Creating and Sustaining Self Direction

How Long Can Working People Ignore Reality?

2011-03-17T13:48:00Z

Ripples of "The New Normal" hit the big time at the Wall Street Journal

The "New Normal" I am referring to is that most Baby Boomers are going to be retiring on a tiny fraction of their working incomes, mostly derived from a shaky Social Security System. What a prospect!

Blogging away for years now with about 60-100 hits per day on this site, I have often felt that I was pretty much alone in my views about the level of "Middle Class Denial" (let's call it "MCD" and make it a syndrome) regarding pension realities. Baby Boomers are applying for Social Security (SS) at a reported rate of 10,000 per day, many on the first day they are eligible for benefits. I've heard from people old enough to qualify for SS, who have experienced a blow-up in their career that led to greatly reduced income. When they tried to apply for Social Security to supplement their reduced income, they discovered that you can only earn a maximum of $14,400 per year and draw on the benefits they've paid for for years. In my next blog I will review the basic parameters of Social Security, but my point today is about the WSJ article titled "Retiring Boomers Find 401(k) Plans Fall Short" . MCD has hit the mainstream press, so what will most of us do about it?

The article starts by saying "The 401(K) generation is beginning to retire, and it isn't a pretty sight." and goes downhill from there, stating that "the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement."

Most people do not give a moment of thought to what they really need in terms of assets in a pension to live well in retirement. This article assumes that people need 85% of their working income after they retire. A typical SS benefit is between $1100 and $1600 per month. I am not a pension actuary (math egghead), but I can do simple calculations. If we use $1600 per month that means $19,200 per year to live on. If that is 85% of your working income, then you were making $21,120 annually when you were working.

Dear readers, please let me know the retirement areas (preferably by the beach somewhere) where I can live on $19,200 per year. If this does not seem practical to you, then let us talk directly about what can be done now and going forward to maximize your pension potential. Remember that I sell nothing no investments of any kind, no pension services of any kind. I am not an investment or tax advisor. I am making a wake up call here and I am soliciting comments from readers about real world problems and solutions.

A Change in Self Direction for 2011

2011-03-06T18:44:00Z

The Case for More and Better Self Direction Now...

When I first began blogging at Self Direction Central a few years years ago, the focus of my work life was Self Directed Pensions. I had the good fortune to work for two good Self Directed pension trustees and learn a great deal about the strengths and weaknesses of those plans. On the blog I was able to express my personal opinions and observations from experience especially about the need for good due diligence. I was always very distressed when I saw people make investments without thoroughly researching who was getting their money and how it is really being invested.

Now I realize that this is not that much different from investing with any mutual fund, even those with a good track record. After all, what risk does the person investing your money for the fund have attached to the results they obtain for you? There are no guarantees and the most that person risks is that they will be wrong often enough and for long enough to lose their high paying, cushy position as an asset manager. No one is likely to go after their pension if they screw up on your investments. I haven't heard of any arrests (other than Bernie Madoff) on Wall Street or in the Mortgage Community either. People have really just become used to not taking responsibility for their own results and do not require much punishment for those who take our money and run with it.

I've often wondered why we can't make them have to put their pension in the same investments they recommend for you and I, just like I wish our Senators and Congressmen/women had only the option of relying on Social Security for their retirement, instead of a separate, fully funded (with real money, not IOU's) private plan.

What has changed?

After some time off from blogging, I find there are new and very exciting variations on self directed retirement plans that can help people willing to self direct toward a better retirement. One is a new way (new since I left the business) for people to use their IRA money to fund loans for others and earn good returns without having to learn the note business and with a minimum of just $5000.00! The company is called "Lending Club" and I hope to do a webinar with the co- founder of this fascinating company, Renaud Laplanche .

The other is related to the bursting of the real estate bubble. The bust has resulted in prices for investment real estate that can be met with cash in an IRA or Cash and some leverage from Pension Real Estate Lender North American Savings Bank (NASB) which can now offer 60-70% leverage for a fixed rate and term. Properties that provide good cash flow can be purchased for amounts that make sense for the first time in 40 years.

Why Changes to the Blog Site?

As time has gone by I realized that I am interested in more than just Self Directed Pensions. I am intensely interested in the concept and the process of how people become Self Directed in general and not just with respect to a pension plan. I am interested in how working people manage their lives and their money to create abundance and to sustain that abundance. I set up a sister site "Sustained Abundance" where I've talked about the paths I see to Abundance and to help myself and others (especially the next generation).

We are in a society where there is great pressure to conform and to be just like others in our peer group. From our earliest days in Pre-School and through our High School and College days we tend to join and conform to one group or another and we mirror the images that we think society demands of us. We do the same thing when we marry and "settle down", but for most of us, the emphasis has been on looking good instead of doing the hard things that will truly make our financial situation truly good.

Look at this excerpt from "The Soul of Capitalism" by William Greider

"From the 1950s to the early 1970s, Brown explained, virtually all classes enjoyed a robust expansion in their discretionary spending on "variety" and "status" consumption. Even the poor gained a much improved standard of living, thanks to more generous public subsidies. However, during the last three decades, as hourly wages stagnated in real terms, working families were squeezed in their ability to maintain an expanding participation in the mass consumption. They more or less succeeded, though at a steadily slowing pace. How did they accomplish this?

First, they worked harder and longer, mainly with women, wives and mothers, entering the full-time workforce and other family members taking on part-time jobs. Second, they borrowed against their savings, with credit cards and lines of bank credit that steadily drew down the accumulated equity they owned in their homes. This process explains the mountainous debt levels households built up amid the booming nineties. After storing up savings through home ownership during the sixties and seventies, the average homeowner drew down home equity dramatically during the last two decades, from 70 percent to 51 percent of mortgage value."

In the simplest terms, we got it and blew it as fast as we could on "variety and status" consumption.

Thanks to Mortgage Equity withdrawal and easy credit, in 2005 the average American was living on 125% of their annual income. Now for many the income is gone along with home equity and savings. Thanks to the loss of millions of outsourced manufacturing jobs and millions of jobs related to the latest real estate bubble, Americans (and many others too) are faced with the loss of their homes and the reality that the future may not have as much "variety and status" consumption. More importantly, people are realizing that they have not saved enough for retirement and they are trying to re-balance their lives and use the productive work time they have left to create abundance for the future.

Hard Choices Ahead

For most of us this means hard choices and less consumption now. I cannot tell you how many times I hear from people young and old, that they do not care about the future and that they "want to live now". I wonder how many of these people are among the 15 Million (during the past 3 years) who have moved back to their parents homes or with siblings because they cannot afford to pay for the meanest rental living space.

If you are one of those who sees reason and purpose in living with less now to have a better future, send me your comments, tell me your story and how you are going about making changes. People need to realize that they are not alone, that they are not the only ones who abused the plenty they had and that there is a future that can be improved.

Here's to a future of Sustained Abundance through Self Direction, starting now.

Job Hoppers and Self Directed Retirement Plans

2010-04-29T20:44:57Z

Some Pension Considerations for Job Hoppers

I recently read an interesting article posted on BNET by author Penelope Trunk, titled "Why Job Hoppers Make the Best Employees" . This article introduced me to Ms. Trunks career blog at www.penelopetrunk.com which I am enjoying on many levels. My comments on this topic are directed toward private sector workers, although workers in the public sector are likely to face the necessity of taking more responsibility for their own financial security as public pensions may be reduced or even eliminated in the future if public budgets cannot be balanced. In most cases, cash strapped, profit oriented private sector employers are looking for ways to decrease pension liabilities whereever and whenever they can, by any means they can.

