Alternate Investments for Your 401k/IRA

by Guest

Today’s guest post is from Dr. Jason Cabler, a practicing Dentist, Christian personal finance blogger, and Speaker at Celebrating Financial Freedom where he teaches how to become debt free and live a debt free life.

If you’re like me, you’ve realized that over the last 10-12 years, the stock market has gone nowhere.  Yes, it’s had its highs and lows (currently going higher), and if you recognized those points in the stock market and made some good trades, you could have made some significant money.

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However, most of us don’t do that and really don’t know how to time the market, and we tend to lose our shirts if we try.  The vast majority of us are buy and hold investors, and over most of my investing lifetime the buy and hold strategy has not worked because the market hasn’t exceeded the highs reached over a decade ago.

That’s why I began looking into other ways to invest.  I had really wanted to get into real estate investing for a long time but didn’t know how I could swing it.  I refused to go into debt to do it but didn’t have the free cash available to just go out and buy a house.

After doing some research, I found out about Self Directed IRA’s and 401k’s.

How Does It Work?

A Self Directed IRA/401k is simply a different way of setting up your retirement account that converts your existing account into an LLC (a Limited Liability Company) that allows you to invest in alternative investments such as real estate, businesses, franchises, tax liens, private placement stock, loans, mortgages, and other investments that are usually prohibited under traditional IRA and 401k rules.  But the vast majority of people who have these accounts use them to invest in real estate.

However, there are some investments that are prohibited even under the Self Directed account rules, such as collectibles (Art, Beanie Babies, coins, etc.), Life insurance contracts, as well as any investment that would be considered self dealing such as buying a house and renting it to yourself.

Why a Self Directed IRA/401k is an Advantage

Converting your investment account to a Self Directed account can work to your advantage because it allows you to diversify your investments beyond the usual limited choices of stocks, bonds, and mutual funds.  You can invest in real estate that will appreciate over time and also be able to collect rental income that will feed directly back into your retirement account to be used for more investing.

But just like a typical retirement account you can’t take money out  for your present benefit without paying taxes and penalties (Your tax rate + 10% penalty) and you can’t start taking money out without penalty until age 59 ½.

The biggest advantage though, is that you have more control over your investment destiny, and many more options than just picking from the typical list of stock or bond funds found within your average IRA or 401k account.

Setting Up a Self Directed Account

Of course, to set up and administrate a Self Directed account is a bit complicated, and is probably not the best fit for someone who tends to be disorganized or who is not willing to put in a little time to gain understanding of how it all works.

Setting it up is not cheap, either.  The typical fee for setting up a Self Directed account usually comes to a few thousand dollars due to the amount of paperwork and fees involved in setting up the LLC, as well as time spent consulting with the specialists that set everything up for you and guide you through the process to make sure all the I’s are dotted and the t’s are crossed.

Also, there are a lot of rules you have to be aware of with this kind of setup, but once you understand what kinds of transactions you should avoid, it’s not that complicated.

My Self Directed IRA/401k Experience

This type of account is certainly not for everybody, but for those who want more options and more control over their investing destiny, it can be a good alternative to the traditional IRA or 401k.

My own experience with a Self Directed IRA so far has been a positive one, I have recently made my first real estate purchase using my SDIRA and was able to pay cash for a small house which I had fixed up and is currently for sale, hopefully at a decent profit.

In my situation I could not have invested in real estate any other way, because I refuse to take out a mortgage to make an investment, as I believe in being debt free.  I didn’t have enough free cash to invest in real estate, but I did have enough in my IRA to pay cash for the small house that I have invested in.

So, in the end, I do believe that an SDIRA has been a great advantage for me overall because I was able to begin taking more control of my own destiny (for better or worse) and start building my future now, one house at a time.

If you’re interested in learning more about Self Directed accounts, just Google “Self Directed IRA” and you will find sites for many specialists that deal specifically with these types of accounts and whom I’ve found are ready and willing to answer any questions you might have.

Happy Investing!

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Jai Catalano April 20, 2012 at 6:09 am

Do you think if one had the time for the stock market one could make a good amount of money? My portfolio is starting to look a little nice again thanks to my step father.

Jason Cabler (@DrCabler) April 20, 2012 at 6:24 am

There is always money to be made in the stock market if you know what you’re doing, whether it’s trading up, down, or sideways.

SB @ One Cent At A Time April 20, 2012 at 6:14 pm

My 401k is invested only in stocks and bonds. DO you know if all employers provide self directed 401k options

Melissa@PersonalFinanceJourney April 21, 2012 at 10:48 am

I did not know about this; thanks for the information. We are still working on fully funding our Roth IRAs, but this might be something we can think about in the future.

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