Self-Directed IRAs: Untapped Capital with Near-Endless Possibilities - Clay Malcolm

Self-Directed IRAs – Untapped Capital with Near-Endless Possibilities

By Clay Malcolm, New Direction Trust Company

How much or how little an individual personally controls his or her finances largely depends on one’s comfort level. Some may be more comfortable making automatic contributions to their IRAs, 401(k)s, or health savings accounts and leaving the investment decisions to the professionals. Others who understand that they are professionals in their own regard may be more inclined to take the wheel and exercise true control over how their tax-advantaged retirement dollars are invested.

The knowledge that retirement plan holders can invest their accounts away from Wall Street and into alternative assets has become more mainstream. As such, some loan originators have adopted their familiar business models into their retirement strategies. With a self-directed IRA, you can qualify borrowers and make final decisions on loan durations and interest rates, all while enjoying the same tax-deferred or tax-free benefits of Traditional IRAs, Roth IRAs, or other such savings plans.

However, some self-directed retirement investors may want to capitalize on a seemingly persistent demand for debt, but they may not want to originate loans themselves. This is where loan originators and investors can achieve a key mutual benefit.

If you’re looking to issue new loans but don’t have the capital on hand to do so, self-directed IRA holders can be the answer. You may already try to utilize individual investors as a means of replenishing capital for new transactions, but it can be tough to rack up the funds you need from small allocations one person at a time. This can be frustrating for you as a lender in need of money and for the prospective investor who wants to get involved for more than just a few thousand dollars. On the other hand, those same people may have five-, six-, or even seven-figure balances in their retirement accounts, and that money is just as eligible to go to work as loan capital as the money in a person’s wallet.

Someone using non-retirement money might meet with you, agree to terms, and complete whatever paperwork you deem necessary. He or she may then write a check or transfer funds from a bank account, and the transaction is initiated. The process of onboarding a retirement investor would essentially be the same, except the investor would need to coordinate the transfer of funds from his or her IRA custodian. This can occur relatively quickly via wire transfer or ACH, as many self-directed IRA custodians have begun embracing technology at a greater pace. Any and all subsequent investments would also have to come from the account, and any payments would have to return to the account.

Investors who want to tap the debt market can also participate via private or public equity investment in the lender’s entity. They may also buy shares in a fund of a lending company, if said company were inclined to offer such investments. Keep in mind that retirement account holders may have longer investment time horizons, especially if that account holder is under the age of 59 1/2. Therefore, IRA investment may give the lender the opportunity to deploy those funds for a longer term.

There are certain IRS stipulations that an IRA holder must follow to take advantage of this investment model,but they’re hardly inhibitive. Prohibited transactions rules generally surround self-dealing between an individual and his or her account. In other words, you could not borrow money from your own IRA, repay the loan with interest, and retain the tax benefits of the account on those earnings. Other disqualified persons include lineal family members such as parents, children, and their spouses, as well as any fiduciaries to the retirement account (i.e. someone directly affiliated with your IRA custodian cannot profit from your IRA’s investments). Non-lineal family members like siblings, cousins, or other non-relatives such as friends or business partners are non-disqualified and perfectly able to participate in an IRA investment.

As long as an investor maintains proper separation between his or her IRA money and non-IRA money while never conducting IRA business with disqualified persons, said investor can be a resource of loan capital that you may have never considered. Education-based IRA providers are making it easier than ever to fund alternative investments with retirement dollars, so now maybe the time to get started.

ABOUT THE AUTHOR:

Clay Malcolm is Chief Business Development Officer at New Direction Trust Company, a custodian of self-directed investment accounts that hold alternative investments. Mr. Malcolm provides preliminary and continuing education to anyone interested in promissory notes, real estate financing, and other loan structures as assets in IRAs, 401(k)s, and other such tax-advantaged or taxable investment plans.

CONTACT: cmalcolm@ndtco.com | 877-742-1270(Ext. 113) | www. ndtco.com