Everybody in Gen X and Gen Y will need to get more involved in securing their financial future. The transfer payments funding Social Security went negative in 2009, meaning that contributions from workers to Social Security were less than the payments being made to retirees drawing Social Security. Do you want to bet your retirement on Social Security?

As a Baby Boomer, I have lived trough the golden era of stable middle-class employment and participated in the not so gradual decline of that era (See "Going Down With the Joneses "). The recent Financial Recession (reminds me of the old line, "when your neighbor is laid off, it's a recession, when you are laid off, it's a Depression") I wrote an article entitled "Broken Promises" to discuss some of the realities of pensions in the modern work place and in her article, Ms. Trunk reminded me of a number of the positives to Job Hopping and a changing view of job hoppers. Early in my work life, I took some grief for changing jobs after just a few years. Lacking a specialized education, I changed jobs to learn new skills and to increase my salary and it worked pretty well except in the area of my pension.

Like most brainwashed Americans I spent less time planning for retirement than for my annual vacation and when I left a job, for the most part I left the pension contributions I accumulated with the employer plan where they had accumulated or in a couple of cases, rolled them over into a cash account at H and R Block, who did my taxes. In one case, I took an early distribution and paid the 10% penalty for the ready cash. None of these approaches effectively maximized my control or results from my pension assets.

Failing to Plan means Planning to Fail
The cost of my failure to plan is reflected in the asset balance in my Pension. My point is this: If you are going to be a job hopper, take the time to learn the ins and outs of Self Directed Retirement Plans and set up one or more plans that suit your situation. When you move from one position to another, you are in control of all of your assets and do not abdicate control to others. If you take no responsibility for results, you will get the minimum results from "professional investment managers" that will keep them employed and out of jail. Don't worry about them, (in 2009 25 Hedge fund managers were paid more than $1 Billion in personal compensation and the highest paid earned $4 Billion) invest some time in your own retirement.

If you have your own business with no employees, this will likely take the form of a Self Directed 401k, which is far more flexible than a Self Directed IRA. If you work for a large employer that offers a 401k or any plan that offers matching contributions, take advantage up to the maximum amount for matching and consider an additional IRA contribution. In any case, it is time for Job Hoppers of all ages to pay attention to and take advantage of the control that is offered through Self Direction of retirement assets and I don't mean just selecting a family of mutual funds and forgetting the investment for 20 years.

The Changing Employment Landscape
I suspect that our employment system is evolving into a simple two tier system. One tier will be that of generic service workers who basically need all of their meager earnings to subsist. Employees in this tier should do everything possible to fund an IRA or Roth IRA account every year that they work. This means financial sacrifice of some kind and doing without something now to fund something in the future. This will be a very difficult choice for workers in this tier.

The other tier will consist of knowledge workers with specialized skills that are transferrable and incent employers to do a bit more to retain them. A good example of this is technical and scientific work related to National Defense. This is not the type of work likely to be outsourced to Chindia or Malaysia. Workers in this type of area and other technical areas will get more pension benefits from employers than service workers. Workers in healthcare will see increased demand, but need to understand their pension options.

In all cases going forward, Americans need to take much more responsibility and become far more active in the direct management of their pension in order to produce better results for their own future.

Rethinking Your "Retirement Plan"

2009-11-22T02:28:00Z

America is Clearly Transitioning toward a New Paradigm for Retirement

I read an online article at a blog called " GoToRetirement " this week that really got me thinking about what it means to have a "Retirement Plan” and a better understanding of planning for retirement. I encourage my readers to review this blog entry and consider how the points raised apply to each individuals current situation.

The sad fact is that most people between the ages of 50 and 60 still do not have a formal retirement plan. Recent economic events have impacted this age group more than almost any other, since most in this group have been hit with a double whammy of declining home equity and declines in the value of traditional securities investments in a 401k or other qualified pension plan, if they have an employer that still offers one (or still have a job). They are also the same group of people that has been setting records for consumption, borrowing and spending for years. Now they are a key target group for employers seeking to cut costs and pension liabilities as many are highly compensated (or better compensated because of seniority) and nearer to retirement.

For people under 50 the recession has reinforced the need to give more thought to what it means to have a formal, written "Retirement Plan". This is a good thing since most Americans devote less time to planning for retirement than they do to plan for annual vacations. I know it is far more fun to think about and plan for travel fun and games than to devote time to thinking about an uncertain future, but at the same time people of all ages should at least consider the hard facts of retirement in the United States. Take a look at a chart I have used before, which reflects data from before the start of the recent recession (the good old days).

This information is even more important for people under 50 because they must become more involved in planning for their own retirement, in order to have one.

In the "good old days" of retirement, only 2% of retirees were self sustaining and I suspect that most of those were people who had earned far more than they needed to spend plus those who knew how to invest. Given recent events, a very high percentage of people currently between 50 and 60 are probably facing the reality of working well into their 70's in order to build retirement reserves to reasonable levels. They will also have to spend far less and save much more than they ever did. This means a lower standard of living now in return for a better standard of living later. This will be the toughest financial challenge the Baby Boomers and Echo Boomers will ever face.

What Ever Happened to Self Reliance?
Several generations born after 1950 have relied on Corporate “generosity” or on the mistaken belief that a benevolent government would continuously increase the benefits available to retirees through Social Security and somehow guarantee those benefits in the face of a declining workforce and an ever increasing base of retirees who are living longer than ever after retirement. In both cases Americans are in for a huge shock.

The Corporate retirement promises made to employees (when America was the dominant and most profitable industrial power in the world) have already been broken (think Enron, WorldCom and now the struggling U.S. Automakers or Airlines). Ridiculous actuarial assumptions of unsustainable corporate contribution levels, investment results and continuous growth of new employees to backstop promises to old employees have fallen far short of reality. Today profit margins for U.S. industry must be competitive with global competitors. Global labor rates are often below our poverty levels and offering fewer (if any) benefits. This means that less domestic corporate profits are available to fund pension liabilities for past and future employees of U.S Industry. The general decline of U.S. manufacturing jobs means less new funding for existing plans that were designed to need ever more new funding from a growing, young work force.

Government Retirement Plans are Unsustainable
Those who have been part of State and Federal retirement programs who have retired or will retire in the next few years can expect to receive pension benefits that far exceed the contributions they made. This is especially true given the actual investment results obtained by pension managers. Fortunately for these employees, the failure of the pensions they participate in is backstopped by taxpayers who will never receive a dime of benefits from the plans they will be forced to backstop through new taxes. In California the $50 Billion of recent financial losses in the CalPers pension program is a perfect example of this scenario. Promises of 100% of salary at retirement, with Cost of living increases and full medical coverage will probably be met, but at what cost to taxpayers who are not participants in state pension plans? Clearly new hires coming to work for a cash strapped state governments will eventually have to make concessions in the structure of their pension plans to accommodate financial realities, if they are even offered a pension plan.

Of course anyone who is qualified or interested has (or had) the option of going to work for the government in order to obtain the benefits of long term employment by the government. But what about the taxpayers and entrepreneurial business owners who do not work for the government who will have to pay more taxes to fund government pension liabilities that could go to fund their own retirement goals? How far will “free market” business people go to financially support the pension miscalculations and investment mistakes of government retirement plans?

