If you recently watched your individual retirement account or 401(k) drop by double digits, you may wonder if there is a better way to sock away money in an uncertain economy.
What if you could replace some of your investments with tax-deferred holdings not tied to the troubles on Wall Street? Maybe you'd prefer to invest in cattle in Wyoming, a gas station in Philadelphia or an underwater cemetery in Miami.
Impossible -- or even illegal -- you say? Not so, according to the Internal Revenue Service tax code. Self-directed alternative IRAs, which are more widely known for their ability to fund real estate, can also be used for private equity investments, such as limited liability corporations, private stock offerings, leases and lease options, and joint ventures.
Many investors do not realize that investing IRA money in private equities is perfectly legitimate, and has been since 1974, when the IRA code was written.
"With this (stock) market being what it is, we will start to see more private equity funded by IRAs," says Tom Anderson, CEO, president and founder of PENSCO Trust, a custodian firm for self-directed IRAs based in Portsmouth, N.H.
However, investing in self-directed IRAs is not a sure ticket to riches. These products often involve a high level of risk that can wipe out retirement savings for investors who are not careful.
Returns in the long run
Al Horrigan, 66, of Sarasota, Fla., is one of PENSCO Trust's clients. He started investing in alternative private equities and real estate in 2000. He first dabbled in day trading with $21,000 from his Roth IRA and turned it into $70,000.
With his IRA custodian at his side, Horrigan used the money to purchase 40 acres of land in Nevada, which he flipped three years later for $350,000. He then bought more real estate and Apple stock, which mushroomed to a value of $680,000.
Examples of self-directed IRA investments
- Real estate
- Limited liability corporations
- Private stock offerings
- Leases and lease options
- Joint ventures
Horrigan's IRA now contains a mix of selected stocks, real estate and private equity. His latest investment has been in Neptune Memorial Reef. The privately held company has created an ecological artificial reef off the Miami coast that doubles as an underwater cemetery.
The investment, Horrigan says, is for the long term and will eventually yield good dividends. His other investments have allowed him to live comfortably off his earnings without touching the principal.
"Alternative investments have allowed me to continue to do the things I want to do," he says. "That's what I call retirement."
While Horrigan's goal has been to retire comfortably, others use alternative IRAs to invest in companies that will give them not only savings for retirement, but a job.
Eric Gilkesson, 38, of Atlanta, used his self-directed IRA in 2006 to make a total investment of $95,000 in Signature Channels LLC (now Thanks Again LLC), a rewards program company.
He says the company is now worth about $10 million.
"We've been duped into thinking the 401(k) is the 'end all, be all,'" Gilkesson says.
Gilkesson owns about 3 percent of Thanks Again. His initial investment has ballooned to about $300,000, he says. Moreover, his investment does not represent his entire retirement savings. He also has money in traditional IRAs.