So what should I put in my SDIRA?

or:

Why our Condo Mortgages are excellent SDIRA investments:

There are dozens of Third Party Administrators (TPA’s) out there attempting to get you to establish your Self-Directed IRA (SDIRA) so that you can manage your own retirement funds for a higher rate of return. The big brokerage houses and mutual fund companies also advertise Self-Directed IRA’s although their definition of self direction may be much more restricted than the TPA’s specializing in SDIRA’s. A lot of brokerage company TPA’s seem to think that Self-Directed means you should get to pick between any mutual fund they represent.

The key advantage (as the TPA ads will point out) of a SDIRA is that you can invest in assets other than stocks. Gold, and other precious metals, notes, liens and, of course, real estate are all legitimate investment types.

Certain transactions are still prohibited (you cannot put the house your kid lives in into the SDIRA) and certain investment types are not allowed (art, collectables, insurance) but none of that is really the point of this post– There are 3 million websites that will give you advice about how to manage your SDIRA so that you stay out of the clutches of the IRS who polices such things.  What the internet seems short on is advice as to what to actually invest in in your SDIRA.

Part of the reason for this is that the TPA’s don’t want to help here. They are prohibited from giving investment advice or recommending particular investments.

Another part is the assumption that those who are SELF DIRECTING their IRA are doing so because they have expertise themSELF and therefore don’t need advice.

Often beginners think that the ultimate SDIRA strategy is something called a “Fix and Flip”. But this is is a strategy with lots of potential pitfalls– the beneficiary of the SDIRA is allowed to perform only “ministerial duties” and cannot “actively manage a business” inside the IRA– so, for example, they cannot paint the house themselves (think of this as an IRS prejudice against Blue Collar workers– White Collar tasks are permitted Blue Collar tasks are not) or trade more than 3 or 4 houses a year. To do so risks “blowing up” the IRA— a major undesirable outcome.

The IRS may “disallow the entity” for such prohibited transactions. This means that the entire balance in the IRA becomes taxable income immediately– often with early withdrawal penalties as well– even though only a relatively minor portion of the IRS funds were involved in the prohibited transaction.

By contrast lending money is a well established SDIRA activity and all the actions surrounding it are, by definition, “ministerial”. There is even some suggestion in the literature that activities that would have been prohibited (Selling a lot of units) are allowed if they arise out of notes that went bad (not that we think that our notes will go bad– Illustration point only).

So our Condo mortgages are an Excellent SDIRA investment and we have worked with several TPA’s to make this investment go smoothly for SDIRA account holders who chose to invest.

Of course, there is the larger issue of whether the Condo Mortgages work for you in your portfolio but that’s not a set of questions we can address here without some idea of what the rest of your portfolio looks like or what your investment goals are– Feel free to contact us via e-mail or phone to discuss or even to post comments below.

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