NATALI MORRIS

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Natali Morris Blog

May 17, 2016

How To Invest Your IRA Money In Whatever The Heck You Want

Most people think that an IRA is for buying stocks or stock-based funds. Not true! You can use your IRA money to invest in whatever your little heart desires, with a few exceptions. We’ll get to those later.

The IRA, or Individual Retirement Account, was designed as an account that forces people to save for retirement. There are stiff penalties for taking money out or profiting before retirement. That money is meant to stay there until you are 59 1/2 years old.

What happens while it sits in that account is entirely up to you. Most people don’t know this!

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Most IRAs are held by the big banks that advertise during golf tournaments: Fidelity, Scottrade, Morgan Stanley. Let’s call them Wall Street firms.

Wall Street firms will hold your IRA money and invest it in the stock market. They may tell you that you cannot invest your IRA in other assets such as real estate or small businesses but what they mean is that they don’t do that. That’s not their business and they do not profit from non-stock investments so they discourage it.

Wall Street firms profit from your investments in the stock market by taking a commission or management fee inside of your funds. Those fees can be pretty substantial. I suggest this site to find out how much you are paying in your funds!

I’m not saying that this is a bad system. What I want you to know is that it is not the only system!

Your IRA is full of YOUR money and you can invest it wherever you want with a few exceptions:

  1. You cannot invest in loans or businesses that directly benefit someone in your immediate family such as children, spouse, or parents. This is too close for comfort and the IRS will assume that you are using this money not for retirement but for current gain and they will tax it accordingly.
  2. You cannot invest in life insurance or collectibles such as art.
  3. You cannot invest in an asset you are going to use right now such as a car or primary home.

You CAN however invest in a small business, a local farm, a Broadway production, a note or loan, or in real estate in many forms and fashion: investment properties, tax liens, foreclosures, etc.

You can invest in a litany of other businesses that excite you to no end! I found this article about people who invested their IRA in rock & roll camp. How punk is that!? The Occupy people would be so proud. Scroll through the other investments featured in this article when you have time. You have more options with YOUR money than you might have originally thought. Doesn’t this excite you!?

Well dammit it excites me!

Okay, you’re excited! You love the idea of investing your IRA money somewhere that floats your boat! Here is some important 411 to get you started.

How do you do it? 

You find an IRA custodian that lets you self-direct and either open a brand new IRA or roll over your existing one. The Wall Street firms are not great at this and if they do it, they will charge you some pretty high fees. A few I suggest to start your research are:

This is not a set-it-and-forget-it account because you are in charge of where this money goes. You have to direct (or approve) your investments. You have to make decisions. If you don’t like being in charge of your investments, this is not for you. If you like blindly investing in the stock market and not thinking about things that are outside of your control, the Wall Street IRA is better for you.

But that’s not you! You’ve read this far! You want to be in the driver’s seat!

How do you manage it? 

You have the same contribution limits as every other IRA, which is $5,500 per year. But that is how much you can put in that account from your own money. That is NOT how much your IRA can grow based on your investments. It can grow sky high! No restrictions on growth!!

There will be fees inside of your account as with any bank but most of them are flat yearly fees, not percentages of your gains. There are also fees for administration tasks such as wires, document processing, etc.

Important note: You may want something called True Checkbook Control in your self-directed IRA. Not all custodians offer this and I learned that the hard way. This means that you get an actual checkbook to manage your investments. If you do not have this, every transaction inside of your IRA can be a bit of a pain with online approval forms and delays.

You’ll have to be extra careful with this money though! If you buy a pack of gum with that checkbook, you’ve violated the rules of the IRA and will be subject to HEAVY DUTY taxes and penalties. You will only write checks to your approved investment! You must swear to this in blood oath!

And what happens when those awesome investments inside of your IRA start making money? 

You know that you can’t take those profits and put them in your personal bank account. Those profits are untouchable to you unless you are re-investing them. The business you invest in has to make payments directly to your IRA custodian. It can not be filtered through your bank account. You will see deposits in your online account as your IRA grows and grows but you otherwise do not touch them.

For example, I switched insurance carriers on a property I own inside of an IRA. The insurance company issued me a refund for the old policy in my name. Can I cash that check and then write a check back to my IRA custodian? NOOOOOOOO! No way! Nope! I had to request the insurance company to re-write the refund directly to the IRA custodian and mail it to them with a payment coupon. Yes that’s a pain but if I touch that money and the IRS finds out, I’m in deep doodoo!

