IRA firms give savers choices

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The bursting of the real estate bubble and the devastating toll it took on the economy about five years ago actually created a surge of new business for companies that help retirement investors open and manage self-directed individual retirement accounts.

Stock markets were in free-fall, and banks were aggressively slashing the amount of interest they paid on CDs and savings accounts. Meanwhile, neighborhood streets across the nation were teeming with foreclosed homes and distressed homeowners were on the verge of defaulting.

"People realized that they had money in their retirement accounts at a time when there were tremendous opportunities in real estate," said Gregg Monette, vice president of development and client services at Pensco, a New Hampshire company that helps IRA owners add nontraditional assets to their retirement portfolios.

Pensco's client list, which consists of about 50,000 people and $10 billion in assets, grew tremendously during the credit crisis mostly because of people using their IRAs to purchase single-family homes and commercial real estate for a source of steady monthly rental income.

"People who are more affluent were even writing mortgages," he said. "Banks were tight with lending in 2008 and 2009. Even people with decent credit were having a tough time getting loans. So our clients were writing trust deeds from their IRAs charging 4 percent or 5 percent interest rather than 8 percent that banks were charging.

"When you see all the interest that you pay on a 30-year mortgage, that money can be earned in your IRA instead of someone paying it to a bank. That ends up being a win-win because the person is getting a loan they could not otherwise get for lower interest, and the IRA is getting a great return and has a first position on a mortgage in case of default."

While stocks, bonds and mutual funds are the most popular types of assets in retirement accounts, they are not the only investments allowed.

Self-directed IRAs offer the flexibility to invest in a much wider range of assets, such as rental real estate, gold and silver bullion, private equity, and even businesses owned by the account owner.

But unlike traditional IRAs held by banks and brokerage firms, self-directed IRAs are managed by trustees or custodians who maintain all records pertaining to the asset.

The custodian does not pick investments for the account owner or offer investment advice. They do file the necessary IRS reports, provide client statements and perform other administrative duties on behalf of the self-directed IRA owner.

Such individual retirement accounts receive the same tax advantages as traditional IRAs.

"Sadly, people who keep their 401(k) at a company are pigeonholed into the choices their employer chooses for them or mutual funds who paid enough to be on the platform," said Jason Vanclef, president of VFG Securities in Los Angeles and author of "The Wealth Code 2.0: How the Rich Stay Rich in Good Times and Bad."

Mr. Vanclef said the advantage of a self-directed IRA is the investor can go anywhere they want. "But the flip side is, like a carpenter with a tool chest, you could make a beautiful table or you can also cut your hand off if you don't know what you are doing."

Mr. Monette said about half of Pensco's new clients want to buy real estate with their self-directed IRAs, followed by private equity investments, and gold and silver bullion.

What attracts many to the concept is that it allows them to invest in what they know. A retired real estate developer may not be savvy in stocks and bonds, but he could likely turn a profit in real estate. A cattle rancher in Texas might use the money to breed cattle, sell them at the market and get a higher return than on Wall Street. Or someone who really understands semiconductors might invest in a privately held startup semiconductor company and make a small fortune.

Mr. Vanclef said just about any asset is fair game: collateralized notes, equipment trusts and even franchise businesses.

The only types of investments prohibited are those that include self-dealing transactions that directly or indirectly benefit the account owner and not the IRA. An example would be buying a rental property through the individual retirement account and later deciding to move into the property and use it as a primary residence.

Prohibited transactions could have the most devastating impact. If IRS rules are not followed to the letter -- such as living in a rental property -- the entire IRA could be taxed and the investment purchased with the account's funds could lose its IRA status.

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Tim Grant: or 412-263-1591. First Published July 9, 2013 4:00 AM


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