By Jennifer D. Meacham
The nation’s leading repository of financial figures, the Federal Reserve, has released its newest statistics on Individual Retirement Arrangements, and self-directed IRAs top the list. Indeed, its “other self-directed accounts” category has grown from $12.2 billion 1997 to $149 billion as of 2006, the latest year tabulated by the Federal Reserve.
These days, a growing number of banks, brokerage houses and specialized IRA custodians are saying “yes” to deeds of trust and promissory notes inside self-directed IRAs. That bodes well for power teams tapping new markets.
“As an entrepreneur and investor looking for ways to maximize my investments, this is fantastic,” said Peter Stack, a residential agent with Realty Works, a six-person team in Portland, Oregon. “It’s a way to utilize this lump sum of money and be able to do more with it than just sit and churn over the next 25 years.”
This year, Stack is adding real property to his retirement account portfolio. He’ll use his IRA to finance construction of a split-level vacation rental at Ashland, Ore.’s Lithia Springs Resort.
“I know the area and know it’s growing, plus my (investment) partner has lived there his entire life,” said Stack, age 45. “That’s why I’m so interested in being involved down there.”
He won’t be able to use the rental himself, or rent it to family members. Internal Revenue Service codes stipulate that IRA investment can’t directly benefit the owner until age 59. At 59, however, Stack could take the property as part of his distributions, and stay there anytime he wants, free and clear. Meanwhile, rental income and the eventual sales price go tax-free into Stack’s retirement account until he’s ready to start the withdrawals. (You can find the IRS code guidelines at Self-Directed.info.)
He’s not alone. According to the National Association of Realtors, 22 percent of vacation homes bought in 2006 were purchased as investment properties. That’s up 4.7% in 2006 for a record $1.07 million, from $1.02 million in 2005.
Among those buyers, two-thirds used a real estate agent. Meanwhile, eight out of 10 spend no time in their property, making them prime candidates for self-directed IRA investing. However, NAR spokesman Walter Moloney said that only 1 percent of the investment property buyers it polled used their IRA for funding.
Meanwhile, NAR’s 2006 survey of baby boomer buyers found that 39% of the nearly 2,000 boomers it interviewed said they plan to buy investment real estate by cashing out their Individual Retirement Arrangement. That says that quite a number of investment home buyers still don’t know about IRA self-direction into real estate, a strategy that both saves them from cash-out penalties and this year’s income taxes but also keeps their retirement account value intact.
“As an entrepreneur and investor looking for ways to maximize their investments, knowing about IRA self-direction into real estate is key,” Stack says. “Right now, everyone is sniffing around looking for ways to be investing these funds.”
