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Entrust Administration, Inc.
555 12th Street, Suite 1250
Oakland, CA 94607
800-392-9653
510-587-0960
www.oak.entrustcalifornia.com
The Secrets of
Off The Charts
Wealth
Development
with a Self-Directed IRA
a member of
The Secrets of Off the Charts Wealth Development
The Secrets of
Off the Charts
Wealth Development
In this research report you will discover:
u How to use self-directed IRAs and other plans to build your future
u How to secure a life time of tax free income
u How to own gold, business interests, oil, notes in self-directed IRA, 401ks
u A proven strategy to buy your dream home and avoid the boomer rush
u A sure fire way to make every gain tax-free
u An incredibly simple way to beat low interest rates
u Nine critical questions to ask if you own a business
and more…
2
Table of Contents
u Private letter from ..............4
u Wealth Principle #1: Self- directed IRA basics ..............6
u Case Study #1: Private Equities ..............7
u Wealth Principle #2: Put more choices into
your retirement plan ..............8
u Case Study #2: LLCs ..............9
u Wealth Principle #3: Understanding disallowed
IRA investments . . . . . . . . . . . . . . 11
u Wealth Principle #4: Creating income streams
for long-term financial security . . . . . . . . . . . . . . 12
u Wealth Principle #5: Real estate and notes . . . . . . . . . . . . . . 13
u Case Study #3: Real Estate . . . . . . . . . . . . . . 14
u Wealth Principle #6: Buy Real Estate in Your
Self-Directed Plan . . . . . . . . . . . . . . 14
u Wealth Principle #7: Make maximum contributions . . . . . . . . . . . . . . 15
u Wealth Principle #8: Plan choices . . . . . . . . . . . . . . 16
u Wealth Principle #9: The Roth IRA - Tax-free earnings . . . . . . . . . . . . . . 18
u Wealth Principle #10: The Entrust Individual(k) . . . . . . . . . . . . . . 19
u Wealth Principle #11: Partnering . . . . . . . . . . . . . . 22
u Wealth Principle #12: What do I have to do to
self-direct my retirement plan? . . . . . . . . . . . . . . 25
u Case Study #4 - Real Estate . . . . . . . . . . . . . . 26
u Wealth Principle #13: The Custodian and Administrator
are critical to your wealth . . . . . . . . . . . . . . 28
u Wealth Principle #14: Leveraging . . . . . . . . . . . . . . 29
u Case Study #5 -Notes . . . . . . . . . . . . . . 31
u Wealth Principle #15: Gold, Futures and Commodities . . . . . . . . . . . . . . 33
u Case Study #6- Futures and Commodities . . . . . . . . . . . . . . 33
u Case Study #7 - Gold . . . . . . . . . . . . . . 33
u Wealth Principle #16: Offshore Investments . . . . . . . . . . . . . 34
u Case Study #8 - Purchasing an offshore home . . . . . . . . . . . . . . 36
u Summary . . . . . . . . . . . . . . 38
3
The Secrets of Off the Charts Wealth Development
How our clients are quietly
and easily amassing millions
and how you can, too.
A Private Letter from Entrust
Dear Reader,
Have you ever met a seemingly “ordinary” person, only to learn that he or
she was a millionaire? Have you wondered how people can become so
rich, and still have time for work and family? Do you wish that were you?
Thank you for responding to our offer for a special report. Next year at
this time, you will be richer for the information you are about to read.
When you decide to work with us to accumulate what we call Off the
Charts Wealth, we will be there, ready to serve you...
In this special report, we will take a close look at how you can build
wealth with the strategic yet simple use of self directed IRAs, or other
retirement plans.
The concept of self-direction was created by the IRC - the Internal
Revenue Code Section 4975 among other sections, through Congress
not wanting to direct investments allowed in plans. So Congress, the
writers of the IRC, only dictates what investments are NOT allowed. Since
investments in self-direction are not on that list, you have a great oppor-
tunity to grow retirement plan assets.
In fact, knowledge of this IRS code may provide you with a strategy that
allows you to accumulate tax-free wealth throughout your lifetime and
even for your heirs, provided you know how to use it.
Most of us, even financial professionals, do not realize the full power of
self-direction. Self-directing investments in retirement plans is not new. It
was part of the government’s plan in the 70’s to help all of us save for our
increasingly expensive and long retirement years.
At the end of this report, you will receive an invitation for a free consulta-
tion to show you what self-direction can do for your future retirement
income. But, before you decide to make an appointment, please read
the following.
4
If self-direction is geared to make the average person wealthier and plan for a
better retirement future, why doesn’t every one know about this? Why such a
lack of knowledge?
Using a self-directed strategy requires that we have an independent
custodian and administrator for our IRA. The purpose of the self-directed
custodian is to perform solely as the record keeper and facilitator of a
clients’ investment choices. Unlike banks, brokerage houses and other
institutions that act as non-self directed custodians, the self-directed
custodian must not offer investments.
This hands off requirement poses two problems:
1. Most investment institutions or financial professionals will not
encourage you or facilitate your opening a self directed account, as
they do not make money unless they sell you an investment.
We become part of your team. We provide financial professionals with
continuing education credits to help fulfill their professional require-
ments. Entrust provides you with the information you need to do-it-
yourself. Or if you like to work with an advisor, the members of our local
office will work with you and your advisor so that you may both gain the
understanding of the power of self-direction.
2. Self-direction requires you to choose the type of plan you want and
the investments you put in them.
Solution: Entrust focuses on educating our clients so that you learn self
direction AND achieve investment know how, as never before.
You will find that there is a great deal of eye opening information in the
pages of this report. So we suggest you get a pencil and paper, and take
notes as you read. We also know that personal financial decisions are
often made together with a spouse. So, whether you read this report
separately or together, discuss it and take advantage of our free consul-
tation as a wealth building team.
Now, sit back and relax and let the learning begin.
Yours,
Entrust Administration, Inc.
5
The Secrets of Off the Charts Wealth Development
Wealth Principle #1
To retire rich – learn
self-directed IRA basics
What Is a self-directed IRA?
As part of the Employee Retirement Income Security Act of 1974 (ERISA)
and the creation of IRAs, self-directed IRAs were also permitted. At that
time, qualified plans, such as Defined Benefit, Profit Sharing and Money
Purchase Pension Plans were self-directed. The investments of choice
were most commonly real estate and notes.
The self-directed portion of the retirement industry continues to evolve.
Today, self-direction is an accepted investment diversification strategy.
Investors are able to purchase a wide variety of assets that comply
with the federal rules guiding permitted transactions through IRAs and
Individual(k)s.
The term “self-directed” simply means that you, as an individual, have
complete control over selecting and directing your own IRA or 401(k)
investments. Once established, your account can buy real estate, notes,
limited partnerships, commercial paper, foreign exchange, gold, com-
modities and many other types of assets. By using Entrust as the
administrator for your account, you’ll enjoy much greater flexibility in
the number of investment choices you have. You are not limited by the
parameters set up by the custodian.
In a self-directed transaction, you choose your investments. The self-
directed IRA custodian or administrator assists you by completing the
documents required to establish your account and purchase the invest-
ment.
Entrust is one of the largest self-directed administrators in the country.
To facilitate client transactions, we hold ongoing training and pride
ourselves on fast transaction processing. Many of our local offices hold
client mixers where you can meet other like-minded individuals and
share investment ideas.
