain a full separation of your personal and retirement funds. Income earned by your IRA assets must flow back to the account and any inherent expenses (apart from administration fees, which we’ll touch on below) must be paid by the IRA. Your personal funds or assets may never be used to bolster your IRA holdings unless you make a contribution (deposit).
Beyond these circumstances, self-directed retirement empowers investors to manage their activities in a virtually identical manner as a personal investment. When originating loans with IRA funds, you may qualify your prospective borrowers, establish terms and interest rates, and secure the note with collateral as you see fit. You can even collect principal and interest payments in person as long as the funds are immediately forwarded to your IRA provider and never to your personal bank account.
The Process Is Inconvenient
You may envision stacks of paperwork and endless processing times when following titling guidelines and ensuring your ducks are in a nice, legal row. However, advancing technology is helping to remove these barriers and shorten the distance between investors and their desired assets. From a lending standpoint, loan agreements and security documents will still come into play but won’t require anything beyond the ordinary effort for origination with personal funds. Key improvements in efficiency can become evident with an online dashboard specifically designed for IRA management. Through your personalized portal, you’ll be able to securely authorize new investments, manage incoming payments, make contributions, or initiate any other transactions with the push of a button.
The Fees Are Too High
As with any retirement strategy, unreasonable administrative fees can chip away at your profits and stifle your long-term earning potential. A quality self-directed IRA provider will permit you to choose a fee structure that suits your needs, most often on a per-asset or per-value basis. A per-asset fee schedule should allow you to pay a flat rate for each loan in your portfolio, so a $50,000 note would carry the same fee as a $5,000 note. The $5,000 asset may warrant the per-value fee schedule, as you’ll typically pay lower fees for lower-valued assets in this model. Proper retirement administrators help their clients retain more of their earnings by offering choices instead of locking in a single set of fees.
Furthermore, you may find the tax advantages offered by retirement accounts will offset your fees in the long run. Your account provider should allow you to apply IRA earnings toward fees in the same way you would for other investment expenses. IRA funds that cover administrative fees will never be taxed as distributions and can help you avoid paying out-of-pocket for earnings you won’t enjoy until years down the road.
As you can see, incorporating a private lending strategy into your retirement plan can be easier than some circles would have you believe. The tax advantages provided by self-directed retirement investing are certainly worth considering, and they’re available through the strategies you’ve already come to master. There’s an abundance of educational materials for anyone looking to get started with alternative assets in their retirement plans, so don’t be afraid to seek the answers you need and put your expertise to work for your future.