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Take Over Reins of Your IRA Fund

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05-21-2006

Kiplinger's Money Power, Deseret News (Salt Lake City)

Many individuals who aren't satisfied with returns on conventional investments put some of their IRA money into everything from commercial buildings to community banks. Just about any investment is allowed, except for life insurance contracts and collectibles.

Three years ago, Vincent McCord, 59, invested $250,000 in his IRA as a limited partner in two apartment complexes and a shopping center in Las Vegas. When two of the ventures were sold, McCord, who runs a semiconductor start-up in San Jose, Calif., rolled his profits into real estate properties in Phoenix. He's also invested in a commodities fund and a yearlong promissory note from a company offering him 20 percent in interest. His IRA's value has doubled, he says.

Although only a small percentage of IRAs are self-directed, the numbers are growing. Hugh Bromma, CEO of The Entrust Group, based in Oakland, Calif., says his company has $2 billion in assets, up from $350 million five years ago. Assets under management at Pensco Trust Co. (www.pensco.com) in San Francisco have grown to $1.6 billion today, up from $758 million at the end of 2004, according to CEO Tom Anderson.

Of course, you can lose money. Moreover, the rules governing these transactions are complex. Advisers warn not to place more than 25 percent of your IRA savings into alternative assets.

The biggest tax risk is "self-dealing": using tax-deferred money for current personal use. If you're found violating self-dealing prohibitions, the IRS could disqualify your IRA's tax-deferred status and force you to pay income tax on the full value. Account owners under age 59 1/2 would face early withdrawal penalties.

No matter what the investment, do your homework. Stick with a business you're familiar with, and make sure a lawyer or accountant reviews any contract, especially if there's a risk of self-dealing. Some investments could require regular outlays from your IRA that could chip away at your retirement nest egg.

When you're ready to take minimum required distributions at age 70 1/2, sell part of your investments if you don't have liquid assets in another IRA. If you can't sell it, you may have to re- title part of it outside your IRA. You'll owe taxes on the value of your titled share.