The "Truly" Self-Directed IRA - Reins-IRA

August 26, 2010 by dbdouek

The following article was written for the Summer 2010 Legent Ledger, published by Legent Clearing, available here (page 4).  


One of the more common responses I get when discussing my work with people is that they already know about “self-directed” retirement accounts.  Unfortunately, the creature to which they refer more closely resembles a standard 401(k) than a truly self-directed investment platform. 

 

In a sense, these respondents are correct.  They have heard about something that their custodian, or another heavily advertised custodian, calls a “self-directed IRA” and through those accounts investors may select from a menu (albeit short) of investment options, like many are accustomed to seeing from 401(k) plans.  In some cases, an account holder might even have the option of selecting the specific stocks or funds that the IRA will hold. 

As a result people often remain unaware that the law restricts IRA investment by prohibiting investment only in “certain collectibles” and “life insurance contracts.”  IRA custodians, however, are permitted to impose additional restrictions on investments.  For example, due to administrative burdens, many IRA custodians do not permit account holders to invest in real estate, while the law only prohibits the purchase of the Picasso hanging inside.  The lesson here is that just because an investment may be legal, does not mean that an IRS approved custodian is required to offer the option to account holders. 

The following language comes from the “self-directed” option of Charles Schwab’s retirement web page, “choose stocks; bonds; CDs; no-load, no-transaction-fee mutual funds and more; or select a single portfolio solution.”  When I searched to determine what was meant by “and more” I found the following text regarding options trading, “currently, we allow approved clients to write covered calls and engage in long calls and puts in select IRAs.”  I do not know who qualifies as an approved client, but the FAQ page of Schwab’s website did help me confirm that under no circumstance could commodities, foreign currencies, real estate or mortgages and non-Schwab annuities be held in a Schwab IRA.  I assume this list is not exhaustive either, a phone call would probably confirm that Schwab IRA holders cannot invest in tax liens among other alternative assets. 

So why am I telling you all of this?  Simple; when we, at Reins Financial, use the term “self directed” we mean it. 

We call it Reins-IRA: hold any asset the law allows, invest with the same ease and efficiency you would with non-retirement funds without paying asset-based or transaction fees.  We put investors in a position to invest in alternative investments, like, real estate, private placements, PIPE, hedge funds and commodities without triggering early distribution penalties and income taxes.   By utilizing an IRA LLC strategy, Reins-IRA holders can invest in alternative assets with the ease of writing a check. 

 

Here are some examples:

  • Mortgage Notes: A client wanted to buy short-term mortgage notes with attractive discounts and roll the repayments into additional purchases. He had two problems. First, his custodian required approval and processing lead times of 4 to 6 weeks (he needed to be able to react quickly to be competitive). Second, the custodian wanted to impose transaction fees on each trade as well as asset-based fees (eating up a chunk of his profits).

  • Unregistered Foreign Notes: A client wished to invest in resort property in Scotland and his custodian doesn’t hold private placement notes.

  • Hedge Fund Convertible Notes: After the Custodian had informed the investor that it permitted investments in hedge funds, it summarily declined to ‘accept’ the investment after a six-week review on the basis that the custodian wouldn’t hold notes, only equity.

  • Rental Real Estate: After finding a custodian that would hold her investment in real estate, the client learned that the process would take 30 to 60 days (gives new meaning to the term, short sale) and that she would have to incur the additional expense of retaining a professional property manager.

  • Precious metals: (I’ll conclude the list with my favorite story.) A client wanted to use his retirement funds to invest in commodities. He asked his then current IRA custodian to invest through his then current commodities broker and was told he could not. Next, he found a custodian that assured him they would allow him to invest in commodities. Despite his continued efforts, his commodities broker refused to work with the new custodian who required too much paperwork and added fees to each transaction. Determined to get the job done, he found a commodities broker that would work with the custodian for an additional fee. He noted that his new broker added penalty fees for dealing with the custodian’s paperwork, the custodian in turn was taking transaction fees and asset-based fees, and that any earnings he may have gained were lost in the complex and absurd fee structure he had to take on to achieve his simple goal.

These clients have taken the reins to their retirement assets. At Reins Financial, our objectives for investors are simple:

  • First, we look to put investors in a position to make the investments they wish to make with their retirement dollars.

  • Second, we place investors in a position to move with speed and efficiency, so that they can react, evaluate and invest in the same timeframe with retirement account dollars as with their other assets.

  • Third, we seek to remove the oftentimes excessive costs imposed by a custodian for holding retirement funds—these can range from several hundred dollars to a few thousand dollars annually depending upon the value, number and kinds of assets, and number of transactions implemented in the account.

  • Fourth, we ensure that the vehicle that we have put into place has been created in conformity with IRS and Department of Labor guidelines; that the investor has been properly educated so as to invest with confidence and to avoid early distribution taxes or prohibited transaction penalties; and that we are available as a resource to respond to questions and clarify issues.

We handle transitions quickly and effectively; our clients are free to invest in 18 days or less.  We handle the rollover and all necessary documentation, as well as state and federal filing requirements. After the transition to Reins-IRA, we are always available to educate our clients on the regulations governing retirement accounts and to help them steer clear of prohibited transactions.

Eliminate the custodian gatekeeper and make the investments you want to make. Take the reins to your retirement account.  

Reins does not manage money and does not promote any particular investment; rather we want to put individuals in a position to make the investments they want to make with their retirement funds.

Reins Financial Group is a team of experienced financial service, legal and accounting professionals that together have developed products that allow individuals to take active and efficient control of their retirement dollars.  This means that if clients wish to invest in alternative assets, for example, real estate, private placements, other private transactions, oil and gas partnerships, commodities, film distribution, mortgages, foreclosures and the like, or even in the acquisition of a business or a franchise, we can put them in a position to do so with the ease of writing a check, without triggering early distribution penalties and income taxes.