Yet, you may hesitate in calling for our free, no obligation, meeting be-
cause you do not see yourself as an investor. This makes sense since up
until now, you may have been forced to limit yourself to mutual funds,
stocks or CD’s in your current retirement plans. You have not been al-
lowed to invest in what you know. Read on…
A primary benefit of self-direction is that you can invest in what
you know.
6
With the great tax advantages provided by all IRAs as well as the wider
range of possible investments, you can potentially build wealth and
secure your future much more effectively than through traditional
retirement plans. With a self-directed IRA, you are not limited to the
investment offerings of your custodian/trustee. By using Entrust as the
administrator for your account, you’ll have much greater flexibility in the
number of investment choices.
Case Study 1 - Private Equities
David invests $25,000 of his Roth IRA in a new local community bank.
Retirement plans can hold shares of a privately held company, just as
they can hold stock in a publicly traded company. David already has
an Entrust account with $50,000 in cash.
Here are the steps David would complete:
1. David requests a subscription agreement from the local bank
2. He completes a Buy Direction Letter (BDL), a form that directs En-
trust to purchase the asset in David’s IRA. David indicates that he’d
like to purchase 12,500 shares of the private stock at $2 a share.
3. The BDL and the Subscription Agreement are sent to Entrust for
processing.
4. Entrust executes the agreement and wires the $25,000 to the bank
for the purchase of the stock.
5. The stock certificate for 12,500 shares is sent to Entrust in the name
of David’s Roth IRA, for example, “Entrust Administration of the
Southeast, Inc FBO David Schaffer Roth IRA”.
Four years later, a larger bank buys out the community bank. The
larger bank purchases the community bank for $8.00 a share. David
decides to sell his stock and directs Entrust to sell it by completing a
Sell Direction Letter. The stock is sold and the $100,000 from the sale of
the stock is deposited into David’s Roth IRA cash account.
Private Letter Rulings not obtained by the instant case should not be
relied on. See also Swanson vs. Commissioner at IRS website.
7
The Secrets of Off the Charts Wealth Development
Wealth Principle #2
Put more investment choices
into your retirement fund
It’s a common misconception among Americans that the only invest-
ments allowed in a retirement account are stocks, CDs, and mutual
funds. The truth is that broader investment options have been available
to the public since 1975, the year contributions could first be made to
IRAs.
So, how come my portfolio manager says I can’t do this? It is because
large transaction-driven custodians have focused on a narrow universe
of investments and have dominated the retirement industry. While these
kinds of accounts may be right for some, they don’t offer the kind of free-
dom that a self-directed qualified retirement plan offers.
To fully maximize your investment options, you need to have a retire-
ment plan that allows you to select your own investments. A fully
self-directed retirement plan allows you the freedom to invest in many
types of assets - assets that are allowed by the U.S. Treasury Department
regulations and the Internal Revenue code.
There are at least 43 different types of investments that are allowed
in a self-directed plan.
And in some cases, you can borrow to buy them, when done properly.
You now see why you must join us to discuss your future possibilities,
and how our “ordinary” clients are getting rich.
Here are just some of the self-directed investment options that our
current clients are taking advantage of:
u Accounts Receivable Financing
u Apartment Buildings, Co-ops and Condominiums
u Building Bonds
u Commercial Paper
u Commercial Property
u Commodities/Future Accounts
u Contracts of Sale
u Factoring
u Foreign Sales Corporation Stock
u Gold Bullion
u Improved or Unimproved Land (Leveraged or Un-Leveraged)
u Joint Ventures
u Leases
u Like and Unlike Exchanges
8
u Limited Liability Companies (LLCs)
u Limited Partnerships Join us at our seminars to learn about
u Palladium
many more investment choices for
u Private Placements
your wealthy future. Here is how to
u Securities, Certificates of Deposits, Stocks, Bonds, Mutual Funds
register:
u Single Family and Multi-Unit Homes
u Tangible Asset Deeds Visit our events page on:
u Tax Lien Certificates
www.oak.entrustcalifornia.com
u Trust Deeds and Mortgage Notes
u U.S. Treasury Gold and Silver Coins
Case Study 2:
Using LLC and other Company Forms For Purchases in IRAs
LLC – Limited Liability Company. An LLC is a legal form of company
offering limited liability to its owners. It is similar to a corporation, but
may be suitable for smaller companies with restricted numbers of
owners. Its owners may be shielded from personal liability.
IRAs have invested in both private and publicly-traded stock since re-
tirement plans and accounts began. Since most of the issues regarding
IRA ownership of LLCs center on percentages of ownership, it’s neces-
sary to ensure that these percentages comply with tax provisions.
In many cases, IRA ownership of an LLC means that certain relatives are
disqualified after the formation and funding of the LLC. However, if an
LLC is entirely owned by an IRA, the entire benefit of the LLC must go
to the IRA. Once any disqualified person, such as the beneficial inter-
est owner of the IRA) receives any personal benefit, the IRA ceases to
be an IRA effective the end of the previous year in which the violation
occurred. It is imperative to seek the opinion of legal counsel with an
understanding of all requirements and potential problems involved in
LLC ownership. The most necessary part of any LLC is a carefully
crafted document.
The majority of people who purchase closely held stock have no issues
regarding ownership among themselves and disqualified persons.
Generally, these purchases have a broad enough ownership base to
ensure that a violation of percentage of ownership does not occur.
The IRA holder who self-directs the retirement plan to purchase
controlling interest in a new LLC (that was not previously owned by a
disqualified person) can assume an official position, such as managing
member or president. By doing so, the IRA directs the beneficial owner
as the responsible person for purchases and sales within the LLC. The
custodial function of the IRA is only that of the LLC. The LLC must ad-
here to all rules and regulations of the regulatory authorities.
9
The Secrets of Off the Charts Wealth Development
The IRA custodian or trustee should have no part in the formation or
operation of the LLC unless the custodian wishes to be potentially
considered a fiduciary or active trustee/custodian. In addition, you
need to ensure that no violation of the indirect rule occurs and that
unrelated business issues are dealt with.
Basic Requirements to Buy Investment Property within an Entity
such as an LLC or LP Owned by an IRA or Qualified Plan
1. The Plan or IRA may own 50% or more of the investment, but the
entity will be a disqualified person.
2. No disqualified person may generally receive any current benefit
from the investment.
3. The entity has the obligation to ensure that all IRS and DOL re-
quirements are met, such as prohibited transaction and tax rules.
4. The entity may debt finance property. Unrelated Debt Financed
Income or Unrelated Business Income Tax may be paid from the
entity.
5. The entity must prorate dividends to owners based on percentage
owned.
6. The entity must be constructed by competent legal counsel.
10
Wealth Principle #3
Understanding disallowed
IRA investments
Self-directed individual retirement accounts provide a great deal of
freedom, flexibility, and choice of potential self-directed investments.
However, they are also governed by a set of rules that self-directed
investors must be aware of and follow.
Prohibited Transactions
Some types of self-directed transactions violate the basic intent of your
IRA, and may subject your account to risks and penalties. Your retire-
ment plan is intended to benefit you when you retire and not before.
Transactions that can be interpreted as providing immediate financial
gain to the account holder or other disqualified persons are not allowed.
