How Bill Broke the Common Myths of Retirement Planning by Investing His Retirement Account in Real Estate & an Overseas Mango Farm.
“What we need is some financial engineers.” ~ Henry Ford
When investing for retirement, we are often presented with traditional investment choices including stocks, bonds, and mutual funds. Irrespective of your understanding of these assets, you are to rely on their performance for your retirement. That doesn’t sound fair, at least to some of those who understand now to benefit by investing in alternative assets.
Now, that’s an interesting proposition, but how is it possible?
How did Bill manage to invest in real estate with his retirement funds?…
With the help of a self-directed retirement account!
What is a self-directed retirement account?
A self-directed retirement account differentiates itself from conventional retirement accounts by offering investment discretion to the plan owner. It means the plan owner chooses the type of assets he wants to invest in. Unlike conventional IRAs where plan custodians control your investment options, a plan custodian in a self-directed IRA plays a passive role.
Two of the most popular self-directed retirement plans include:
- Self-directed Individual Retirement Account (SD IRA)
- Self-directed Solo 401k Retirement Plan
Self-directed Individual Retirement Account
It is quite similar to a regular IRA apart from one key difference; it allows alternative investments. Some of the popular investment options include real estate, precious metals, mortgage notes, tax liens, tax deeds, private lending, private equity, and much more.
Our client and hero of the story, Bill, did it with a self-directed IRA. Bill works at an auto manufacturing plant in Bloomington, Illinois. Prior to opening the SD IRA account, he had a 401k with his employer along with another IRA. His primary goal was to achieve diversification and reduce his stock market exposure.
He found out about overseas investments through an online magazine, Live and Invest Overseas. Bill and his wife are avid travelers, which makes overseas investments a perfect match for them. With the help of this publication, Bill discovered an opportunity to invest in an organic mango farm in Panama.
After his visit to the Panama, Bill decided to purchase the property, 1 hectare of farmland, through his SD IRA. The best part of the transaction is that he chose a turnkey company for his investment. The company takes care of the entire operation, starting with land prepping to sowing seeds and exporting the produce. Bill didn’t stop with this investment. He went ahead to purchase a neem tree farm in Brazil.
And Bill is just one of the financial engineers we came across. Another client we assisted purchased a vacation rental property in Belize using their SD IRA. Their decision to choose Belize came after multiple trips to this amazing country. I’ll make sure to cover their story in one of our next articles.
Anyone can open a self-directed IRA and become the financial engineer of his/her own life.
Self-directed Solo 401k Retirement Plan
If you happen to be an owner-only business or have some self-employment activity going on, a self-directed Solo 401k can take your investing experience to a new height.
Just like a self-directed IRA, a self-directed Solo 401k plan not only allows alternative investments but comes with a bag of unique features. Let’s take a look at some differentiating features of a Solo 401k plan.
- Higher contributions: You can contribute up to $60,000 annually to a Solo 401k plan, making it one of the quickest options for accumulating retirement funds.
- Checkbook control: Unlike an SD IRA, the plan owner of a Solo 401k has checkbook control over his/her investments, allowing him to invest by simply writing checks.
- Participant loan: Every eligible plan participant of a Solo 401k plan can borrow up to $50,000 or 50%, whichever is less, of the account balance.
- Built-in Roth: A Solo 401k plan comes with an in-built Roth feature, allowing you to contribute post-tax dollars to your account.
- No UBIT on leveraged real estate: You can purchase leveraged real estate in your self-directed Solo 401k plan without being subject to UBIT (Unrelated Business Income Tax). The loan has to be a non-recourse, a loan where the property itself serves as the collateral and has no additional credit responsibility on the borrower in case of a default.
5 Steps to Purchasing a Property with Your SD IRA/Solo 401k Account
Open a self-directed retirement plan: Start with a self-directed retirement account. It can be a self-directed IRA or a self-directed Solo 401k plan. What is important is the availability of alternative investment options.
- Fund it with qualified rollovers: Fund the plan with qualified rollovers and/or annual contributions.
- Find a property: Just like a regular real estate transaction, find a suitable property. You can choose among residential, commercial, and even paper real estate (mortgage notes, tax liens or tax deeds).
- Titling the property: When purchasing a property within your self-directed retirement account, the key is to title the property correctly. In case of an SD IRA, plan custodian will hold the property of the title. When investing with a self-directed Solo 401k, your Solo 401k trust will hold the property of the title and you will sign on its behalf.
- Repair and maintenance: Any repair or maintenance cost incurred in the upkeep of the property must go out of the plan itself.
- Treatment of income: Any income generated by your investment property must come back to your retirement plan only, tax-deferred!
- Prohibited transactions: You must understand prohibited transactions very well and avoid getting into one at any cost.
The most significant feature of a self-directed retirement plan is that it makes you the in-charge of your retirement planning. Be mindful where you go and always seek professional counsel.