In recent years, government employment has skyrocketed, but not all jobs include benefits at “grandfathered” levels and many positions (e.g. postal employees) are being offered on a contract basis with no benefits. Have you noticed too that the Government calculations for Cost of Living Adjustments conveniently show that there is no need for an increase in current payouts? Somehow the calculations have the result of saving the government hundreds of millions, perhaps billions of dollars in Cost of Living adjustments. Have you also noticed that most products and services for retail consumers are more costly than ever?

So what about those of us who have been most affected by the recent harsh recession or those of us who recognize the necessity of facing harsh facts about our age and financial position? The bottom line is that we must start investing time in a true plan for retirement in order to have resources for a reasonably comfortable retirement or any retirement at all.

Are IRA Assets Protected From Creditors?

2009-09-01T19:58:00Z

Protection Varies by State and Type of Plan

Most people assume that the assets in an IRA are 100% protected from Creditors. Almost everyone remembers that the NFL Pension assets of accused murderer and ex-football star O.J. Simpson were protected against a civil action by the family of his ex-wife. His plan was a Qualifed Plan and not an IRA and the pension assets he had accumulated as a player were protected from garnishment in that suit. Your legal and/or tax professionals should be familiar or get familiar with State statutes that may override Federal protections in certain, limited situations.

Asset protection of pensions includes some gray areas of the law and the treatment of retirement assets is affected by several factors. The Bankruptcy Reform Act of 2005 provided a good deal of clarification regarding access to assets in both Qualified and Non-Qualified Plans. There is also a useful discussion of asset protection in various plans at: http://www.petershannonco.com/timely_tax_topics2.htm .

The two primary considerations are:
1. If the plan is a Qualified Plan, subject to Federal ERISA rules
2. The treatment of Non-Qualified Plans (IRA's and Roth IRA's) is subject to the interperetation by the State Government where the IRA plan holder lives.

In California, information on the treatment of plan assets can be found at: http://www.journalofaccountancy.com/Issues/2006/Jan/ProtectRetirementAssets.htm . The chart below summarizes the treatment of plan assets under federal and state law. Please note that there are exceptions to exemptions for QDROS and other situations.

While the Bankruptcy Reform Act of 2005 did clarify and appears to have improved the asset protection for Non-Qualified Plans, the protection is not absolute.

Budgeting for Pension Contributions

2009-08-03T16:44:00Z

Anyone Can Save to Make Pension Contributions to a Self Directed Retirement Plan

If they really want to, any working person can find a way to save for the future in the form of tax deductible contributions to an IRA, or for the self employed, an Individual (k) plan or other Self Directed Retirement Plan (SDRP). After many presentations on SDRP's I get audience members pulling me aside to tell me that what I am saying makes sense, but that they don't make enough or are simply unable to save for retirement.

Because I already know the answer, I always ask them a direct question; "Do you have a written monthly budget that you update weekly?" 99% of the time, they say, "no I do not, or I've been meaning to do that" or something similar. Since there are 52 weeks in a year, if you find $50 of fluff somewhere in your budget you can make a $2600.00 contribution to your IRA and do it. Once you have established an account, most IRA Administrators/Custodians will gladly accept a monthly check with a notation on the check "Current Year IRA Contribution". You do not need to accumulate a lump sum before sending it in, just send it as you get it.

Almost anyone how invests time in creating and maintaining a budget starts to save money. Of course before you send money, you have to find it. One way to do that is to create a simple budget. Take a look at the Webinar I recently recorded at SustainedAbundance.com on Personal Budgeting and decide what type of retirement you really want.

Frequently Asked Questions: Real Estate Purchase in an IRA

2009-07-29T01:10:00Z

More answers to your many questions on Purchasing Real Estate in an IRA!

The response to my entry on the direct purchase of Real Estate using IRA assets was amazing. There were so many good questions that I decided to share some questions and answers. Let me know if you have more questions. Please note, we will use the word IRA, but many other types of Self Directed Retirement Plans (SDRP's) allow the direct purchase of Real Estate.

Q: We are getting ready to purchase some investment rental properties with our self directed IRA’s. Can we discuss the following questions about our new self direct IRA?

A: Yes, but remember I cannot help you with tax, legal or investment advice as I am not not a professional advisor, simply an educator. If your current professionals do not know the answers, refer them to me and I can help them find that information or you can find new advisors. In this Blog, I do not recommend or point to any investments or advisors.

When real estate sales people invite me to speak about Real Estate in SDRP's, they generally do not want me to go deeply into rules on a leveraged purchase or Prohibited Transactionsand limit my time at the podium. When working with any vendor or sponsor of any investment, you should be doing your own due diligence on all parties involved. You should research any vendor or sponsor you are considering investing with. I have written an article on personal due diligence that you should read and consider before investing with anyone.

You can download more FAQ’s on Real Estate in an IRA and there is a decent article on UBIT at http://www.investorsinsight.com/blogs/retirement_watch/archive/2009/04/03/dos-and-don-ts-of-ira-investing.aspx

Q: If we purchase investment rental property, I know you mentioned that the IRA requires a 35% down payment for a loan, is there a requirement on how many years the loan documents are for (15 or 30 years)?

A: It is not the IRA that requires 35% down, but the commercial lenders who do the non-recourse loans required in an IRA or other SDRP. The lenders set the terms and conditions for the loan and I am aware of two larger lenders in this niche. You can see their websites at http://www.iralending.com/ and at http://firstwesternfederal.com/IRA_Lending.aspx . There are frequently asked questions and a podcast available for you at www.iralending.com . I do not sell these loans or profit from them and you deal directly with the institutions. The loans are currently 30 years, fixed or variable.(around 8.25%) There are a number of fees associated with the loans.

If you find a private lender (which can be another IRA) who is not a broker,you can negotiate your own terms, including points, rate, term, down payment percentage, minimum loan etc. Currently the range of interest rates on this type of loan is 10-14% with 3-5 points (3-5% of loan amount) plus document fees and the duration of these loans are usually much shorter (2-5 years), but an individual (or their IRA) can choose to loan you the money for as long as they wish on whatever terms they wish. Finding the private lender is the problem. I do not connect borrowers and lenders for legal reasons and we do not service this type of loan. The best way to find this type of lender is by word of mouth.

Q: When we purchase rental from the IRA whose name needs to be on the loan documents?

A: Any asset paid for by the IRA is titled in the name of the IRA, through your TPA/Custodian. For example, the vesting would be something like: ABC Administration, Inc. FBO John Doe IRA # 12345. The vesting on loan documents would be the same as well as the escrow documents. When documents come to you from escrow, you will have to initial each page before sending them to your Custodian/TPA for execution.

Q: Whose name should the insurance policy and property management agreement be written in?

A: Always the name of the IRA when the property is held directly in the IRA. Your name should not be on anything connected with property owned directly by your IRA. This is an "Arms Length" transaction.

Q: Are the payments for the property taxes and insurance required to be in an escrow account paid through the IRA with the real estate loan?

A: Generally yes, but each lender has their own requirements, so you will have to check with each. Generally they require a 6 month PITI pad, which makes sense because you need a pad in the IRA in case the property is empty for an extended period, since the payments must come from assets in the IRA or new contributions.