For example, an IRA holder may not:
u Borrow money from the IRA
u Sell, exchange or lease property to their IRA
u Receive unreasonable compensation for managing property held by
the IRA
u Use their IRA as security for a loan
u Transfer plan income or assets to a disqualified person
u Lend IRA money to a disqualified person
u Extend credit on their IRA to a disqualified person
u Furnish goods, services, or facilities to a disqualified person
u Allow fiduciaries to obtain or use the plan’s income or assets for their
own interest
For IRAs or 401(k)s, a disqualified person is:
u The IRA holder and his or her spouse
u The IRA holder’s lineal descendants, ascendants and their spouses
u Investment advisers and managers
u Any corporation, partnership, trust, or estate in which the IRA holder
has a 50 percent or greater interest
u Anyone providing services to the IRA, such as the trustee or custo-
dian (See IRS Section 4975 for a complete list of prohibited parties
credentials)
Prohibited Holdings
In addition, direct investment of your self-directed IRA funds in life
insurance, collectibles, which include works of art, rugs, antiques, metals
other than gold and palladium bullion, gems, stamps, coins (except cer-
tain U.S.-minted coins), alcoholic beverages, and other tangible personal
property as may be defined by the Secretary of the Treasury is prohibited.
11
The Secrets of Off the Charts Wealth Development
Wealth Principle #4
Self directing retirement
funds can create income
streams for long-term
financial security
Of the over $14 trillion in retirement plans today, more than $560 billion
is invested through the use of self-directed IRAs and 401(k)s. This means
that individuals and employers have decided to invest in those assets
that they believe will give them the returns, the diversity and the alloca-
tion they choose. Every year, another 3% - 4% of assets is converted
from traditional (stocks, bonds) to non-traditional assets (real estate,
notes, shares in LLCs, etc).
Many factors today warrant a more complete understanding of self-
directed investments by all investors and professionals. The number of
plans and participants covered by defined benefit pension plans has
been decreasing steadily. Covered participants declined from 687,000 in
2000 to 636,000 in 2004. Many newspaper headlines have called atten-
tion to major US companies who have eliminated employee pension
benefits. In fact, in the 90 days prior to January 17, 2006, the Wall Street
Journal, New York Times and Dow Jones Newswire listed over 500 articles
about pension plans.
The number of Social Security beneficiaries will continue to rise as the
funding necessary for their support continues to be at risk. In 1990,
there were 39.8 million Americans collecting social security. In 2006,
there were 49 million.
Terms like “Social Insecurity” and the “Social Security Tsunami” are recog-
nizable jargon in the news and on blogs. The Social Security Tsunami
was coined for the first of the Baby Boom Generation who began col-
lecting their benefits. Additionally, Baby Boomers are unprepared to fund
their retirement, especially considering the rise in the cost of health care
services and drugs. These costs will continue to rise also as life expen-
To open an account, tancy has also risen. The Center for Disease Control’s National Center
contact us: for Health Statistics reported that current life expectancy is 77.9 years
nationwide across all gender and ethnic demographics. This is a steady
Entrust Administration, Inc. rise from 75.8 years in 1995 and 69.6 years in 1955.
555 12th Street, Suite 1250
Oakland, CA 94607 It is also estimated that the average couple will spend $225,000 in unre-
800-392-9653 imbursed medical expenses. Today, only 60.1% of Americans ages 54-64
510-587-0960 Fax participate in a pension or retirement plan.
How will the remaining 40% cover future costs? See the answer in the
12 next section.
Wealth Principle # 5
Real estate and notes can
create a life-long, tax-free
income stream
Real estate investing is one of the major attractions of self-direction. Yes,
you can purchase commercial real estate, residential real estate or op-
tions in your IRA.
Keep in mind that you may never personally use the real estate while
it is held in your plan. After age 59½, you may distribute the real estate
to yourself penalty-free, and then occupy it. So, you can even buy your
retirement home now and avoid the baby boom rush.
The most income strategic way to own real estate in your self directed
plan is to buy it and lease it to others. The rental income is tax-deferred
until the property is distributed to you. If you set up a Roth IRA or have a
small business 401k (see below) the distributions are never taxed as long
as the asset is held in your plan for at least five years.
Real estate is not the only asset that can create a life long income stream.
You may use tax liens, notes and other business interests to create con-
tinuous income for your retirement. In order to assist clients in gaining
education into this valuable strategy, we hold frequent seminars.
Answer these questions to get started on the right track:
u Do you have specific or a type of property in mind? If so, write up a
brief description and target price.
u Do you have a ROTH IRA or Traditional IRA?
u Will you be purchasing the investment with any other individual or
company? If so, will their contribution come from their IRA?
u Are you seeking financing to purchase the asset, or will the entire
purchase be made with the funds in the IRA?
u If the purchase is real estate, do you need help selecting the proper-
ty? Do you have an agent to contact? Have you determined whether
you are considering commercial property, residential or raw land?
Next, take action:
u Determine which type of plan will best suit your needs.
u Open your account with Entrust
u Determine your goals, such as the number of properties you want to
own, the monthly rent you estimate that you’ll receive, etc.
u If funding is needed, find a non-recourse lender. Check the section
called Leverage: Another secret of achieving wealth.
u Select the property.
u Get together with other investors if purchasing a large property. (Ask
for our special consultation on Partnering for Greater Wealth.) 13
The Secrets of Off the Charts Wealth Development
Wealth Principal # 6
Buy Real Estate in Your
Self-Directed Plan
If you are not ready to retire, but want to buy your retirement home
now, or the raw land to build it, here or even abroad, you may do so in a
self-directed plan. This is especially important if your dream home is in a
retirement rising market (i.e. Water front, a villa in Tuscany) that will likely
get more expensive in years to come. If you lease the property to others
while it’s your plan, the income accumulates tax-deferred - or tax-free if
you have a the ROTH. You must either have enough money to pay the
carrying costs in the IRA, or make after-tax contributions (excess contri-
bution to the IRA.)
Once you retire, you may then distribute the home out of your plan to
yourself and live in it. Keep in mind that when you do, you must pay tax
on the appreciation as if it was ordinary income.
One common strategy that we see many clients using is to live in the
property after distribution. To pay the taxes, our clients take a mortgage
on the property, and use that mortgage to pay the IRA tax. If the proper-
ty is sold after two years, any gain within that period is tax exempt up to
$250,000, $500,000 for a couple. Of course, that means you will have to
move, but it also means that you are cashing in on the rise of the market.
Case Study 3: Purchasing Real Estate
A client bought an apartment in Manhattan in 1994 for $185,000 in her
IRA. The apartment was leased out for several years and the cash flow
was accumulated, tax-deferred, in the IRA. The tax-deferred rent net-
ted the client $93,000 in income. In 2002, the IRA property was then
distributed out of the IRA, triggering a tax on $300,000, the value of
the property at the date of distribution. The client lived in the property,
took a $100,000 mortgage loan to pay the IRA tax, and also took a
mortgage interest deduction for three years on their income tax state-
ment.
Three years later, the apartment was valued at $600,000. The client sold
it and took advantage of the exclusion for gains on a primary residence
of $250,000. After paying the mortgage and a tax on $50,000, the cli-
ent had $425,000 in cash. The client still continues to gain tax-deferred
interest on the $93,000 in collected rent, and has used the $425,000 to
buy a debt-free smaller apartment in the same building.
If the purchase had been made in a ROTH IRA, the client would not
pay any tax whatsoever upon the distribution.
