May 16, 2013
VERO BEACH, Fla.--Lil Miller-Fox had heard about a less cumbersome way to invest her retirement savings into a house or other rental property. But the co-founder of a popular web site that helps people identify future retirement property never knew of anyone who actually did so.
The reason, she would come to discover, is that only a very small percentage of people with Individual Retirement Accounts – “I heard 2 percent,” said Miller-Fox – are actually using what’s known as “checkbook IRAs” to take total control of their retirement funds.
But the Vero Beach, Fla., resident, who operates www.PrivateCommunities.com, a site which aggregates information about many of the country’s finest master-planned communities, went one step further: She set up a self-directed checkbook IRA to purchase an investment home at Collier Club, a privately-developed gated community in Sebastian, Fla. And then her husband did the same thing with his retirement savings at another property in the same community.
“Very few people know about this,” says Miller-Fox. “But it is a great way for someone like me to manage my retirement funds. I feel much more comfortable investing in tangible real estate than stocks and that sort of thing.”
Actually, not a lot of people even realize they can invest their retirement money in a rental house. But you can. It’s a great technique for anyone who wants to move into a thriving community when they retire down the road to purchase that property now, while prices are low and mortgage rates are even lower.
Under Section 408 of the Internal Revenue Code, as long as you don’t benefit directly, you are permitted to put into real estate some or all of the funds you have set aside in a tax-sheltered IRA or other simplified employee pension. In fact, the only restrictions imposed by the Internal Revenue Service involved certain limitations on gold and collectibles.
These are called self-directed IRAs because you are allowed to move your funds around. But until a 1996 court case, every step you wanted to make had to be made through a costly custodian. In other words, you choose the investment and the custodian carries out the transaction.
But 17 years ago, in a landmark ruling in Swanson v Commissioner, the court essentially created a new type of self-directed IRA structure – the checkbook IRA – that is much simpler than investing in a regular self-directed IRA custodial account.
Under the new structure, an IRA is set up as self-directed account that’s capitalized by funds rolled over from your current retirement account. Then, a limited liability company is created in which your new IRA purchases the membership units. Now your money is held in an LLC and you are ready to invest at your discretion.
You can buy, sell and manage domestic, foreign, commercial, residential and rental properties, with the profits growing tax-deferred in your retirement account. Your funds are held in a normal business bank account, and as its manager, you can sign contracts and write checks on the LLC’s behalf, just like any other business.
The speed at which you can move opens up a slew of investment choices, such as snapping up foreclosures or tax liens – or even a house in a prime spot on the ocean or in the mountains.
There are still restrictions. You can’t use the property as your own residence or vacation home – and in this case, you means anyone in your family. And you can’t take money out of the account without incurring a big tax penalty. But you can sell a house and purchase another one, or buy more than one property at a time.
There are still fees, too. There’s a charge to set up the LLC, and you still must have a custodian. But because you are running the show, and the fees are much less than with a regular self-directed IRA.
“I purchased a home for cash just to see how this worked,” says Miller-Fox “It worked great. It’s not complicated at all. I’ve had the property rented and the rent is deposited into my checkbook IRA each month. And I pay all the bills from there. I’m in full control.”
The vacation and second home expert really likes the way she can invest in a business she understands – “I don’t know what I’m doing with stocks and bonds,” she admits – and thinks more people would invest as she did if they knew or understood checkbook IRAs.
“It’s a great way for people to finance their retirement homes long before they are ready to use them,” says Miller-Fox.
May 2013
