Real Estate Articles » Money & Finance

Self Directed Ira Vs Traditional Ira

By: Doug Mitchell
Submitted: 09:18PM on Friday 06 February 2009

The recent whipsaw gyrations of stock markets worldwide have kept many an investor on pins and needles lately. Since the beginning of 2008, the US stock market has shed over 40% of its value, with trillions of dollars being lost. IRA and 401k investors are especially worried that their retirement funds won't be there when needed, and for good reason. Much of their investment capital is tied up in mutual funds, and recently they have helplessly watched in horror as their savings evaporated.

To cut their losses, many investors have liquidated their accounts and moved into cash. Such a move does stop the bleeding, but what to do next? Cash doesn't earn much, whether it's held in super safe Treasuries, CDs or Money Market Accounts. Investors are lucky to get 2% on their money and even those paltry earnings are taxed.

Some investors have been taking a more active role in managing their retirement accounts by moving at least some of their money into Self-Directed IRAs. The Self-Directed IRA is exactly what it sounds like: the investor chooses where the money is invested. They simply direct their IRA custodian to invest in whatever they (the investors) choose. Earnings are deposited directly into the IRA account.

Your IRA custodian may have a Self-Directed IRA program. If not, funds are easily transferred to a custodian offering the program such as Sterling Trust, Pensco, and Charles Schwab to name a few. There is no penalty for the transfer and the new custodian handles all the paperwork although their fees have a big range.

In a Self-Directed IRA program the investor conducts their own research and chooses where to invest. There are numerous alternative investments available such as real estate deals, trust deeds or mortgages which can and should be part of every serious investor's portfolio.

Trust deeds and real estate secured mortgages typically earn interest in the 10% to 18% range. The Grace Fund has made annual distributions of 15% (in monthly installments) since launching in 2006. These rates are far in excess of comparable term fixed rate instruments such as CDs, Treasuries and Money Market Accounts. They're safer than stocks because the loan-to-value (LTV) ratio of the collateral is in the 40% to 60% range.

For investors who do not have the expertise or desire to do their own due-diligence, there are many private mortgage funds available. The fund's portfolio of mortgages secures the investor's capital and is diversified in that the loans are on many different properties. The currently depressed prices makes such a loan is safer because of the much lower acquisition cost. That means a 50% loan on a property whose value has already been discounted makes for a very safe investment.

The main benefit of a Self-Directed IRA is that it offers investors 100% control of how and where their money is invested. The custodian does not make investment recommendations. It simply administers the retirement account as the investor directs. Many people feel better about their IRA when they take control over their own financial destiny.

At 01:41PM on June 19, 2009 - Vincent Polisi said...

This is an excellent article and let me restate that a Self Directed IRA is the only type of IRA to have in this or any other market for many of the reasons mentioned in the article. Individual control of the underlying investment is a huge one. It is unfortunate that most people are never made aware of the fact that they actually have the ability to control what they invest in with their retirement accounts and that they can invest in things other than paper securities. The stock market has always represented nothing other than legalized gambling. Unlike paper securities, tangible assets like real estate, have the ability to provide cash flow, equity growth and tax benefits through deferrance and depreciation. All with an underlying real asset.