14
Wealth Principle #7
Make Maximum Contributions,
For Maximum Wealth
Contributions to IRAs add up and allowable contributions are on the
rise. Remember, there are no small IRAs, only small investment think-
ers. At Entrust, every office has the story of a new investor with a tiny,
under $5,000, IRA that bought a note, or an option to buy real estate and
turned on an income stream or quadrupled the nest egg. For example,
one such young investor bought two property options and paid $1,500
for one and $2,000 for another, selling both for $20,000 tax free profit
within months of the option purchases.
If you have more than one IRA, the limit applies to the total contributions
made on your behalf to all your IRAs for the year. You can even make a
contribution for a non-working spouse. And if you are over the age of 50
you may contribute an amount in excess of the basic annual contribu-
tion.
Contributions can be made to your Traditional IRA at any time during
the year or by the due date for filing your return for that year, not includ-
ing extensions. For most people, this means that contributions must be
made by April 15.
Contributions are not required. You do not have to contribute to your
IRA; you may always skip a year.
15
The Secrets of Off the Charts Wealth Development
Wealth Principle #8
For off the charts wealth,
use this chart to choose
your plan
During your free Entrust consultation, we review the types of re-
tirement plans with you. The Qualified Plan flow chart below was
created to assist you when selecting a plan. Whether you are looking
at plans for yourself or for a client, your local Entrust office would be
happy to review the various choices available.
Client Decision Table: Which Plan Works For You?
Strategy note: Even if you have no immediate investment in
mind, we highly recommend that you choose a plan and open an
account. Entrust only charges a small fee to open an account and
does not charge a full account fee until you select an investment,
and any funds can be place in FDIC insured CDs. Once you select an
investment, your plan becomes the purchaser and the contract will
read FBO (for the benefit of) Your Name, IRA. You will want to have
your account established and ready to use, so that you can take
advantage of an investment as soon as you have identified one.
16
IRA/Qualified Plan Selection Flow Chart
Do you currently receive earned NO You are not eligible for an IRA or
income? (W-2 or Schedule C or F)? Qualified Plan
YES
Are you self-employed? NO Does your employer offer a quali- NO You are eligible to make fully deduct-
fied plan, such as a defined benefit, ible IRA contributions, and if eligible,
401(k), profit sharing plan, money those contributions may be made to
purchase plan, and or a simplified a Roth IRA
employee pension plan (SEP)?
YES YES
You may make IRA contributions,
and, if eligible, those contributions
may be to a Roth IRA. The deduct-
ibility depends on your earnings.
Do you have a qualified plan, such NO You may establish a qualified plan, If you You may make IRA contributions, and
as a defined benefit, profit sharing, which includes a defined benefit don’t if eligible, those contributions may be
or money purchase pension plan? plan, profit sharing plan or money made to a to Roth IRA. SEP & SIMPLE
purchase plan. If you establish such IRAs are other options.
a plan:
YES YES
You may make IRA contributions, You may make IRA contributions,
and if eligible, those contributions and if eligible, those contributions
may be to a Roth IRA. The deduct- may be made to a Roth IRA. The
ibility depends on your earnings. deductibility depends on your
earnings.
Do you have a Simplified Employee NO You may establish a simplified NO You may make IRA contributions, and
Pension (SEP) or SIMPLE IRA? employee pension plan, which is if eligible those contributions may be
associated with an IRA. to a Roth IRA.
YES YES
You may make IRA contributions You may make IRA contributions in
in addition to your SEP or SIMPLE addition to your SEP contributions
IRA contributions and if eligible, and if eligible, those contributions
those contributions may be made may be made to a Roth IRA. The
to a Roth IRA. The deductibility deductibility depends on your
depends on your earnings. earnings.
17
The Secrets of Off the Charts Wealth Development
Wealth Principle # 9
A tax terrific strategy to
build your fortune
The Roth IRA, named for its sponsor, Senator William V. Roth, Jr., provides
a tax-free accumulation of wealth on all income and growth in your
IRA, provided that the assets are held in the account for five years or
more.
Since the ROTH also requires no minimum distribution at age 70½ and
allows you to make contributions from income no matter how long you
work, even past age 70½, it is the ultimate power tool to make up for lost
time. With the real estate and note method of deriving income, you can
very quickly build up a nest egg that becomes a true retirement tax-free
windfall.
One exception to the tax-free ride is the Unrelated Business Income Tax,
or UBIT. This tax is imposed on a Traditional IRA but only on the portion
of gains from investments for which your IRA borrowed to acquire. Yes,
you can leverage your IRA to make even greater and faster gains. We
have identified many non-recourse lenders (they cannot collect against
any other of your assets, in or out of the IRA, if you default.) But if you
decide to use leverage, UBIT will apply to the gains and income in the
same proportion that you took on the debt acquisition. This is true even
with a Roth. Yet, UBIT can be avoided. Be sure to check out the section
on Leverage: Another secret of achieving maximum wealth.
Important Note: In 2010, the income rules prohibiting some of our
readers from having a Roth IRA will be eliminated, allowing the conver-
sion of traditional assets to a Roth. With a Roth IRA, all contributions are
after-tax, and any earnings are tax-free as long as the account remains
open for five years and distributions are taken after the age of 59½. We
strongly suggest that you fund your account now and plan to pay the
conversion tax.
You will have two years to pay the tax. We also suggest making after tax
contributions to your plan and converting it into a ROTH with no tax due
in 2010.
18
Wealth Principle #10
Attention Business Owners:
The Individual(k) Plan can
help to solidify your
retirement future
In 2002, new legislation was passed that provided an opportunity for a
new type of retirement plan for small business owners. Called the Solo(k)
or the Individual(k), this recent legislation allowed the rollover of funds
from Traditional post tax IRA assets to the Individual(k), as well as from
401(k), 403(b) and government 457 plans.
Individual(k) plans are extremely flexible from a funding perspective.
There are two primary components to plan contributions:
1. A profit sharing contribution that can range annually anywhere
from 0 to 25 percent of compensation, and
2. An employee salary deferral that can range annually anywhere from
$0 to $15,500 for 2008 ($16,000 for 2009) (as indexed for cost of liv-
ing).
This is in addition to previously available characteristics including:
u The ability of the business owner to self-direct investments with the
funds in the account
u Being able to borrow from the plan
u Benefiting from a retirement age of 55
u Ability to continue contributions after age 70½.
This may be one of the most powerful ways for a business owner to
make up for lost time in building their financial future because the new
law permits contributions of up to as much as $46,000 for 2008 ($49,000
for 2009), plus some catch up for people over the age of 50.
Nine questions that are critical to your Individual(k) wealth:
__________________________________________________________
Q. Can I establish an Individual(k) plan if my business has employees?
An Individual(k) plan is a type of plan designed specifically for owner-
only businesses. An owner-only business, for this specific purpose, is
defined as either a business that employs only the owner and his or
her immediate family members, or a business that employs the owner
19
The Secrets of Off the Charts Wealth Development
and other part-time employees where the part-time employees may
be excluded from plan participation under federal laws governing plan
coverage requirements.
Q. Do I qualify for an Individual(k) plan if my business is incorporated?
An Individual(k) plan can be established by both incorporated and unin-
corporated businesses (including sole proprietorships, partnerships and
corporations). If your business is incorporated, you must draw a salary
or wage (i.e., Form W-2 income) to be eligible for an Individual(k) plan.
As an owner of an incorporated business, you may want to give special
consideration when you establish your Individual(k) plan, make your
employee salary deferral election and deposit deferrals (please see later
questions on these issues).
