I like solutions that give me maximum choice and control. I service my own motorbike and guitar. I do my own basic electrical and plumbing repairs. I file my own taxes… unless they get really complicated, in which case I know where to draw the line and bring in an expert.
Along the way, I’ve learned to avoid large and remote institutions, because they don’t give me much choice. Retirement planning is an example. For several years I had a 403(b) plan from my previous employer. Once I accounted for costs and fees, it became clear that I should pay taxes on salaries that would be used for contributions, and invest them myself.
Many people are aware of the fact that individual retirement accounts (IRAs) suffer from the same problem… but it’s one that you can solve by moving away from the IRAs offered by large institutions and moving to a standalone IRA.
Exempt IRAs
Most retirement investment products are not designed for you. Instead, they are designed to direct your retirement savings to the US stock market. An entire “food chain” has grown around the US pension system, pumping money from Main Street to Wall Street… as if more was needed.
The problem is the lack of investment options. Most institutional IRAs only offer a limited number of US equities and bonds.
The truth is that your IRA can legally pursue just about any investment option imaginable – real estate, new businesses, intellectual property, precious metals – you name it. A “self-directed” IRA is completely legal – and can be as simple or as complex as you like.
Here’s how it works. By law, all IRAs must have a US-based “custodian” who is responsible for securing your IRA, keeping records, processing transactions, filling out IRS forms, and other administrative tasks. Most major custodians simplify things for themselves by offering a standard menu of US securities and bonds. But nothing can stop IRA custodians from offering offshore investments, real estate, private mortgages, precious metals… and more. In essence, some custodians allow you to manage your own IRA.
A standalone IRA is just like a conventional IRA: tax-deductible contributions; no tax on income; distributions are taxed as ordinary income. The difference is that IRA specialist custodians allow you to actively choose their investments.
For example, your standalone IRA can buy a home that you plan to use in retirement, but is temporarily renting out. The tax-deferred rental income is used to maintain the property and fund other investments. You can choose the property and negotiate the terms of the deal yourself. (However, the custodian must be the legal owner, so all documents are in his or her name, even if it refers to you as the owner of the IRA, such as “XXX Company Custodian for the benefit of (Your Name) IRA.”)
When you take out a home title in retirement, you will pay ordinary income tax on the appreciation of the home’s value from the time the IRA purchased it. For example, let’s say your independent IRA buys a $100,000 home. You rent it out, and it’s priced at an average annual rate of 8%. After 20 years, your $100,000 investment will be worth $215,890, and when you move, you’ll pay income taxes on $115,890.
Gold Option
Thanks to the Taxpayer Assistance Act 1997, independent IRAs can hold gold, silver, platinum, platinum, and palladium, either as bars or coins. In either case, the metal or coin must have certain qualities to qualify for an IRA. For example, an IRA can hold American Gold Eagle coins, Canadian Gold Maple Leaf coins, American Silver Eagle coins, American Platinum Eagle coins, and 99.9% pure gold and silver bullion or better. (Some well-known gold coins, including the South African Krugerrand, are off limits, as are ingots that are not pure enough.)
To meet IRS requirements, precious metals in the IRA must be held by a custodian…sorry, you can’t keep them yourself. IRS publication 590 stipulates that “the trustee or custodian must be a bank, federally insured credit union, savings and loan association, or entity approved by the IRS to act as trustee or custodian.” Many trustees/trustees use personal storage to store IRA metals. Alternatively, your IRA can invest in COMEX metal futures or exchange-traded funds (ETFs).
Best Offshore Options
There is one more IRA “hack” that can really open up the world of retirement investing. That is so that your IRA custodian creates and owns a limited liability company (LLC), either in the US or overseas, which in turn can make the necessary investments, including gold and other metals. In this case, you can basically manage the LLC yourself, bypassing the custodian for most matters.
The key to all of this, however, is to get good advice from an experienced and knowledgeable tax attorney. The IRS rules for IRAs are pretty strict, and errors can lead to “early distributions”… with accompanying tax implications.
So go ahead, and increase your IRA… but get help. DIY doesn’t mean doing it yourself.