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Dr. Jamie Fettig

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Retirement Savings

Upgrade Your Sluggish 401(k) to a $2.5 Million Cash-Cow

By Tom Phelan

Self-Directed IRAs - which allow you to invest in non-traditional instruments, such as real estate - are the fastest growing segmentof the $3.7 trillion IRA market. Some experts estimate that roughly 75 percent of new retirees roll their 401(k) accounts into IRAs where they can diversify beyond stocks and bonds.

But why wait until you've retired to put a workhorse IRA in your stable? A careful evaluation of your current plan could reveal that, by simply changing the structure of your IRA, you could reach your financial goals and retirement much faster.

Let me tell you the story of how WS, a gentleman from California, did just that ... and show you how you can do the same.

Today's IRA Choices

You can set up your Self-Directed IRA in many forms, including a traditional IRA, a Roth IRA, or the Simplified Employee Pension plan (SEP IRA). Most IRA custodians that hold real estate will usually allow you to purchase raw or vacant land, residential properties, or commercial buildings for your portfolio.

WS made full use of this opportunity and is now part-owner of a very profitable commercial property. His story is not unlike that of many I run across every day.

WS had about $30,000 under-performing in two IRAs and a 401(k). He had the chance to buy into a $2.5 million apartment complex, but he needed to come up with $50,000 cash as his portion of the down payment. For most people, that might have been the end of the story. Deal lost.

But not for WS. He rolled his retirement funds into a Self-Directed IRA, raised the additional $20,000 from private sources, and became a partner in a 104-unit apartment that makes him as much as $2,200 a month in cash flow.

Self-Directed retirement plans are remarkably flexible. So I'd like to go a little deeper into the possibilities, including how you could potentially sock away as much as $88,000 in tax-advantaged retirement money in the next four months.

But more about that in a moment.

As I said, there are several forms your Self-Directed IRA can take, depending on your personal situation. Today, I'd like to introduce you to the SEP (Simplified Employee Pension plan). Just remember that if this particular structure doesn't work for you, there's another out there that will. (Consult with a qualified Self-Directed IRA custodian.)

The Powerhouse SEP IRA

There are six major benefits to a SEP IRA that you won't find with a traditional retirement plan.

1. Simplified Paperwork

The SEP IRA is for the self-employed or small-business owner. Basically, the SEP is a written plan allowing you to make contributions toward an employee's retirement plan - or, if you're self-employed, toward your own retirement plan. And you can do this without becoming involved in the typical tedious and complex retirement plan process.

2. Flexible Investment Choices

The SEP also functions as a low-cost pension plan for individuals who own small businesses and want to purchase non-traditional investment products (including - but not limited to - investment real estate).

3. Larger Contributions Allowed

The major appeal of the SEP is that it gives the taxpayer the ability to put away much more money each year than either the traditional or Roth IRAs. Those have a maximum annual contribution of $4,000 (plus modest catch-up provisions if you are over age 50).

As of 2006, employers can contribute a maximum of $44,000 or 25 percent of the first $220,000 of an employee's eligible compensation, whichever is less. And you can be both the employer and the sole employee.

In other words, you could sock away $44,000 before the end of this year ... and, beginning in 2007, you could sock away another $44,000. That gives you an IRA nest egg of $88,000 in just a few months!

Wait, it gets better.

4. The Advantage of Leverage

Your SEP could invest in an LLC that buys commercial real estate (including apartment buildings, strip malls, office towers, and more) and uses "non-recourse" financing for mortgage leverage. That means instead of having a $30,000 retirement account with $30,000 worth of stocks and bonds, you can use that $30,000 as a down payment and control an asset worth $100,000.

5. Partnerships Allowed

Buying a property may require more funds than you currently have available in your IRA - but with a SEP IRA, you can purchase an interest in the property in conjunction with other individuals, such as a spouse, a business associate, or a friend.

Let's say you've found a $3.5 million medical building that requires you to come up with a 30 percent down payment. With the proper structure, you can bring in partners (who may or may not be using IRA monies) to help fund the deal. And because your SEP could invest in an LLC that buys investment real estate, people who would otherwise be construed as "Disqualified Parties" by the IRS (Mom, Dad, Grandma, Grandpa, sons, daughters, grandsons, granddaughters, and especially your spouse) can invest in the same LLC with or without their IRA funds.

6. Immediate Access to Your Cash

One of your options when you set up a SEP IRA is to have "Check Book Control." A Check Book Control Self-Directed SEP is established by having your SEP form a single-entity LLC (you) and then having the LLC elect you as its manager.

A Check Book Control Self-Directed SEP gives you "investment spontaneity." In other words, you can immediately write checks for real estate deals without having to submit the traditional IRA custodian "Buy Direction Letter," wait for it to be approved, and then wait again for the same IRA custodian to fund the purchase ... a process that could take weeks.

I never cease to be amazed by how few people know about or understand the SEP IRA - yet it's one of the most powerful savings tools on the market.

Today's Action Plan: Take a look at your current retirement savings vehicles and see if you could benefit from a SEP IRA or another form of Self-Directed IRA.

 
 
 

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