Q: How is the rent check redeposited into the IRA, especially when property managers are collecting rent? Where is the rent check sent to?

A; A copy of “property management contract” is generally required to be sent to your TPA/Custodian, if you utilize a property manager on the property. Monthly statements are also generally required by a TPA/Custodian. Ask the property manager to make the net income check payable to your IRA as vested and be sure to have them reference the property address on the memo field.

Q: If there is a positive cash flow on the property does the full payment go back into IRA or can we use the positive cash flow to pay down the loan?

A: Remember this is full self direction, so you choose what to do with the excess cash flow from your property within the IRA. You can invest it somewhere else in something else or use it to pay down the loan, but don’t forget to accrue money for repairs, replacement of water heaters, furnaces, appliances, roof etc. New contributions to the IRA can be used to cover new expenses as well, but you need earned income to make contributions. If you take the profit as a distribution to pay bills you would have to pay applicable penalties and taxes and report the distribution to the IRS.

Q: Are purchases or down payment on rental/investment properties from Self Directed IRA’s with a positive cash flow considered to be debt-financed income property which maybe taxable by the IRS as UBIT (unrelated business income tax) or are purchases from self direct IRA exempt from these rules?

A: IRA’s are not exempt from UBIT. I have mentioned that there are rules for a real estate purchase in an IRA and UBIT does apply to the leveraged portion of an IRA purchase once the taxable income exceeds the IRS threshold ( I believe this is $1000, but check with your CPA). As I said, in an IRA, the leveraged portion of the purchase is subject to UBIT. This is not true for Purchase Money in an Individual (k) plan.

There is technical information on UBIT in IRS Publication 598. Just remember the key is that the IRS allows you to borrow money that you never earned and use it to leverage a real estate purchase in your IRA (that you may not otherwise purchase). In return, they tax the net return on only the leveraged portion and you keep the net gains after the tax, working tax deferred in the IRA. When you must file and pay UBIT taxes your CPA will probably use the 990-T form.

Q: What are the steps we need to take to start purchasing property from our self directed IRA?

A: While I cannot speak for the specific rules at each TPA/Custodian, I can outline the general steps in the process:

Steps to Buy Real Estate held directly in a Self Directed Retirement Plan (Real Estate Purchases inside an LLC or other entity will be handled differently)

1. a.Open an Self Directed IRA or Qualified Plan (401k, SEP, SIMPLE) Plan that allows Real Estate and other Alternative Investments. b.Transfer funds from another Custodian or fund with new contributions. You will be given an account number, make sure you write it down. Remember you should not make offers or earnest money deposits from personal funds on a property you want to purchase in your IRA. Get your account open and funded, then start buying.

2. Locate an investment Property

3. Make offer on the property in the name of your plan. (Earnest Money Deposit must come from Plan assets, not personal assets)

4. If offer is accepted complete a buy direction letter for your Real Estate, describing the purchase in detail, with a copy of the purchase contract. You will initial each page of your escrow documents before sending them to your TPA/Custodian for execution. Your TPA/Custodian signs the contract on behalf of your IRA and forwards it as specified to your Real Estate Broker/Escrow/Title companies - Once your TPA/Custodian receives documents for a purchase or sale, they will review the documents within a few business days. After the documents have been reviewed in the time frame outlined, they will contact all appropriate parties (client, title/escrow officer, sales team, attorney, etc.) for any corrections that may be needed. If there are no corrections, they will fund the transaction a few business days of receipt of the investment documents. If you need to expedite your transaction be prepared to pay rush or special handling fees to your TPA/Custodian.

5. At Closing, you read and approve all documents from title and escrow.

6. Title company sends approved docs to administrator who signs them on behalf of your plan (continued on page 2)

7. Rental or lease agreements must be assigned by the seller to the plan. New agreements made in the name of the plan. Property Management agreements are signed between the plan and the property manager.

8. TPA/Custodian sends funds to title/escrow

9. Deed is recorded in the name of the TPA/Custodian FBO the IRA or QP and the deed is sent to your TPA/Custodian

10. All income is sent to Admin All expenses paid from plan in direct proportion to ownership

The process is not all that different than a personal purchase, just keep thinking of your IRA as a separate person from yourself and you will do just fine!

Getting Started with Self Directed Retirement Plans

2009-07-09T02:00:00Z

On Demand Webinar "Getting Started with Self Directed Retirement Plans"

Many of my readers have suggested that I find a way to include recordings of my webinars on my site. This recent webinar on Self Directed Retirement Plans includes a discussion of basic plan features and a couple of speakers on alternative investments in Real Estate and Structured Settlement Annuities. To download and play the entire webinar you will need Windows Media Player. You can click on the link below to download the .wmv file.

As always, I welcome your feedback and questions or suggestions for new topics.

Getting Started with Self Directed Retirement Plans. 5 minutes of the full 1 hr+ pre-recorded webinar available for download and viewing with Windows Media Player

Bernie Madoff Gets 150 Year Prison Sentence, but Who Really Pays?

2009-07-01T16:47:00Z

Everyone Pays for What Bernie did if the same thing happens again...

They said that people in the courtroom cheered when the 150 year sentence was announced on the "Day of Reckoning" for Mr. Madoff. Since Bernie is 71, this is a life sentence. He will lose his lavish lifestyle on Park Avenue in trade for a small prison cell where he is still guaranteed a free room, 3 square meals a day and the best of free health care. There are more than 48 million Americans who do not have the "luxury" of health care benefits, and I would guess that many of those have no free room are not guaranteed 3 squares a day, so to that extent Bernie is still ahead of many Americans.

Who Else Loses?

Of course the innocent members of his family (there must be some) will be reduced from a fairy tale lifestyle to something far more pedestrian, but at this point there is still great personal wealth in the Madoff family that cannot be attached if no wrongdoing can be proven by family members. The "victims" of the Ponzi scheme will suffer to varying degrees, but many were mega wealthy to begin with and were diversified in their holdings. Those who did not diversify and based their entire financial life on the inflated returns promised are ruined. There are those who will truly suffer from the financial consequences of their losses.

I doubt that there will ever be a substantial recovery of the missing funds. Anyone smart enough to game the system for $Billions over 20 years is certainly smart enough to bury their ill gotten gains deep in the global electronic financial system (or gold in the ground somewhere), freshly washed and accessible to those in the know. So what lessons can be learned? How can we make sure we don't put our trust in a Bernie Madoff?

One of the easiest ways to accomplish this is by taking direct personal responsibility for the investment decisions you make, do your own due diligence and more specifically, buy hard assets like real estate or gold that you can drive by and check on. The use of a fully Self Directed Retirement Plan will allow you to do this. It means you will have to be directly involved in the process and some part of your free time will have to be re-directed to planning for your comfortable retirement.

Would you sleep better knowing exactly where your money is and who is managing it (you)? Can you trust yourself to work in your own best interests? Who else can you think of that is more concerned about the conservation and growth of your assets than you?

By establishing a Self Directed Retirement Plan for at least a portion of your retirement assets, you can change your life and create a better, more stable retirement. If you want to learn more, join my next Webinar on July 7th at 6PM PST or email me at lance@selfdirectioncentral.com .

Did You Know You Can Buy Bank Owned REO Investment Properties in your IRA?

