The Freedom to Choose Your Own Path

When your IRA is held at Preferred Trust, you’re in the driver’s seat to choose the investments held by your IRA. You can select from a wide range of alternative assets as seen below, the only limitations are those in red.

Popular Investment Options:

As a passive custodian Preferred Trust does not endorse or offer investments. The popular investment options below are a reflection of the types of investment strategies used by our current clients.

Real Property

A popular investment option is direct or indirect real estate investing.

With IRA real estate investing, you can invest in property for long-term appreciation, rental income, or a short-term ‘fix & flip’. The investment properties may include; single family and multi-unit homes, apartment buildings, condominiums, commercial property, and improved or unimproved land, just to name a few.

When seeking ways to diversify your retirement portfolio, real estate may be an option.  It may provide recurring income and potential appreciation in value over time. However, real estate investing is not for the faint of heart, as you must consider allocation of your time, cost, and commitment before considering this type of investment.

 

Required Documents to Close a Real Estate Deal

Real Estate Purchase Options

  • You can co-buy real estate with your IRA funds and personal cash
  • Use a blend of IRA funds and a non-recourse loan or other private lender
  • Loan funds to another person and collateralize the loan with real estate

Unrelated Business Taxable Income (UBTI)

If your IRA owns an asset that produces UBTI, your IRA may be subject to an UBIT pursuant to Section 511 of the Internal Revenue Code. Generally, IRA investments that can generate UBIT include any investment that incurs debt financing. Consult your tax advisor.

Precious Metals

Asset diversification is crucial when it comes to selecting the investments that will create a strong and viable retirement portfolio. Precious metals are one type of asset that provides you with the opportunity to invest in something tangible that can weather a financial crisis. Investing in gold, silver, platinum and/or palladium minimizes your exposure to losses when other types of investments lose value. Unlike stocks and bonds, precious metals have inherent value and, metals can be held for an infinite amount of time. You control the ability to purchase and sell the metals in a tax-deferred or tax-free (Roth IRA) environment until which time you decide to withdraw your bullion or coins and take direct physical possession of them.

In 1997, Congress passed the Taxpayer Relief Act which expanded the precious metals holdings allowable in IRAs. Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce US gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, platinum and palladium bullion. Proof coins must be encapsulated in complete, original mint packaging and include the certificate of authenticity. Small bullion bars must be manufactured to exact weight specifications and non-proof bullion coins must be in brilliant uncirculated condition and free from damage.

Gold

Gold

Gold must be 99.5% pure and must be produced by a refiner/assayer or manufacturer that is certified/accredited by NYMEX or COMEX and meets minimum fineness requirements. Below is a list of acceptable gold products.

American Eagle bullion and/or proof coins
American Buffalo coins
Canadian Maple Leaf coins
Austrian Philharmonic bullion coins
Australian Kangaroo/Nugget coins
Australian Lunar series coins
PAMP Suisse bars
Chinese Panda coins
Other products that meet the minimum fineness requirements

Silver

Silver

Silver bullion bars must have a minimum pureness of 99.9% and must be produced by a refiner/assayer or manufacturer that is certified by NYMEX or COMEX. Below is a list of acceptable silver products.

American Eagle bullion and/or proof coins
Canadian Maple Leaf coins
Austrian Vienna Philharmonic coins
Australian Kookaburra coins
Mexican Libertad bullion coins
Chinese Panda coins
Other products that meet the minimum fineness requirements

Platinum

Platinum

Platinum bullion bars must have a minimum pureness of 99.95% and must be produced by a refiner/assayer or manufacturer that is certified by NYMEX or COMEX. Below is a list of acceptable platinum products.

American Eagle bullion and/or proof coins
Australian Koala
Austrian Philharmonic
Canadian Maple Leaf
Other products that meet the minimum fineness requirements

Palladium

Palladium

Palladium bullion bars must have a minimum pureness of 99.95% and must be produced by a refiner/assayer or manufacturer that is certified by NYMEX or COMEX. Below is a list of acceptable palladium products.

Canadian Maple Leaf
Other products that meet the minimum fineness requirements

Precious Metals Dealers and Depositories

Selection of the metals dealer and the storage facility is an important part of the investment process. It is up to the account owner to perform all necessary due diligence related to the dealer and the depository. Websites such as www.usmint.gov and www.money.org can help consumers research information about metals dealers. Specific factors to consider when selecting a dealer include pricing, fees and delivery time. You can also verify if the dealer is a member of any industry trade groups such as American Numismatic Association. The US Commodity Futures Trading Association issued the a report to help consumers identify fraud related to precious metals investments.

Per the IRS, precious metals invested using your IRA must be held in the physical possession of a bank or an IRS-approved nonbank trustee. You may not personally store the precious metals that are owned by your IRA. This rule also applies to indirect ownership through an IRA owned LLC. Specific factors to consider when selecting a depository include location, security, licensing, insurance, storage fees and types of storage offered; segregated vs. non-segregated.

