Entrust Learning Center > Keyword: investments > Diversification and Tax Free Investing: Putting Greens, Foreclosure Auctions, RE Investment, the IRS, Uninvested Cash - and the Self-Directed Retirement Plan.

Diversification and Tax Free Investing: Putting Greens, Foreclosure Auctions, RE Investment, the IRS, Uninvested Cash - and the Self-Directed Retirement Plan.

The self-directed retirement plan offers a wide range of investment options, illustrated by the following short subjects. Consider this information in light of your own Keogh, Qualified Plan, or IRA.

The self-directed retirement plan offers a wide range of investment options, illustrated by the following short subjects. Consider this information in light of your own Keogh, Qualified Plan, or IRA.
 
Putting Green Partners

Several commercial brokers discovered a wonderful investment opportunity: A putting green. They established a limited partnership for the sole purpose of the acquisition, the main intent of which is investment property. As tax-deferred investment vehicles should not be used for the purpose of running a business, the partnership "pre-leased" the putting green to a professional operator of such enterprises. The lessor pays a fixed amount to the partnership, as determined by the terms of the lease. The general partner (in this case not an investor) distributes income to the limited partners, after paying minimal costs.
 
The partners are all members of the same firm, but otherwise unrelated. They funded the acquisition as follows: Two of the partners transferred all of their retirement plan assets to self-directed plans with Entrust Administration. One opened a SIMPLE IRA with $20,000. Another opened a Money Purchase/Profit Sharing Plan, and funded $15,000 on anticipation of 25% of her gross income. The partnership made the acquisition with both tax-deferred and non tax-deferred funds; some partners elected to use non tax-deferred funds. All the partners share the same tax accountant, and were therefore fully advised from a tax point of view on the overall transaction. (It is advisable to seek tax advice when making contributions to any tax-deferred plan, particularly if one is self employed and intends to shelter a good portion of their income. A tax advisor can help to establish amounts needed to fund self directed plans.)
 
This is a fairly straightforward use of self-directed plans. It is worth noting that the kind of partnership investment described above has the characteristics of many publicly-offered limited partnerships: The partners all know each other. They all have a commonality of interests and receive information and administration from the same source. As a result, the coordination of the entire transaction was expeditious. The entire transaction took one week - and the time could have been shorter had not an express mail package from one partners been mis-routed by the carrier. The net return from the partnership to the self-directed accounts is in excess of 12%. The partners who transferred all of their funds did so knowing they could retain their existing investments, and liquidate them when they wish to make purchases not handled or managed by regular broker dealers. In this case they retain both options, and will not be charged administration fees for stocks, bonds, and mutual funds.
 
Foreclosure Auctions

Foreclosure auctions are becoming popular again with self-directed investors. Sometimes, the required exact-amount payments present a challenge. Keogh and other qualified plans present fewer problems with this as they are usually self-trusteed, and the trustee takes the trust checkbook to the auction. However, not all government agencies accept such checks, and often require cashiers checks. This can make buying at auction difficult for the retirement plan investor. Holders of IRA or SIMPLE IRA accounts have additional problems: the account holder cannot write a check and expect to be reimbursed from the account without the IRS calling the transaction a taxable distribution.
 
There is a solution to the problem. You can use a certified check, or sight draft (considered by many financial institutions to be an anachronism). This approach allows the custodial institution to issue a check with flexible payment options acceptable in almost any auction venue. Payment is predicated on the client's approval, and documentation is forwarded according to the requirements of the retirement plan. This low-tech solution is easy and convenient. There are additional methods which work very well, but depend on the flexibility of your custodian.  For more information, call your local Entrust office.

Real Estate Investments and the IRS

In the here-we-go-again department: Some regular broker dealers, seeing that their customers want to get out of stocks and mutual funds, have been telling their clients that you can't invest pension plans and IRAs in real estate - and if you do, the IRS will audit your account and disqualify your investment. If you have any doubts about flexible investment options, instead of calling your administrator or custodian, call the Internal Revenue Service for IRAs and SEP-IRAs, and the US Department of Labor for Qualified Plans. Your regional office may try to refer you to your tax preparer or administrator. If that is the case, ask to speak with the administrator or CPAs source of information, such as ERISA lawyer or other such service provider. This way you can confirm your investment options with the full assurance of correct information.
 
Uninvested Cash

Be sure that the "uninvested" cash in your retirement plan gets invested! Ask for a prospectus whenever a trustee or administrator invests in anything other than insured deposits and receives payments from the investments. This requirement is often not met, the result being that the value of your cash account is not disclosed - and may not match your expectations. Ask how much your trustee gets paid for "managing" your cash, and always ask for a prospectus so you know where the money is going.

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