2009-05-19T22:26:14Z

Buy Deeply Discounted Cash Flow Real Estate in your Self Directed Retirement Plan

Everyone has heard about the exceptional values in the real estate marketplace represented by Bank Owned, "Real Estate Owned Properties" (REO). Banks which have foreclosed on properties are marketing them through retail channels that include Brokers and Agents that specialize in REO properties. These brokers and agents in particular are familiar with the processes and procedures used when dealing with the Asset Managers and Loan Servicers who control the sale of these deeply discounted properties. On a daily basis, investors are buying properties that yield very competitive cash on cash returns in California and many other states and there is the possibility of future appreciation over time on top of monthly returns.

Not everyone is aware that you can make Alternative Investments in a Self Directed Retirement Plan including the purchase of REO real estate for investment.

The process of making offers and having them accepted on REO properties is different from the traditional Owner Occupied Real Estate Residential Purchase and working with a Broker or Agent who is familiar with the process can make the difference between getting the property and not getting the property from the servicer/lender/bank that owns it.

The time frames and conditions for REO purchases make the possibility of an all cash offer using funds from a Self Directed IRA or other Self Directed Retirement Plan very attractive for investors and banks, since there are no financing contingencies. Asset managers love to see offers of this type and respond favorably when they know the deal will get done. If needed, a non-recourse loan can be used for properties over $100,000.00 in price. These loans do not use personal credit and are based on the cash flow of the property, but do require 6 months expenses to be available in the IRA after the earnest money and down payment are made.

When using a Third Party Administrator (TPA) for record keeping in the Self Directed Plan, the process and documentation used in a Real Estate purchase with IRA money is nearly identical to a personal purchase, except that all of the documentation is made out in the name of the Self Directed Plan and Title is held "For the Benefit Of" your IRA or other Self Directed Plan.

Needless to say, careful due diligence of the properties is important and the prospective buyer should consider paying for an inspection especially since REO properties are sold "As-Is". It is best to know if repairs are necessary, since the costs for repairs must come from assets in the plan or new contributions to the plan and not from personal assets of the IRA owner. You should also do careful calculations on the potential return on your real estate investment.

IRA and other Self Directed Plan owners can also combine funds from multiple plans and plan types to make real estate purchases as Tenants In Common or using specially constructed LLC's that are funded from plan assets. Before you can make any offers or buy any real estate, you need to open and fund a Self Directed Plan. When transferring assets from an orphan IRA or an old 401(k), 403(b) or TSA plan, you need to allow at least 4 weeks for the funds to transfer after opening an account with a truly self directed plan administrator or custodian. So if you are interested in a purchase at todays low prices, get started today.

If you are interested in learning more about this type of investing or participating in a webinar, send an email to lance@selfdirectioncentral.com

"Buyer Beware" is Not Just a Saying

2009-05-09T18:40:00Z

Due Diligence in your Self Directed Retirement Plan

Recently I have had a number of calls from clients and readers who have lost money in alternative investments they selected for their own self directed plan. My first question when I get a call like this is, "what Due Diligence did you do to determine if the investment sponsor was legitimate and what calculations did you base your decision on?" In almost every case, the decision to buy was made in the heat of a selling event and almost no Due Diligence was conducted prior to the purchase. The purchase of local hard assets, like real estate you can physically see, touch and inspect is one way to avoid an investment fiasco.

We are in tough times and tough times often bring out the best in human nature, but also nuture the worst. People under financial pressure will do and say just about anything to make a commission. It is our responsibility as investors to know who we are doing business with and how they are doing business.

People have endured brutal and perhaps insurmountable financial losses in their corporate 401k plans, which were invested primarily in stocks and mutual funds. Now they are in pain and realize that their retirement dreams have been changed, or realize they may never be able to fully retire. As a result, many people are opening Self Directed Retirement Plans and then investing in schemes that promise to quickly return the monies lost in the stock market through very high, "safe" compounded yields and the promise of near term appreciation. All with little or no effort and little or no risk on the part of the investor. Passive investing with stellar results. Sounds like a Bernie Maddoff pitch to me.

So many people have bought into these schemes that I have categorized these types of investments as "TOHOR" investments, which stands for "Triumph of Hope Over Reason". People need to realize that unscrupulous promoters know the mental state of their marks very well and design their sales pitch to appeal to emotion over reason.

SDRP investing can be tremendously successful and the best SDRP investors will retire with dignity, but the best investors are characterized by an almost obsessive need to understand what they are investing in, what it costs now and will cost in the future, who they are buying from and they have a plan for the duration of the investment.

What Should Your Custodian/Administrator Do regarding Due Diligence?

The primary function of a Self Directed Retirement Plan (SDRP) custodian or administrator, other than providing Administration and Record keeping for your SDRP Assets, is to help educate their clients on the best ways to maximize their results from Self Direction.

SDRP custodians and or administrators do not give tax, legal or investment advice or help clients select investments or investment sponsors, but they do want clients to make sound investments and they benefit when client investments increase in value. Since they cannot give advice on specific investments or recommend investment sponsors, I think it is imperative to let my clients know how important it that they thoroughly research the background of referral sources, individual sponsors and the investments that they sell. This process is commonly referred to as “Due Diligence” in the investment world.

As Americans, we have become very trusting of financial advice given by providers who earn commissions on every transaction they make. Of course people need to get paid for their work, but it is ultimately up to you as an investor to see that they have earned the commissions you pay and you have a right to ask what those commissions are and how they are paid.

Every investor should do much more than rely on the representations made by sales people and their sponsors. The logic for this is simple, the people selling you an investment rely on the income from that sale to make their living and times are tough. This makes it very hard for them to be objective about the true value and future prospects of whatever they may be selling. You need to do your homework to the fullest to avoid losing your hard earned pension money in bad investments and consult with your tax and legal professionals before committing more than just a few percent of your assets to any one investment.

To do this fully can be complicated and time consuming, but at a bare minimum, consider doing the following:
For any investment, whether in Real Estate, Precious Metals, Notes, Tax Liens etc., take time away from the heat of the moment (just after a presentation promising exceptional results from an investment). Go home, sit down at your computer and go to sites like these to check on the investment sponsor. After asking the sponsor what legal structure they operate under request copies of all documents relevant to the offering.

1. Better Business Bureau – www.bbb.org – look at the national site, not just locally for complaints against the investment sponsor and the organization that referred them to you.
2. Rip Off Report – www.ripoffreport.com - look for the names of sponsor companies, the names of principals of the companies and the organization that referred you.
3. Google Search – www.google.com – Do multiple searches with search terms including the name of investment sponsors, the organization that referred you and add search terms to help complete your due diligence for example “John Doe Investment Club, lawsuits” or Jane Doe Properties, fraud claims” Legal complaints, fraud alerts, consumer complaints and as many other search terms as you can think of.
4. The department of Real Estate in your state will have status of licences and complaints against Brokers or Agents
5. The Department of Corporations in your state should be checked to determine if a Corporation is in good standing and if there are any complaints.
5. The Securities and Exchange Commission – www.sec.gov – help@sec.gov Phone (202) 942-7040. It also pays to do a search for any SEC litigation under the name of Principals of any company you are considering investing with to see if there is any history with the of litigation with the SEC. A history of litigation does not necessarily indicate any current wrongdoing, but should be considered carefully in evaluating the company you are considering doing business with and the people who run it. The link to research SEC litigation is at http://www.sec.gov/litigation.shtml
6. The Insurance Department in your state can be contacted to check the licences of Agents or Brokers and to see if there are any complaints.