Q. Are there special requirements if I have ownership in more than one business?
If you have ownership in more than one business, you may have to in-
clude all businesses under one business retirement plan (depending on
whether the businesses constitute a “controlled group” as defined in the
Internal Revenue Code under section 414). In cases where aggregation
is required, an Individual(k) plan may or may not be appropriate depend-
ing on whether the business employs common-law employees that
must be covered under a qualified retirement plan.
Q. What is the deadline for establishing an Individual(k) plan?
The deadline for establishing an Individual(k) plan is the last day of your
business’s tax year (e.g., December 31, for a calendar tax year). However, if
your business is incorporated, you may want to establish your plan early
in your tax year to allow you to make employee salary deferrals based on
your Form W-2 income throughout the year (because you may not defer
on compensation that is paid to you from your corporation before the
initial adoption of your Individual(k) plan).
Q. What is the deadline to make an employee salary deferral election?
If you are the owner of an unincorporated business (i.e., sole proprietor
or partner), you must generally make a written employee salary deferral
election (specifying the amount of your intended employee salary defer-
ral) no later than the last day of your tax year.
If your business is incorporated, you must generally make a written em-
ployee salary deferral election (specifying the amount of your intended
employee salary deferral) before the compensation is currently available
or paid to you.
20
Q. What is the deadline for funding my Individual(k) plan?
The deadline for funding the profit sharing portion of your Individual(k)
plan is your business tax return due date, including extensions. The
deadline for depositing employee salary deferrals depends on whether
or not your business is incorporated.
If you are an unincorporated business owner (i.e., a sole proprietor or
partner), the deadline for depositing your employee salary deferrals is
your business tax return due date, including extensions.
If your business is incorporated, conservatively, the deadline for deposit-
ing employee salary deferrals is the earliest date on which the deferrals
can be reasonably segregated from your business’s general assets, and
no later than the 15th business day of the month following the month in
which the deferrals are withheld.
Q. Can I establish an Individual(k) plan if my spouse or my children work for me?
Under the attribution rules found under IRC Sec. 318, your spouse and
children are generally considered owners of the business. Consequently,
you generally will be eligible to cover them under an Individual(k) plan
arrangement without being concerned about the administrative costs
that come into play when a plan covers common-law employees. (Note:
It’s important to recognize, however, that you and your family members
must be subject to the same plan eligibility criteria as any common-law
employees you may have. In other words, you cannot have an age crite-
rion of 21 for common-law employees, yet choose to cover your son or
daughter who is only age 20.)
Q. Can I take a personal loan from an Individual(k) plan?
Both incorporated and unincorporated business owners are eligible to
take personal loans from qualified plans.
Q. Since Individual(k) plans are designed primarily for owner-only coverage situations,
what types of common-law employees can generally be excluded from participation in
a qualified retirement plan?
Generally, under federal law, you are permitted to exclude the follow-
ing types of employees from coverage under a 401(k) plan, such as an
Individual(k):
u Employees under age 21
u Employees with less than one year of service
u Employees who work less than1000 hours per year
u Certain union employees
u Certain nonresident alien employees
21
The Secrets of Off the Charts Wealth Development
Wealth Principle #11
How to Turn A Little Known
IRS Prohibition into the
Ultimate Off the Charts
Wealth Machine
Self-directed individual retirement accounts provide a great deal of free-
dom, flexibility, and choice of potential self-directed investments. How-
ever, they are also governed by a set of rules that self-directed investors
must be aware of and follow. Care must be taken not to run afoul of the
rules laid down by the IRS, which warns against “prohibited transactions”
or self-dealing. Some types of self-directed transactions violate the basic
intent of your IRA, and may subject your account to risks and penalties.
But, if you really understand prohibited transactions, they can be the
incentive for you to gain great wealth.
Your retirement plan is intended to benefit you when you retire and not
before. Transactions that can be interpreted as providing immediate
financial gain to the account holder or other disqualified persons holders
are not allowed.
Here are the primary restrictions:
a. Personal use while in the plan. The first is that you cannot physically
occupy the property that is in your IRA or Individual(k) or other plan, or
use it for any personal purpose. You cannot allow an entity that you con-
trol to enjoy the property, nor can you buy the property from yourself.
What you cannot do with yourself, you also cannot do with any “disquali-
fied person” (see below.)
b. Use by certain other people. A disqualified person, under Section
4975, paragraph C, of the IRS includes your spouse, ancestors, lineal
descendants, and spouses of lineal descendants. It also includes your
custodian. It does not include siblings. Your IRA may not engage in any
transaction with these disqualified persons. This includes purchasing
from, lending to, renting or selling to a disqualified person.
You may not deal with: You may deal with:
You and your spouse Your brothers and sisters and their spouses
Your own parents, natural or adoptive or your Your stepchildren and spouse’s stepchildren
spouse’s parents Your aunts, uncles, and cousins
Your own or your spouse’s grandparents
Your children, natural or adoptive, spouses
Any fiduciary of your IRA, incl. spouses,
Ancestors, and descendents
22
Other prohibited transactions:
u Borrow money from the IRA
u Sell, exchange or lease property to the IRA
u Use the IRA as security for a loan
u Transfer plan income or assets to disqualified persons
u Lend IRA money to disqualified persons
u Extend credit on the IRA to disqualified persons
u Furnish goods, services, or facilities to disqualified persons
u Allow fiduciaries to obtain or use the plan’s income or assets for
their own interest
For IRAs or 401(k) s, a disqualified person is:
u The IRA holder and his or her spouse
u The IRA holder’s lineal descendants, ascendants and their
spouses.
u Investment advisers and managers
u Any corporation, partnership, trust, or estate in which the IRA
holder has a 50 percent or greater interest
u Anyone providing services to the IRA, such as the trustee or
custodian (See IRS Section 4975 for a complete list of prohibited
party’s credentials)
Prohibited Holdings
In addition, direct investment of your self-directed IRA funds in life
insurance, collectibles, which include works of art, rugs, antiques, met-
als other than gold and palladium bullion, gems, stamps, coins (except
certain U.S.-minted coins), alcoholic beverages, and other tangible
personal property as may be defined by the Secretary of the Treasury is
prohibited.
How These Prohibitions Help You Grow Wealth
If you review the above carefully you will see that you probably had no
intention of doing any of the prohibited transactions, but perhaps did
think of working in one way or another with some of the disqualified
people. The IRS wants to protect your next egg. So their protection is
welcome and actually not very restrictive.
But, for those of you that do want to include a disqualified person in
your plan, consider this.
Do not confuse transactions with disqualified persons with partnering
with disqualified persons. One of the great “OFF THE CHARTS WEALTH
RESULTS” comes from partnering with a brother, parent, friend, company,
spouse when you can POOL funds, in and out of a plan, to purchase
larger parcels of property or co-own notes, real estate options etc.
23
The Secrets of Off the Charts Wealth Development
Entrust offers meetings, webinars/seminars on partnering.
Using an LLC – Limited Liability Company
You can easily partner with others by using an LLC.
Basic Requirements to Buy Investment Property within an Entity
such as an LLC or LP Owned by an IRA or Qualified Plan
1. The plan or IRA may own 50% or more of the investment, but the
entity will be a disqualified person.
2. No disqualified person may generally receive any current benefit
from the investment.
