A self-directed IRA can provide you with a way to have more control over your retirement investments. Many people get very creative when it comes to choosing investments for a self-directed IRA. Here are a few creative uses of a self-directed IRA.
1. Foreign Currencies
Most traditional IRA brokers do not provide the ability to invest in the Forex market. However, if you set up a self-directed IRA, you could potentially get involved in Forex. The Forex market is the single largest financial market in the world with over $2 trillion per day changing hands. Therefore, if you use an investment strategy that works, you could potentially bring in a substantial return on your investment. Some people will put their money with a managed Forex trading account. This allows a professional Forex trader to trade your funds for you. Some people have made much higher returns with this type of investment than they ever could have in the stock market.
2. Franchise
Another creative use of a self-directed IRA is to purchase a franchise. Many people do not consider this form of investment when thinking of potential uses for IRA funds. However, with this type of investment, you can oversee the business and make sure that you are provided with a substantial return on your investment. Franchises are great because they want to ensure the success of each individual franchise. Therefore, they take the time to put policies into place in order to make the franchises successful.
3. Real Estate
Another possible use of funds from a self-directed IRA is to purchase real estate. If you have enough money in your IRA, you could potentially buy houses or commercial property in order to generate a regular income. This would be similar to investing in a bond with the monthly income that it would provide. However, this will typically be on a much bigger scale. This type of investment also allows you to have some type of say over the returns that you can generate. You could manage the property yourself and oversee any repairs or maintenance that needs to be done.
4. Commodities
Many people also choose to use the funds from a self-directed IRA to invest directly in commodities. Typically, most standard brokerage accounts do not allow for this option. By investing in futures contracts of commodities, you could potentially realize an astounding return on your investment. You could get involved with speculation on oil, gold, silver, wheat, soybeans or corn. Any kind of commodity that can be traded could help you make money for your retirement account. Make sure that you know what you are doing when it comes to trading commodities, though. Many people will get involved in this market because of the astounding returns that they have heard of people making. However, unless you have a sound money management and investment strategy, you could potentially lose a lot of money.
In ERISA Advisory Viewpoint Letter No. 2011-04A, the Department of Labor’s (DOL’s) Staff member Benefits Security Administration (EBSA) has figured out that an IRA’s proposed purchase of the IRA owner’s promissory note and a deed of trust held by the bank which had funded the Individual Retirement Account owner’s purchase of real estate would be a restricted deal. EBSA reasoned that, so long as payments were due on the note, the transaction would produce an impermissible extension of credit from the IRA to disqualified individuals.
Background. The direct or indirect financing of cash or other extension of credit in between a self-directed Individual Retirement Account and a “disqualified person” is a forbidden transaction. A disqualified individual consists of a “fiduciary” (i.e., any person who exercises discretionary authority or control over the plan’s management or disposition of strategy properties), a fiduciary’s partner or other family member, and a trust in which 50 % or more of the useful interest is had directly or indirectly by a fiduciary.
Any direct or indirect transfer to, or usage of plan assets or strategy earnings by or for the benefit of, a disqualified individual, is also a prohibited deal. In addition, a fiduciary is forbidden from handling the income or possessions of a strategy in his own interest or for his own account.
Facts. In 1993, Donald and Betty Warfield (the Warfields) purchased an interest in an eight-unit home structure in San Diego, California, for $200,000. They funded the purchase with a loan from Chase Bank (provened by a promissory note) amd protected by a home mortgage on the home. The title to the home was held by a household trust of which Donald was the trustee and he and Betty were the sole recipients. Title to the property was encumbered by a deed of trust utilized to secure the note held by the bank.
For several years, Donald kept an Individual Retirement Account which he was the sole participant and Betty was the sole recipient. Donald had sole discretion over the Individual Retirement Account’s possessions.
Proposed deal. Donald proposed that his IRA purchase the note and deed of trust held by Chase Bank. Upon the IRA’s payment, the bank would have appointed the note and the deed of trust straight to the Individual Retirement Account. A third-party business bank, functioning as custodian for the IRA, would have gotten the regular monthly payments on the note from the Warfields and enforced provisions of the note and deed of trust. The deal would have been structured to avoid any new loan or other extension of credit between the IRA and the Warfields.
Conclusion. EBSA identified as a preliminary matter that Donald was a fiduciary and a disqualified person with regard to the IRA since he had sole discretion to direct the Individual Retirement Account’s investments. Betty was also a disqualified person, as was the family trust because Donald and Betty were its sole recipients. Hence, the proposed transaction would be a prohibited transaction given that the Individual Retirement Account’s acquisition of the note from the bank would essentially produce a continuous debtor-creditor relationship in between the IRA and disqualified individuals till all quantities due on the note were paid.
EBSA additional figured out that the IRA’s purchase of the note was itself a forbidden deal since it would belong to a contract, arrangement, or understanding where the fiduciary caused plan properties to be utilized in a way created to benefit the fiduciary (or persons where the fiduciary had an interest). EBSA discovered that under the realities of this case, Donald, as the Individual Retirement Account owner and fiduciary, would have an understanding that the properties of the IRA were being made use of to produce a prohibited deal (i.e., a continuous debtor-creditor relationship in between the IRA and disqualified individuals).
While self-directed IRAs allow many diverse kinds of investments, account holders have to be acutely familiar with the guidelines against forbidden deals. The charges for restricted deals can be very severe.
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