Other Red Flags
• A company that has only been in business for a short time (less than two years) offering very high compounded returns (over 10%)with little or no risk
• Any company that says they cannot provide referrals from existing clients
• Sponsors who say they work because they love to help people
• Complex investment structures without direct control of an investment (Private Placements, Small Syndications
• Inability to see and touch your investment before buying
• Pressure to make a decision in a narrow time frame “today only”, “price will increase tomorrow”
• Little or no documentation of cash flows
• No paperwork you can take home
• LLC's should have ready access to copies of operating agreements for your review and for your files
• Corporations soliciting investments in shares should have a Share Purchase agreement or similiar instrument for your review and such documents should be reviewed by your tax and legal counsel before execution of the investment.
• No discussion of Exit Strategies, no liquidity, high fees to exit an investment, high ongoing fees for management that impact net returns
• Where out of state Real Estate involves outside management for the collection of rents be sure to research the management company. One way to do this is to call large local real estate offices in the area you are buying and ask if they know the firm being recommended. If the management firm also does real estate, check with the state regulatory agency for Real Estate transactions.
• Any company that suggests a specific rate of return but says they are not offering a security. If real estate is involved be sure to run your own calculations for returns using different occupancy rates. At some point, any real estate can be un-occupied and certain types of real estate, (for example, blue collar residential real estate) can have high vacancy rates due to economic conditions. Remember to research the overall employment factors in the areas where you are considering a purchase.

If everything checks out to your satisfaction and the answers to your questions are acceptable to you and your tax and legal professionals, you can move forward with the knowledge that you did not act in haste. Remember that your grandparents always said “haste makes waste”.

Watch for an upcoming webinar on Due Diligence my site at www.botbseminars.com .

Having Time to Test the Tests of Time

2009-04-09T15:50:00Z

Or, if I only knew then what I know now...

Recently while surfing the net I came across a well written blog by a "thirtysomething" on "Financial Commandments for Your Thirties" that brings home to me the slow spread of a new paradigm among younger generations about money. Namely that there are good reasons to carefully manage it and to save it for the future and specifically that "Debt is not Wealth".

As a Baby Boomer I was very happy to see this viewpoint expressed and I realize that younger generations may have a better grasp of financial reality than mine at that age. This realization was reinforced when I recently held an open house (one of my hats is as a Realtor in CA for a Broker specializing in Bank owned (REO) properties). A group of young people came in to see an REO property in a popular suburban development featuring a man made lake. Properties in the area had a high pricing premium before the bubble burst and a have a high monthly Home Owners Association (HOA) fee for the privilege of living there now.

The property I was showing was close to $800k at the peak of the CA bubble and is currently listed at closer to $500k by the bank that owns it. The home fills the lot with about 8-10 feet on either side, an alley in the back for access to the garage with no driveway and a postage stamp lawn in a courtyard like front yard. It is a nicely finished, 2600sf home, but the young people (engineers and professionals) did not stay long and commented that even at $500k the house was way overpriced and they were seeking to pay cash and get something with real value and without the ongoing HOA fees. Although they did not buy my property, I was happy to witness the intensity of their belief and welcome the rebirth of thrift in younger Americans.

One topic that was not mentioned in the Financial Commandments was tax deferred savings in a Self Directed IRA, so I made the following comment on the Blog:

While you described a traditional IRA well, you forgot to mention the growing use of truly Self Directed retirement plans. As far as IRA’s are concerned, the IRS only excludes investments in Collectibles like art and fine wine, life insurance contracts and shares in an S Corp from an IRA account. The traditional investment community limits the investments in IRA’s they offer to the products they earn a commission on. Most of the time, this rules out investments in anything other than stocks, bonds and insurance in various forms. The plan documents approved by the IRS for a truly Self Directed IRA include the options for investments in real estate of all kinds, precious metals, tax liens and both secured and unsecured notes. One place you can get oodles of free information on this type of IRA is at http://www.cencal.entrustcalifornia.com/. You should do a follow up post to your readers and make them aware of this option!

If you are in your thirties, you have time to really accumulate assets in a Self Directed IRA or other Self Directed retirement vehicle. In the current financial environment, savvy mature investors are loading up on hard assets like real estate and precious metals. Many view the purchase of a small investment property at the right price as something they can control directly without fear of market manipulation and with stable, predictable returns.

Going Down with the Joneses

2009-03-03T19:23:00Z

Dealing with the New Realities in Middle Class America

In a recent entry on one of my other blogs at http://unsustainabubble.com in an entry called "Going Down with the Joneses", I wrote about the paradigm shift that is taking place in the American Middle Class. Specifically the difficult, disruptive and very painful adjustments that are being made in saving, spending and consumption and over all life styles, accelerated by the current economic crisis and rapidly expanding unemployment. In a future article I want to discuss the key factors in our financial history that have brought us to this point and the strategies we can use going forward to best create sustained abundance, regardless of the external environment.

One of the ways people will begin to rebuild wealth once they have dealt with their debt and created an emergency fund, will be to increase the amount of contributions they make to their retirement plans. As you will see in my article, Americans are woefully unprepared for a self sufficient retirement. Less than 2% of retirees will be independent. Everyone else will either continue to work, depend on children or the charity of strangers, or live below the poverty level on a shaky Social Security Check.

Since this is a longer article with charts, I have made the full document available and if you click on this link http://www.box.net/shared/cfje9z2vpv you can view it and download it to share with others.

As always, I welcome your feedback, negative or positive and encourage you to share your thoughts with me.

More Broken Pension Promises to Come

2009-01-25T00:08:00Z

Why Self Direction of Pension Funds Should Replace the Broken Promises of Corporate Plans

It's not bad enough that the value of shares in many Corporate 401k plans have been slammed by the sell off of securities in 2008, but there is another unintended consequence of the sell off in securities that will likely impact earnings on shares of companies with an active Defined Benefit Plan for many years to come. The best short discussion I have seen on these issues is about a likely $409 Billion hole in Pensions that is likely to reduce U.S. corporate earnings for a long time.

"Defined Benefit " (DB plans have largely been replaced at many corporations with "Defined Contribution" ( DC, or 401k ) plans. This process is part of a massive transfer of the financial responsibility for pension benefits to workers from corporations. This transfer has taken place because of the long term liability created by Defined Benefit plans to the corporations that still have them (similarly more and more of the costs of health care insurance have been shifted to employees rather than increase costs of health benefits to corporations).

These long term pension liabilities have been created because the financial assumptions used to calculate the annual contribution of the corporations have been faulty. This is primarily because they assumed a higher annual rate of return from the stock market than could actually be sustained (except for short periods in a bull market). The faulty assumptions may have also included higher mortality rates ( betting that retirees would die sooner than they actually have in real life). This means that retirees who draw benefits after the date of their projected death have created financial pressure on the entire system. (Darn those pesky Octogenarians!) The mortality rate in the U.S. has been steadily increasing since WWII.

Many corporations layoff and settle with older higher paid employees getting close to retirement to reduce unfunded liabilities in the future.

There has been a moral hazard for Pension Actuaries (mathematicians for investment funds and insurance companies) since they were paid extremely well to calculate favorable numbers for major corporate pension plans, much like bond rating agencies were paid very well to assign high investment ratings to bundles of Sub-Prime Mortgage Loans. Pension actuaries earn several hundred thousand dollars per year in salaries that are not connected to the results of their calculations. They lose nothing financially by underestimating contributions needed to adequately fund pensions.