3. The entity has the obligation to ensure that all IRS and Department
of Labor requirements are met, such as prohibited transaction and
tax rules.
4. The entity may debt finance property. Unrelated Debt Financed In-
come or Unrelated Business Income Tax may be paid from the entity.
5. The entity must prorate dividends to owners based on percentage
owned.
6. The entity must be constructed by competent legal counsel.
Because partnering or even the individual use of the LLC is such a
powerful tool to grow wealth, we partner with lawyers and CPAs to hold
seminars.
Here is how to register:
Visit our events page on www.oak.entrustcalifornia.com
24
Wealth Principle # 12
You are what you do, not
what you know, when it
comes to making money
It’s time to take action. And you are probably asking what do I have to do
to self-direct my retirement plan?
It’s easy. Basically, there are three steps to self-directing your IRA funds:
1. Open an Account – If you’ve already chosen a retirement plan, open
a self-directed IRA account with Entrust. Our professionals are trained
in all areas of self directed IRAs, and are ready to assist you.
2. Fund your Account – Fund your account by making a contribution
or by transferring funds from another IRA. Your local Entrust office can
assist you.
3. Choose an Investment – If you have an investment in mind, simply
contact your local office. If you’re looking for investment ideas, attend
a seminar or workshop in your area. Visit the events page of our web-
site at www.TheEntrustGroup.com for events near you.
Now, is the time to take advantage of our free consultation, call us at:
(510) 587-0950
And remember:
u You may put funds in an IRA any time of the year
u The amount you put away is not taxed in the year you make the contri-
bution (unless it is contributed to a Roth IRA).
u You must qualify for a Traditional to Roth IRA conversion and it will be
taxable to you.
u If you qualify, contribute to a Roth IRA. A Roth IRA is generally prefer-
able, as the gains are never taxed.
u If you do not qualify for a Roth IRA, a Traditional IRA may be used.
However, gains are taxed when you start taking distributions.
u If you already have an IRA and wish to self-direct it, all you need to do
is complete a self-directed IRA application at Entrust. Then you may
transfer the assets from the old IRA to your new self-directed IRA.
25
The Secrets of Off the Charts Wealth Development
u If you had a 401(k), TSA, 403(b) or government sponsored 457 plan
from any previous employers, you may roll these over to any Tradition-
al IRA or Qualified Plan, if the plan allows it.
u The paperwork is easy and the process goes very quickly. It takes only
two to four weeks to fund the new account by transferring or rolling
over monies from your previous IRA and/or Qualified Plan.
Case Study #4: Linda’s Purchase of a Duplex
The transaction unfolded as follows:
1. Linda opened her first self-directed IRA. She employed Entrust to
provide self-directed IRA services.
2. Linda’s first real estate transaction involving her plan was the pur-
chase of a duplex.
3. She was familiar with a property and knew that the tenants had
been there for over five years and were not likely to move in the
near future. She decided to make an all cash offer of $400,000. The
current owner needed cash, so the timing was ideal. She made an
offer on the property in the name of the plan. Example:
The Entrust Group, Inc. FBO Linda Chang IRA #12345
The cash flow on the property was $9,600 per year gross and $6,000
net. This cash flow satisfied her plan’s needs. The offer was accepted
by the seller.
4. Linda completed a Buy Direction Letter for the purchase of the prop-
erty and sent it to Entrust along with a copy of the contract which
she had read and approved. Entrust signed the contract on behalf of
her IRA and sent a $20,000 good faith deposit to the title company
from her IRA in accordance with the instructions on the Buy Direc-
tion Letter.
5. A preliminary title report showed no prior liens or other conditions
that would preclude the purchase. All closing documents were read
and approved by Linda.
6. The title company/escrow agent sent the documents to Entrust.
Entrust signed them on behalf of Linda’s IRA.
7. Property management agreements were made between the IRA
and the provider. Rental or lease agreements were assigned to the
name of the IRA.
26
8. Entrust sent the funds from Linda’s IRA and the completed docu-
ments to the title company/escrow agent.
9. The deed was then recorded in the name of Entrust for the ben-
efit of Linda’s IRA (e.g., The Entrust Group, Inc. FBO Linda Chang
IRA #12345) and was sent back to Entrust. Entrust maintained
the deed in safekeeping. Linda’s IRA now owns the property.
10. Tenants were instructed to make all payments to Entrust FBO
Linda Chang IRA #12345. All income was then deposited into an
FDIC insured account at the custodial bank.
Service providers such as utilities and insurance companies
were instructed to bill “The Entrust Group FBO Linda Chang
IRA#12345.”
All expenses, such as taxes, hazard insurance, maintenance, gas,
electric and disposal services were sent directly to Entrust to be
paid from IRA funds at the custodial bank.
As you can see, the purchase of a property in an IRA is as
straightforward as making that purchase personally. The only
difference is that there is an intermediary, such as Entrust, per-
forming the transaction on behalf of the IRA.
27
The Secrets of Off the Charts Wealth Development
Wealth Principle # 13
The Custodian and
Administrator are Critical To
Your Wealth
Whether choosing to open your own account or if you are a professional
looking to support your clients, you have local offices accessible to you
and/or your client. We are interested in developing partnerships with
professions. As Entrust cannot recommend any investments, we supple-
ment your business to your clients, we don’t compete for it. The custo-
dian and administrator should be a neutral party that will not interfere
with investment choices or the investment advice you are giving as an
advisor.
When opening an account, it’s important to make sure that the unin-
vested money contributed to your self-directed account is FDIC insured.
The fee structure should be clearly communicated and there should
be choices based on account value or number of assets in the account.
Finally, the account owners should not be charged until they make an
investment. Don’t wait to open an account even if you wait to select
your investment. One mistake many people make is waiting until they
find an investment before opening an account. In fact, the experience of
successful self-directed investors is that the very opening of the account
promotes finding the investment.
Your custodian should be approachable, available and knowledgeable
in IRS rules and guidelines, federal and local tax issues, allowable assets
and transactions. They should offer educational programs for profes-
sionals and clients in the community. They should be ready and open to
partner with advisors.
Don’t be left behind. Contact us for an immediate consultation for
yourself or invite a member of your firm and learn how to open the self-
directed account.
Here is how to register if you are a professional seeking CE credits or
further information:
Visit our events page on www.oak.entrustcalifornia.com
28
Wealth Principle # 14
Leverage: Another Secret of
Achieving Maximum Wealth
What if you don’t have much money in your plan? How can you make
assets grow? The answer is leverage.
IRAs (and Qualified Plans) may borrow funds to purchase an asset. Debt
financing a property in an IRA is for the benefit of the IRA and is therefore
allowed.
A non-recourse lender is required when your IRA is applying for a loan.
Most institutional lenders do not lend to IRA plans because such loans
can’t be sold in the secondary market. Community banks and other
portfolio lenders, such as hard money or private lenders, are much more
likely to lend to IRAs (or Qualified Plans).
Here is what you need to know about obtaining a loan for your plan:
u The loan to value ratio* is important for any lender.
u The loan to your plan must not permit recourse to you as an indi-
vidual.
u You may not guarantee a loan, but a third party who is not related to
you may.
u You can use other or additional collateral for the loan.
u Follow the ten requirements for purchasing a property with debt as
outlined in this report.
*Banks generally lend 80% of the appraised property value (loan to value or
LTV) or less on single-family dwellings. The lower the LTV, the more appealing
the transaction may be to a lender. Private lenders may lend more to your
plan than banks. Also, your IRA may purchase a property subject to an exist-
ing debt.