Preferred Trust Company will work with any dealer and depository that the IRA owner selects. For additional information related to the dealers and depositories that Preferred Trust clients have worked with, please visit our Resource page.

Depository Storage Options

Segregated vs. non-segregated. Some depositories only provide segregation storage options for certain types of coins and bullion. It is important to understand the different storage options based on depository availability.

With segregated storage the bullion is inspected, packaged, labeled and stored, physically separate and apart from the bullion of other Preferred Trust Company clients.  Typically the cost of segregated store is more than the cost of non-segregated store. Account owners are guaranteed that they will receive the same exact bars or coins that were originally deposited upon distribution.

With non-segregated storage, fungible bullion products (which by nature are commercially interchangeable) are inspected and stored in high-security vaults. Clients that select non-segregated storage benefit from significant cost savings because the bullion is stored in bulk.

The Process

Preferred Trust Company will fund the investment by sending payment to the dealer. The dealer will then send the bullion to the depository you selected. Finally, the Depository will verify receipt of the bullion with Preferred Trust Company.

Private Equity Investments / Private Placements

Private equity, sometimes referred to as a private placement, consists of ownership interest in companies that are not publicly traded on a stock exchange. These alternative investments can be made in an existing business, a real estate venture, an investment partnership, and other areas.

Perhaps the best-known form of private equity investing is buying a stake in a new company with growth potential.

There are two primary ways in which your self-directed IRA can invest in private equity:

  • Through a fund: This may include Private Equity funds or Venture Capital funds.
  • Directly into a company: This means a direct investment of money into private companies.

Important things to consider when investing in private placements:

  • If it is an existing entity – total ownership by disqualified individuals (including the IRA owner) cannot be higher than 50%.
  • If the IRA is running a business in a flow through entity (i.e. Limited Partnership or LLC) it may be subject to UBIT (Unrelated Business Income Tax).
  • The IRA owner cannot work for a business owned by their IRA.

Private Lending

Your self-directed IRA can lend money to others in a secure or unsecure investment.

Whether the investment is secure or unsecure, a Promissory Note instrument must be used for any private lending and must include the following details:

  • Parties involved in the transaction (Borrower & IRA as the Lender)
  • Loan amount
  • Duration of time (loan term)
    • Unsecure private lending cannot exceed a 2 year period and extensions are not permitted.
  • What are the rules for extensions or non-payment?
  • Interest rate and payment schedule (monthly, quarterly, upon maturity, etc.)
  • How are the fees (transaction fees, default, extension, etc.) handled and when do they apply?

Tax Liens / Tax Deeds

Investors buy tax liens for the right to collect taxes and interest from a property owner, or to foreclose on the property. Investors seek out tax liens due to the relatively low capital required, as well as the possibility of large returns. Some states don’t offer tax liens, but instead offer tax deeds. A tax deed sale is a governmental sale of real estate to cover nonpayment of taxes. These offer investors an opportunity to buy a property deed at a discount.

Private Debt Investments, Deeds of Trust / Mortgage Notes

Another option for those looking to invest in real estate without all the hassle, cost and time needed for investing in real property are private debt instruments. These include notes secured by deeds of trust and/or mortgages; contracts for deeds (taking over an existing loan); and corporate debt offerings. This alternative investment option matches quality real estate borrowers with investors seeking capital preservation in (at times) collateralized turn-key real estate. These investments offer diversification, control, double-digit returns and ease.

Trust deeds are often offered by a hard money lender. Hard money lenders are entities that provide funding for residential and commercial building. The economy and the strength of the financial market dictates the level in which banks and financial institutions are lending money. Hard money lenders fill the gap when a loan size is too large for a community bank and too small for large institution banks for short term financing for land acquisition or development. Reasons for considering trust deed investments:

  • High demand for real estate loans: The recent credit crisis has created a high demand for specialized loans, since real estate developers are often unable to obtain the funding they need through conventional sources. As a trust deed investor, you can therefore expect a higher interest rate for the amount you lend, as well as lower loan-to-value ratios, which will significantly lower your risk.
  • Less risk: Real estate developers and investors have a great deal to lose if they fail to make loan payments, so your risk as a lender is significantly less than if you were to invest in stocks. Moreover, real estate investments generally bring in highly attractive returns, since the situation is similar to when you invest in a fixed yield bond that pays off at maturity.
  • Diversification of your portfolio: It is considered part of a sound strategy to divide your investments between trust deeds, equities and fixed-income investments. Real estate is proving to be a popular sector in which to invest, as are the tech and agricultural sectors.
  • Greater control: You can choose the real estate project you wish to invest in.
  • Speed: You may not wish to have your investment tied to a particular project for too long; with a trust deed you are looking at a waiting period of between six and 24 months.
  • Simplicity: There isn’t too much to analyze, since trust deeds cover a turn-key real estate investment.
  • Trust deeds yield more than bonds: Individual trust investments are considered too small to interest large corporate or government investors. Therefore, the deed market is generally monopolized by smaller investors who, with the right professional guidance, can ascertain the risk, value and expected return to be garnered from particular investments.
  • The time is right: Experience has led lenders to be wary of risking over approximately 65% of market value. Moreover, most lenders are requiring safety nets like personal guarantees of creditworthiness. Finally, the significant drop in property prices recently experienced (up to 40 per cent in many cases) is not likely given current values.
  • The minimum investment amount varies: Some investment firms welcome investments as low as $10,000, while others set much higher limits. This variation allows you to make a smaller investment at first, to ascertain whether or not you are comfortable with this type of investment.

