Wednesday, September 30, 2009

Fully Self-Directed Retirement Accounts

As I mentioned earlier, Americans currently have $14 trillion in their 401(k)s and IRAs (Retirement Fund = RF). These are investments that could be directed towards a green, local and sustainable economy although 97 percent of these investments are currently invested in Wall Street.

In a fully Self-Directed RF, the beneficiary can direct the trustee to purchase almost any investment that wouldn't be disallowed by the prohibited transaction rules. These rules generally disallow investments involving personal use, self-dealing, related-party transactions and investments in collectibles, life insurance, antiques, works of art, etc.

RFs are essentially trusts, established for a beneficiary and held by a trustee. Most RFs are held by trustees that limit investment options to a narrow menu of choices. These may be called "Self-Directed" RFs because the beneficiary "directs" the investment, but options are limited by the trustee to predetermined menu of investments.

It is however possible to create RF trusts with trustees who allow investments in alternative assets like real estate, private lending, VC investments, private placements, precious metals, LLCs, international holdings, etc. These trusts are fully self-directed. Just like any RF, the investments are held by a trustee for the beneficiary in the RFs name.

Let's say you wanted to invest in a LEED-certified commercial infill project in your neighborhood to provide positive cash flow and capital appreciation. There are numerous advantages making that investment inside the walls of your RF including tax deferred or tax-free earnings (including any gain on sale), bankruptcy creditor protection, and pretax deductions on your contributions.

A trustee of a traditional, Roth, SEP, or SIMPLE IRA can allow these types of investments although most don't. Employer provided plans like pension and profit sharing can also be placed with a trustee who allows these types of investments though it may be necessary to amend the plan documents.

I'll come back to this discussion because it provides great opportunity to fund the green revolution and it is too complex to handle in a single blog post. Feel free to contact me at my office if you need immediate information.

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