One result is that for some companies, like U.S. auto manufacturers facing a shortfall of pension funds to meet commitments, more corporate earnings must be allocated to pension obligations. This means less money will be available to pay bills, improve plants and grow for the future. If they cannot grow and they must contribute to underfunded pensions from revenue, dividends will be cut.

One way that auto manufacturers have offset these obligations is to include the costs of unfunded pension liabilities in the cost of each auto sold to consumers. Included in the price of one U.S. manufacturer is about $1400.00 that goes to fund DB plans in place for existing retirees still covered by the DB plan. New employees are not covered by the DB plan in place for retirees and must make contributions to a 401k plan that may or may not have matching from the employer. Many employers have reduced or eliminated matching contributions to 401k plans. This same method is being used by other manufacturers in the same predicament, making them less competitive in pricing to foreign companies that do not have the same liabilities.

In part this mess is an unintended consequence of Globalization, since many high paying union jobs with DB Plans were sent to low paying markets that did not have pension liabilities and higher profits that resulted were not used to better fund the existing pension plan liabilities from jobs that were exported. The accounting for pensions is extremely complicated and over time has allowed corporations to create shadow earnings that relate to returns in pension plans and use those earnings to prop up balance sheets and pump up the payouts to key executives to astronomical levels.

Where is the Bottom Line?

For a really long time, individuals have looked to their Corporation or to the Government to take care of their future financial needs. All of these promises will be broken as they must be, since they cannot be met.

Wherever possible and by any legal means possible, corporations will shirk their moral duty to meet the promises they made by going bankrupt and destroying existing plans. Think of all the broken promises at Enron where contributions to the pensions of hard working and honest employees were made in Enron stock. The people may be retired, but without the benefits they were promised and the half-assed provisions for them to make up for what they lost mostly consist of ways for them to defer taxes on current earnings. Ask anyone that worked for Enron if they are satisfied with what is left of their Enron pension promises.

This means that starting today and going forward, we must each be responsible for the ultimate results of our pension planning. This can be done by using the simple mechanism of a Self Directed Retirement Plan for rollovers and especially for Small business owners with no full time (1000 hours or less per year) employees.

A Call to Action

Anyone that agrees with me that Corporations will do as little as they can to secure a dignified retirement for loyal employees, or that Social Security is unlikely to provide for a dignified retirement must start making plans to create their own Sustained Abundance for the future.

I know this will not be easy or fun. Either you can live below your means and save more, or you can find ways to make more. Either option will be difficult and reduce your current lifestyle or take away from your free time.

If you are interested in learning more, take a look at the Webinars and Seminars offered at www.botbseminars.com or contact me at lance@selfdirectioncentral.com .

The Importance of Self Reliance

2008-11-22T03:18:00Z

Get Ready, Because History Will Repeat Itself

Back in 1870 the U.S. resembled the China of today in many ways. Most of our citizens were still in the country, living near or working on family farms (this is the case in China today). Poor, disabled or ill and elderly people were taken care of by family or friends or through local religious groups in the local community. There was no health or disability insurance and no company pension to count on, only the hard assets that were saved or purchased or inherited. Today we are closer than ever to being back in the same situation we were in back in 1870.

From 1870 on as we became an Industrialized nation, people left the farms for the cities and gave up the social network that protected them for the lure of higher pay in the cities. The burden of caring for people in need fell on the people themselves or in many cases the sweatshops they worked for. Conditions in the slums around Steel Mills, Coal Mills and other manufacturing sites were harsh and the Poor Houses and Debtors Prisons were a form of slavery. Local religious groups provided some relief too.

Gradually conditions improved somewhat as cities and states took on some of the social costs for the elderly and displaced in the cities and Unions gained some power to create livable wages and working conditions. The crash of 1929 resulted in an unemployment rate of 25% and with so many losing their life savings, created the need for centralized Federal systems to address nationwide problems.

After (or because of) the Great Depression our Government created and funded many important Social Programs, including Social Security in 1935. The idea behind Social Security was to create a safety net for working people in an industrialized economy in case they outlived their savings. If you look a the original provisions of Social Security, the age for eligibility was 65 at a time when average life expectancy was 67!

If you read a " History of Social Security " written by CPA's you will begin to understand the problems that will force government to cut benefits and increase the age for SS eligibility, or bring down the system. From the very beginning, the benefits paid out had a negative correlation to the money paid in by workers. Reading the Federal Government " Historical Background and Development of Social Security " will give you the clear understanding that all of us need to prepare for our own retirement without counting on Social Security to protect us in the future.

In 2008, U.S. life expectancy has increased to age 78. It was 70 in 1950 and as I said, 67 in 1935. Social Security was and is not designed to handle benefits for such longevity. New medical advances are expected to increase U.S. Life expectancy. By the way, don't get too excited by the current U.S. life expectancy as 41 other countries have a higher life expectancy than we do. Perhaps this is because we work more and have less access to medical care than many others, even though we spend 40% of the world budget for healtcare in this country. There are many reasons for this mess. One obvious one is the bloated profits of pharmaceutical companies.

Contrary to what most Americans believe, the Government does not invest our SSI contributions to fund our future benefits. In fact, the last several U.S. Presidents have raided Social Security surplus accounts by borrowing them to balance the national budget. What everyone needs to understand is that the money comes in through current taxes and is paid out to beneficiaries. Right now there is still more coming in than going out. That will not be the case in 10 years or so.

The original intention of Social Security was not to replace saving for retirement, but that is what Social Security has become. Some 30% of Baby Boomers will rely 100% on Social Security for their full retirement income, which will put them below the current poverty level in America.

This means that every rational American has to take full responsibility for the quality of their retirement. Based on the reliance of the Boomer Generation on Corporations or the Federal Government, subsequent generations will have the pain of seeing what failure to plan really means by simply seeing how most Boomers will live after retirement.

Wishing and hoping will not solve our individual financial problems, only good planning and investing in hard assets which return solid profits will. A Self Directed Retirement plan will help those willing to take responsibility and control for helping themselves.

It's high time we all learned to fish again.

No Surprises Here

2008-11-01T18:25:00Z

63% of Americans Have Stopped Making Pension Contributions!

Given the difficult financial times so many are facing, I was not surprised to see some shocking statistics like the one above in an article titled "Four Ways to Protect Your Retirement From the Ongoing Financial Crisis at:
http://www.moneymorning.com/2008/10/29/retirement-assets/ . But it really got me thinking about what so many of us have not done about planning for the future.

There is really no reason to be surprised by this statistic, considering that most Americans have lived well beyond their means for years (peaking at 113% of income in 2005) and most stopped saving for the future in 1985. For more than 23 years we have lived primarily for the moment, expecting that the future would take care of itself. Why not when our political leaders and consumer companies keep telling us that it is OK to spend?

Almost all of us have a friend or a relative with a friend or acquaintance whose working life consisted of working for the post office or being a fireman or carpenter or perhaps a clerk in a big corporation for their entire career.