Eight Basics To Know About Non-Recourse Loans
1. Locate a non-recourse lender/bank.
2. This lender may not have recourse to you. It may only have recourse
to the asset being financed. This means the debt is secured by the
subject property financed in the retirement plan and not by you
personally. Your personal credit may not be used to facilitate the
loan.
2. A seller may carry-back financing.
3. If you are using your IRA, debt financing will be subject to Unrelated
Debt Financed Income Tax (UDFI).
4. Acquisition debt in a Qualified Plan is not subject to such tax in
certain circumstances.
29
The Secrets of Off the Charts Wealth Development
5. Any additional debt incurred in an IRA or Qualified Plan is subject to
UDFI.
6. UDFI does not apply if the debt had been paid off for 12 months or
more.
7. UDFI must be paid by the IRA or plan. The IRA or plan files IRS form
990T.
8. You may transfer funds from another IRA or qualified plan to pay
down debt.
What happens if there is a shortage of money in the IRA?
Now that you know that borrowing is possible, this might be a remedy if
the investment you made, like real estate, surprises you with unexpected
expenses. There are also other alternatives.
Let’s go back to Linda’ case. Here is what Linda could do if she encoun-
tered unexpected maintenance costs.
1. Making a contribution to her IRA. This is the easiest option.
However, it may only be used if she had not made a contribution
at all that year or had the ability to contribute enough funds to
cover expenses without exceeding her annual contribution limit.
If those requirements were not met and Nancy contributed to her
plan anyway she would be making an excess contribution. Penal-
ties of 6% of the amount she over-contributed (or 10% in the case
of a SEP IRA) may be assessed for each year the excess contribution
remained in her IRA.
2. Transferring or rolling over funds from another IRA or quali-
fied plan. Provided that funds were available in another plan, this
is another relatively easy solution.
3. Increasing her “debt finance.” This requires the completion of
additional paperwork with her banker. Nancy may incur additional
points, more interest and some fees if she exercises this option.
4. Selling another asset in her plan. This is an easy way to raise
funds. Nancy could sell all or part of a note in her IRA or Profit Shar-
ing Plan and use the proceeds. She could also sell part of a stream
of income from a note for a short period if the amount she needed
to raise was small. Either way, this would result in a discount of a
note she owned in her IRA or plan.
5. Bringing in partners. This is more complicated, as it would involve
going through the sale process. As a part of that process her bank
and her IRA would give up an undivided interest in the property
and would suffer some profit loss. She could also do this using a
Limited Partnership or a Limited Liability Corporation, but using
either would add more expenses. She could not, after the original
30
purchase, partner with herself or any other “disqualified persons” such
as ascendants or descendants and spouses thereof.
6. Selling the property as is. This is an option, but is the least preferable
as the IRA would likely suffer a loss of the profit interest.
In the case study below, the client understood how to face a problem and
create even more wealth:
Case Study #5: Notes
Recently, a collection agency informed one of our real estate bro-
ker clients, Lee, about some problem loans. Lee had formerly sold
the property in question, 18 Main Street.
The principal due on the note was $110,000. The borrowers were in
danger of being foreclosed on. Lee was able to purchase the obliga-
tion from the lender prior to foreclosure. The financing was Lee’s IRA
along with her friend Eddie.
Lee was able to negotiate the purchase of the note for $100,000; a
9.09% discount. She had her IRA purchase 50% of the note and her
friend Eddie the other 50%.
Lee’s IRA 50% $50,000
Eddie 50% $50,000
NOTE $100,000
Two years after the transaction, the borrowers began to have more
problems and the loan payments were not made regularly. Eddie
decided that he wanted to sell out his 50% ownership because of the
collection problem.
Lee, who had originally sold the property, knew that there was a fair
amount of equity in the property. She was also aware of the financial
issue of the borrowers and the potential of foreclosure. Though the
payments were slow, they were being made.
Lee recognized the opportunity she had with Eddie wanting to sell.
Lee negotiated a 10% discount with Eddie. Lee’s IRA purchased Eddie’s
50% of the note for $44,505.
Lee directed the trustee of her IRA, Entrust, to purchase the note at a
discount from Eddie on behalf of her IRA.
31
The Secrets of Off the Charts Wealth Development
Original Current Balance Lee’s IRA
Amount Purchase 10%
Discount
NOTE $110,000 $98,900
Lee’s IRA 50% $49,450
Eddie 50% $49,450 $44,505
IRA Purchase
Total $44,505
Total Cost to
Lee’s IRA $93,955
Lee’s IRA ended up with a note paying 15% over 30 years with a value
of $98,900.
Lee’s IRA paid a total of $93,955.
All income Lee received on the note is tax-deferred.
Lee’s intentions always included purchasing properties and holding
them, so this transaction fits nicely into her financial plan. In addition
to other properties, her IRA now owns a high yield note. If foreclosure
should become necessary, the plan would then own the property and
be able to sell it with or without a carry-back note. The plan would
also have other options, including a lease option or the property could
simply become a rental.
32
Wealth Principle #15
With self direction you can
invest in gold and oil
What about Gold, Futures and Commodities?
Individuals with various investment objectives and levels of desired risk
may include Futures and Commodities in their self-directed accounts.
Please consult with a tax accountant, attorney and investment advisor to
see if Futures and Commodities are suitable for your investment portfo-
lio. Entrust and its custodial institutions do not warrant the suitability of
any investment.
Case Study #6 – Futures and Commodities
Jim wanted to invest in corn. Here is what Jim had to do.
1) Jim opened an account with Entrust. He completed the applica-
tion kit, which included the transfer/rollover form. He returned
the completed forms to Entrust. Entrust received funds and com-
pleted paperwork from Jim’s prior custodian.
2) Jim had to designate a broker for his account. Jim worked with
the broker of his choice. However, all deposit and withdrawal
transactions were generated by Entrust for his retirement ac-
count.
3) He completed the Buy Direction Letter and trading application and
returned it to Entrust.
Jim is ready to begin trading! Entrust works with Jim’s broker to pro-
cess the corn investment in his IRA.
Case Study #7 - Gold
Ted wanted to invest in gold, and had $10,000 to commit. But the
fabrication charges and commission did not make it worthwhile. He
purchased an overseas gold certificate directly held in his IRA. The
custodian sent a letter to the Mint, and the gold was stored there free
of charge, and the certificate held by the custodian.
33
The Secrets of Off the Charts Wealth Development
Wealth Principle #16
To expand your portfolio,
consider offshore real estate
An on line survey performed in April 2007 of 30 thousand self-directed
IRA real estate investor clients, 30% were interested in investing in off-
shore real estate. Property investment opportunities for the small inves-
tor outside of the United States have increased.
An increase in investments in cash flowing and appreciating real estate
in Mexico, Panama, Costa Rica, Nicaragua, and other central and south
American countries has risen over the last few years, in particular. The
popularity of these areas appear to be related to proximity to the United
States, and what seems to the US investor reasonably priced and some-
times inexpensive property which may be used for investment, and
perhaps second or vacation homes.
Panama, for example, ties it’s currency to the US dollar, and in fact the
dollar is the medium of exchange. Costa Rica, sometimes noted as the
“Switzerland” of the Americas, is considered by many to have a pleasant
climate and is seen as an opportune area for a vacation home invest-
ment. As Mexico is close geographically, many North Americans visit this
local seeking vacation homes for their retirement portfolio.