A great way to make sure that your investments pay you properly are to get payment coupons with your account number written out so that money zooms right passed you and into your account. Or you can use a loan servicing company, which I also highly recommend. Remember, this is an awesome way to grow your investment but it is also a high-stakes game. Do it wrong and you can lose up to 60% the value of your account in penalties and back-taxes. ¡Muy mal!

So why would you do this? 

Because the stock market is likely not your business or even a business you know how to affect or read. Because the stock market cannot promise you safe and consistent returns and often a lot of your profit is eaten up inside of mutual fund fees. Because maybe, just maybe, you can do better.

And then again, maybe you can’t. Maybe you wouldn’t know a good investment if it tea bagged you in the forehead. In which case, leave your money to grow conservatively and cyclically in the stock market. That may just be your better fit. But if you think that you can do better, shouldn’t you at least consider it and start to do further research??

Which IRA should I choose? Roth or Traditional? 

Come on. You know the answer! Your IRA is going to be worth bank when you are 59 1/2. You don’t want to pay taxes on it then! Pay those taxes now with a Roth! And for those of you who still want to argue with me over this, buh-ring it.

Do you do this? 

I do. Until this year we held two investment properties in my Roth IRA and one in my husband’s. I sold the two in my account this year however because I wanted to loan that money to a fellow investor and profit from the real estate note rather than managing a property myself. That has proven to be a really interesting investment and I will talk about that in another post.

Guess you’ll have to subscribe for that! To be continued!

Meanwhile, what are your questions about this punk rock way of investing? Ask away!

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Disclaimer: Natali Morris is not a certified financial advisor. She is an autodidact. She writes this blog to chronicle and share her self-guided education about personal finance. She is not selling financial products or recommending that you do anything other than educate yourself on the various options about finance that took her years to discover and leverage. She wants you to be in the drivers’ seat and do the best you can with the money you make, ’til death do us part. Amen. You may kiss the bride.

4 responses to “How To Invest Your IRA Money In Whatever The Heck You Want”

  1. Ben Curry says:

    Tea bagging your forehead – Lol! That’s a visual I didn’t see coming!!!

    Great advice. I was thinking of using money in this manner to increase our family cash flow but after reading your post, I know I definitely can’t do that. Thanks!

  2. Natalie Wang says:

    Hi Natali! I heard about your blog through the Bigger Pockets podcast and wanted to let you know that I read your entire blog in a day! I love that you break down complicated concepts into easy to understand steps. I’m also at a point in my life where I’m starting to plan a family and your blog is perfect. Thank you so much for taking the time to share your experience!

  3. Vanessa Jones says:

    Thank you for talking the time to write this article!
    It clears some of the questions I had about the self-invested IRA, but it opens even more questions for me. Let’s say someone contributed 3 years in a Roth IRA at maximum allowed and now they have $16,500 and they want to invest in a real estate property. With such a small amount, arguably, they can’t buy a decent piece of property out right, so they need a loan or a partner. How is that part of the deal structured? Another question, let’s assume that the Roth IRA was able to purchase out right a piece of real estate property. I get the part that the rent check has to be written in the Roth IRA account and not the personal name (I still have fogginess around the exact details, but the custodian can probably explain details there). The question is, if there is a plumbing issue, how is that expense covered? Let’s assume that there is no more cash in the Roth IRA and a check can’t be written from the Roth IRA account to the plumber. I would love more clarity around these kind of details- day to day operations of a property bought under the Roth IRA name’s.

  4. Joshua G says:

    Thank you for your posts Mrs. Morris,
    I’m in Vanessa’s boat. Would that $16,500 that she used to purchase a property for say, $100,000, be the portion of the Roth? Say Vanessa collected $800 per month on the property. Is that to say that the growth on the Roth account would be $1,584 –> $800/month * 12 months * .165 (% of Roth Equity in the property?).

    Would one be able to carry a mortgage on the “rest” of the value of the property?

    Also, does that mean in that 4th year, another $5,500, could be credited toward the “Roth portion” of that property?

    I’m new to this and I appreciate your insights, there are a few ways to peal the banana of creating wealth. I’m grateful for running across your sight as it has proven very useful and practical. Thank you again!

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