Real Estate Investment Trusts (REIT)

Real Estate Investment Trust (REIT) allows an investor to diversify into many different real estate investments while earning a dividend of sort for the invested capital.  Due to the unique nature of the tax structure, a REIT is required to pass 90% of its income each year on to the investors, so the yields tend to be high relative to other investments.  There are many types of REITs however a self-directed IRA is only permitted to invest in privately held REITs.

When evaluating privately held REITs and real estate companies, conduct property due diligence by requesting a copy of the company’s annual report, prospectus and other financial information. Consider reviewing the following:

  • A demonstrated ability to increase earnings in a reliable manner.
  • Management teams able to quickly and effectively reinvest available cash flow as well as consistently complete new projects on time and within budget.
  • Strong operating characteristics such as effective corporate governance procedures, conservative leverage, accepted accounting practices, strong tenant relationships and clearly defined operating strategies in competitive markets.

Limited Partnerships

Unincorporated businesses in which certain partners are liable only to the extent of their investments. Limited partnerships are a popular method of raising capital from passive investors who prefer to not be involved in day-to-day business operations. There are traditionally two sets of partners 1) those with personal liability and 2) those not liable for debts.

Advantages of Limited Partnerships:

Pass-through taxation. Tax burden is passed on to the partners instead of the partnership itself. Therefore profit earnings are passed on to the partners through Wages, income and profit and each partner pays tax proportionate to their individual share of profits.

  • Obtain investment capital. Allow investors reduced risk by becoming a limited partner while raising needed capital.
  • Full autonomy. General partners enjoy full autonomy to make important business decisions as limited partners are not directly involved in the management of the business.
  • Equal Responsibility. General partnerships provide equal responsibility for all debts and other liabilities. The liability of the limited partner does not exceed his capital investment in the company.

Disadvantages of Limited Partnerships:

  • Constricted tax rules. Some tax rules restrict limited partnerships from claiming losses beyond $25K per year. A yearly rollover is allowed for losses greater than $25k.
  • Complicated tax rules. If financing options are used for the investment taxes can be complicated to compute.
  • Interference. Passive investors may be tempted to get more involved in the management of the business moving their role to general partners which forbids them from exercising their limited liability privilege.

Limited Liability Company (LLC)

Legal organization that provides the tax advantages of a partnership while limiting the legal liability of individual partners. An LLC is not a corporation but a legal form of a company that provides limited liability to its owners in many jurisdictions. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Some know Single Member LLCs in an IRA as a Checkbook IRA and can be appealing for many investors. It is important to learn the rules that surround these types of investments. When your IRA owns interest in your LLC, you have complete control; there is no custodian between you and your investments or transactions. This can be positive or negative based on your investment experience.

In order for your LLC to invest in your IRA, follow these guidelines:

  • You must be the managing member and the IRA is the registered owner
  • There can be no other owners in a single member LLC
  • If there are multiple owners, your ownership must be 49% or less and you are not a managing member.
  • Pre-established LLC’s will need to be amended to reflect the above guidelines

Potential Benefits:

  1. Protect Assets
  2. Pass-through taxation
  3. Heightened credibility
  4. Limited Compliance requirements
  5. Flexible management structure

Few restrictions Potential Disadvantages:

  1. Formation and ongoing expenses
  2. Transferable ownership
  3. Limited precedent
Single member LLCs held in an IRA have been identified as high risk with regard to Internal Revenue Code Section 4975, 408, 408A and other applicable codes. Holding an LLC in your IRA can provide flexibility however requires greater responsibility on the part of the IRA holder. Consult a legal professional accordingly.

Other Investments

Beyond many of the popular alternative investments available for self-directed IRAs there are even more possibilities available for self-directed investors. Review the IRS guidelines to ensure you are accurately complying with them prior to purchasing alternative investments.

Additional self-directed IRA investment possibilities:

  • Equipment Leasing
  • Factoring Investments
  • Oil and Gas Investments