As Spain became the opportunity for Germans to have a second home/
retirement venue, some believe that Mexico, Central and South America
present a similar advantage for North Americans. The numbers of Ger-
man investors has reached over one million and the numbers are grow-
ing.
The reality of making such an investment is more complex than simply
purchasing a nice property in a nice climate. The US investor must be
clear about his or her objective. One can become enamored on a vaca-
tion trip and be talked into a purported investment property. A vacation
is often an escape from reality and that escape typically does not include
performing the due diligence and analysis needed to meet the targeted
objectives. This is one of the most overlooked parts of the vacationer/
investor.
In each venue, whether Mexico, Costa Rica, Panama, Nicaragua, Belize,
or Ecuador, for example, the native language is Spanish. Regardless of
the local sellers’ capability in speaking English, the language of law is
Spanish. Competence in the language of law and expertise in local law is
essential.
Mexico and every country in central and south America have different
34
laws regarding real estate and taxes. The vesting of property varies from
one country to the next, and so does the method of title transfer.
For example, a client recently encountered a Panamanian real estate de-
veloper who had begun to grade roads, and subdivide property and take
deposits of $6,000 per parcel, and to be sold for $80,000 for single family
homes. The investors were told that all that was needed was the consent
of local officials to proceed with the development. In Panama, the legal
ownership must be a registered properly with a central authority.
The builder had “purchased” the property from local inhabitants who
farmed the land. The title to the land had never been perfected by the
local inhabitants who had right of possession. When the builder bought
the land, he failed to follow the proper procedures for securing title. His
time line for completing the process of building and selling suddenly
became much longer. The farmers continued to farm the land, and the
developer continued to work with local lawyers to actually purchase the
property.
In addition, the builder had to work through some local cultural issues.
The inhabitants on the land were the San Blas Indians, who have a cul-
ture of their own, just like many peoples in other countries. The mayor
of the village had veto power over most everything. He was not in the
right frame of mind to go along with some of the revisions to the build-
ing plan. The builder’s “hill to climb” became even steeper. The investors
had all their deposits returned, without loss, as deposits remained un-
cashed.
This example is illustrative of some of the issues one must explore and
ensure that they are dealt with in advance. Planning and fully under-
standing the objectives the investor has, along with language, cultural
and legal issues are among the first to be considered.
It’s also important to determine whether the investment makes sense.
We have found that the demand for properties in some Mexican and
central American countries has driven property prices to the point where
Net Operating Income targets could not be met. In other cases, there
were many properties where both only cash flow and appreciation were
not significant. It is essential that the numbers support your objectives.
Beach properties in Costa Rica and mountain properties in the Panama-
nian highlands are still available as vacation, second home or income
properties. It is just a matter of evaluating the economics of the pur-
chase.
One of the most overlooked issues which may affect the popularity of
buying foreign investment property is taxes. Tax issues are not only lo-
cal, but US taxpayers must report and pay tax on worldwide income. In
our experience, many investors overlook the reporting requirements of
35
The Secrets of Off the Charts Wealth Development
the IRS and the ordeal of expatriating, if one wants to do that. And the
matter of designating beneficiaries varies from country to country. It’s
essential to pay attention to these details with local counsel along with
your US counsel.
The numbers of investors in Mexico and Central America has been in-
creasing, as real estate markets there appear to be better for investors in
certain circumstances. As beach front property is more of a premium, the
prices are certain to increase as property value increases. Cash on cash
returns will also be decreasing as prices continue to be “bid up”. The
more due diligence and planning that is performed, the better. As every-
where, caveat emptor is the rule.
Case Study #8: Purchasing Beach front in Nicaragua
Sarah and Bill heard about beach front property in Nicaragua.
They want to use their IRAs to fund their investments, but they also
would like to live on their property after they retire. If they pool their
IRAs, they would be able to buy a property outright, with each of their
IRAs owning a portion of the property based on the percentage con-
tributed. If they want a bigger property, they could include friends in
the deal, or apply for a non-recourse loan to fund the property.
To fund the transaction, the couple could form an entity, such as a
corporation or trust, to hold the property for the IRA. The couples col-
lective IRAs would become stake holders of the entity.
Sarah and Bill head to Nicaragua to evaluate the property. They have a
great time exploring the country and even take a couple of side trips
to look at real estate. Fortune is with them and they find a property
that they both agree on.
Because Sarah and Bill already have self-directed retirement accounts
at Entrust, they complete a Buy Direction Letter to instruct Entrust to
purchase the property with the funds in their IRA accounts. Their IRAs
will take title once the transaction is complete.
Their representatives must work with Nicaraguan attorneys and title
companies to ensure that the IRAs have ownership and that all income
and expenses are properly credited and their IRAs are debited.
Sarah and Bill look into taking out a loan to buy the bigger property.
They discover that all debt used for acquiring property in an IRA must
be non-recourse. Usually a corporation or foundation is put together
by legal counsel in Nicaragua, which will in turn be owned by the IRA.
The corporation or foundation will then be the borrower, with prop-
erty income and expense flowing through the IRA-owned Nicaraguan
entity.
36
Any debt-financed property, regardless of where it is located, may be
subject to unrelated debt-financed income tax in the United States.
During the time the property is owned by their IRAs, they can’t live or
vacation in it, not even for a moment. And neither can their parents,
children, or children’s spouses. In the meantime, the property is main-
tained by a property manager.
Sarah and Bill decide to rent out the beach house to tourists and
arrange for their property manager to collect the funds. The rental
income goes back into their IRA accounts. All maintenance expenses
are taken from their accounts. The maintenance is performed by third
party contractors that are unrelated to the couple.
For Sarah and Bill to access their Nicaraguan beach front property
when they retire, they first need to take a complete distribution of the
property owned by their retirement accounts. This becomes a taxable
event in the U.S. The fair market value of the property is added to their
taxable income in the year of distribution. However, if they had used a
Roth IRA to purchase the property, they would not have to pay taxes
on the distribution. The distribution is a net asset value, so if Sarah and
Bill have a debt against the property, the distribution amount will be
based on the fair market value minus any mortgages.
37
The Secrets of Off the Charts Wealth Development
Special report summary
Creating your financial future comes down to the freedom to make
choices: relying on your own knowledge, understanding the opportuni-
ties, getting expert help and enjoying the challenges of taking charge.
With a self-directed IRA or real estate IRA, you can invest your retirement
funds when, where and how you want.
Self-directed IRAs and real estate IRAs give you the ability to choose from
a variety of investments, such as mortgages, notes, real estate, offshore
real estate, private placements and more. And, by diversifying your in-
vestments, you may protect and enhance your retirement.
The Entrust Group is the world’s premier provider of account administra-
tion services for self-directed retirement plans through a nationwide net-
work of dedicated local offices. For more than 25 years we have been an
acknowledged authority in the field of self directed retirement accounts.
Our commitment is to always be the knowledge leader in our field, and
to deliver that knowledge to you through the highest level of service in
the industry.
Turn your IRA into a wealth-building machine and secure your future. Invest
in what you know, understand, and control.
Here is how to register:
email us at bizdev@theentrustgroup.com
Entrust Administration, Inc.
555 12th Street, Suite 1250
Oakland, CA 94607
800-392-9653
bizdev@theentrustgroup.com
38
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