This is the friend (or couple) who started buying Gold Coins systematically in the '70's and was buying small houses in Northern California or out in the desert. or out in the midwest somewhere when they were still $30,000 or less. Perhaps the carpenter or fireman bought burned out houses and did the rehabbing themselves and then rented them out (creating sweat equity weekend after weekend while peers were gambling in Vegas), taking the positive cash flow and buying other properties or paying of the mortgage early.

This is the friend that people laughed at because they drove an old car and wore less chic clothes, lived in a modest house in a less desirable neighborhood with modest furnishings and stayed in the same job with the same company or the government for years, even if the position was not exciting or glamorous, even if they detested the people they worked with or the job they were doing. This friend did not throw lavish catered parties on credit or hiring a petting zoo for a childs birthday party to impress the neighbors.

In the blink of an eye, 20 or 30 years have passed and all of a sudden, this boring friend owns 2, 3, 5 or more paid for income properties (including the same modest home they always lived in) and has a full pension, with cost of living adjustments and health care for life, because they stayed the course).

This friend is the topic of discussion among people who are still working to make payments on a home that looks good, in a great area with 25 years of payments remaining on a mortgage held by a 50 year old person who wanted to retire at 62! The house is upside down in value and still dropping. The "owner" has not made meaningful contributions to a pension or done any systematic investing or created any sweat equity, but has had a new leased car every 2 years and some swell vacations too, on credit. Their closets are jammed with stuff and they have a self storage unit, full of more stuff, that costs $135 a month to maintain, or more than $16,000, plus lost interest over 10 years). They also have 250 channels or more on their premium cable service for $160.00 per month.

Now "all of a sudden" the boring friend has retired on full pay, plus the income from their rentals and Social Security and has the time and the money to do as they please and is not at all worried about the stock market gyrations because they truly own "free and clear" hard assets that are generating passive income, either personally or in Self Directed Retirement Plans. So who is laughing now?

Of course we all know exceptional people who made their fortune by building their own business, but they are the exception and a small percentage of the 37% of us who are still making pension contributions. We can learn much from these successful people, but far more from the regular, systematic savers and investors. We also know people who inherit money or win the lottery too.

Let's face it, when people who have not saved anywhere else but their 401k plan (and only did that because there was company matching of contributions) find themselves upside down on their Home Equity and over limit on their credit cards and out of work due to the recession, the first place they go for money (if their family has none) is to their 401k assets or to assets that have been rolled over into an IRA from a 401k at a previous employer.

It does not matter if there is a penalty or not or if current taxes must be paid. This money is accessible when all other sources are not.

The problem is that in most cases, funds distributed now from a pension will almost never be replaced and the younger the person is taking the distribution, the more the lost funds will cost over time (due to loss of compounding tax deferred). The older the person is taking the distribution, the less income they will have from their private pension to supplement Social Security after retirement. It has been said that more than 25% of Baby Boomers will live entirely on Social Security. This means an income below the current Poverty Level.

My point is this, now is not the time to stop saving for retirement. In fact, most of us need to buckle down and save even more, even if it means less channels on cable, fewer parties and fewer vacations on credit.

Self Directed investments in Notes secured by real estate or tax liens can compound at rates well above 12% annually with tremendous safety and security. Careful investments of in real estate can have similar cash flows with potential for appreciation. In these times, Real Estate investors must look for fundamental value at the right price and this is hard work. No one is going to do the heavy lifting and all of the footwork to direct you to a high yield investment without taking a fair commission for doing the hard work. Once the commission is paid, the yield will be reduced to reflect the work that was done.

The more work that you do for yourself in selecting good investments in a Self Directed Plan, the better the yields that you will achieve and investments in correctly priced hard assets will be much safer in a recession or even a depression.

Unfortunately you cannot use sweat equity in an IRA to make improvements to a piece of real property, nor can you use money from your IRA to pay for courses in investing in Real Estate for related investments. The sweat equity you invest is in good education that you pay for with money that would otherwise go to Cable TV or $300.00 shoes that will be out of style next year.

Next time you look at those $300.00 shoes, think about your friend who is free to do as they please and after many years of planning and saving, has the means to do just that.

More on IRA's and Prohibited Transactions

2008-10-18T16:12:00Z

Why Tempt Fate?

As a businessman and investor I can relate to clients, prospects and students who contact me with personal financial problems that they hope to solve using IRA money, without taking a taxable distribution. Many times, they are looking for solutions to current problems in their personal or family finances, using assets currently in a Self Directed IRA account. Frequently the solutions they seek to implement are based on "self dealing" with "disqualified" parties and so constitute "prohibited transactions" (sometimes called PT's) in an IRA. In a recent response to a client concerning some potential investments, I made the following comments, which I have paraphrased here for the benefit of others:

From our perspective as people working self directed retirement plans(who do not provide legal, accounting or investment advice), the loan you propose to make to a spouse or lineal family member and the investment in a siblings existing business venture are transactions that would probably be viewed by the IRS as prohibited (self-dealing) and if you proceed with these transactions, the entire assets of your IRA may be deemed distributed to you as of January 1st of the tax year in which the transactions were made, if discovered and reported. The financial penalties for a forced distribution like this are in my view, severe and not worth the risk.

Some CPA’s or other advisers take the view that a specific, individual transaction is unlikely to ever be discovered by the IRS. If you accept this idea and do a transaction of this nature, you are playing a form of tax roulette.

I keep thinking of the actor Wesley Snipes possibly serving time in prison because his advisers told him paying income tax is unconstitutional and therefore unnecessary. Do you think he is happy today with that decision, even though he had the use of the money that should have gone to taxes? http://www.cnn.com/2008/CRIME/04/24/snipes.sentencing/

You may be better served if you are in need of money and have no other source, to take a taxable distribution now from your IRA. If you make risky transactions and are audited, you may end up on an ongoing, never ending merry-go-round with the IRS. You have to ask yourself whether this is something you really want, or must have. You also need to understand that it is very difficult or may be impossible to replace this money in the IRA through contributions in the future.

In my experience with clients who cannot get a loan from any other source because their income or assets are insufficient to support the loan or their current debt service is too high to be sustainable, even if they could legally borrow from their IRA (which you cannot legally do per Section 408 of the IRS code available at:www.irs.gov/pub/irs-tege/irc408.pdf), they are not truly capable of making the payments to service the additional debt. This may not be the case for you, but I wanted to share my experience.

Recently, I have seen a parade of clients in deep financial distress and great economic and emotional pain and strain. 19 of 20 are looking for a solution to their pain that does not involve any risk or additional pain or any reduction to their current lifestyle or any additional cost. For those 19 who find a short term, “painless” solution (painless = very expensive in current/future costs or interest rates) to a current economic problem, typically an unsustainable debt load and diminishing income (or no income) to service it, they are back in deep distress in a year or less, with the additional burdens created by the “painless solution” they took in the first place.

The 1 in 20 who take the time and honest effort to review every aspect of their finances and credit and who adjust life style and budget to a sustainable level have less stress, more peace of mind and a simpler life style they can maintain in the future. The other 19 are merely living for the moment and putting off the inevitable…

If you make an investment with IRA money from your Self Directed IRA, all returns on the investment must go back into the IRA as they come in, for the exclusive benefit of the IRA. You cannot have the personal use of the plan assets for a while and then put them back into the IRA at your convenience.

I certainly understand the temptation, but the facts are not in your favor when you tempt fate by forcing a prohibited transaction using IRA assets. My advice to friends, family and clients is the same.

Do not tempt fate or you will most likely regret it.