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What's In Your IRA?

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Is your IRA invested in stocks, bonds, mutual funds, and ETFs? Or have you decided to spread your investment horizons a bit, and include some "non-traditional" IRA investments? Since this is the Spring IRA season, which is your last chance to post a tax deduction for 2013, you might consider some alternative investments to diversify your IRA.

But, fair warning: Not all investments are allowed inside an IRA. Many are prohibited, including buying a vacation home, artwork, or collectible coins, with your IRA money. And if you make a mistake in your choices, you could face huge penalties - and waste the opportunity to grow all that money for your retirement. You'll need the advice of an independent IRA custodian trustee, and you need to know the basics before you make a move.

Opening a Non-Traditional IRA

There are certain "alternative investments" allowed in IRAs, but you cannot make those investments directly. Instead, you must open an IRA with a custodian that will let you "self-direct" or choose your investments. Then you deposit the IRA funds into the account, and direct the custodian to make the actual transaction. While self-directed IRAs can expand your investment horizons, you will also find that they charge significantly higher fees.

Scott McCartan, CEO of Millennium Trust, one of the largest IRA trustees, explains that these trust custodians do not give investment advice, but instead "take the administrative hassle out of opening the IRA, funding it, completing the transactions, taking custody of the asset, obtaining required annual valuations, collecting any rents or income from the asset, and then making sure sales proceeds are directed back into your IRA."

There is a vast pool of money sitting in IRAs, not only from annual contributions, but from rollovers of 40l(k) accounts as people change jobs or retire. And using an alternative IRA custodian means you are not restricted to traditional investments such as stocks, mutual funds, ETFs, and bank CDs. But you have to do your own investment research and choose the appropriate asset to purchase. The trustee is only an administrator and custodian.

What Assets Are Allowed in Your IRA?

Stocks (equities) are the most popular IRA investment, but that doesn't mean all stock-related investments are allowed. For example, while you can do certain options transactions such as writing covered calls to hedge your stock investments, you cannot simply write "naked" calls because these allow unlimited risk. And that kind of speculation is prohibited in an IRA. However, some hedge funds will accept IRA accounts, working with your trust company.

You can buy certain gold and silver bullion coins such as American Eagle or American Gold Buffalo coins (proof and non-proof),and the American Silver Eagle, as well as the Austrian Gold Philharmonics and Canadian Maple Leaf coins. Basically, in order to be held inside an IRA, the coins must be considered bullion, and not "numismatic" or collectors coins. Thus the old American Double Eagle gold coins and even Krugerrands are not allowed, but bullion bars are appropriate.

Most trustees will deal with the bullion dealer of your choice, or will provide you with a list of bullion dealers. After setting up your IRA account with a trustee, you initiate the purchase order. The trustee gives you a "funding notice" to give to your coin dealer, who then gets payment from the trustee. The coins or bars must then be directly transferred to an insured precious metals depository authorized by the custodian. Important: you cannot simply transfer coins or bullion you already own into your IRA account. (There is an additional cost for shipping and insurance when metals are taken out.)

John Johnson, President of GoldStar Trust Company, which specializes in precious metals IRAs says one of the great attractions is the ability to take distributions in gold. "Most of our customers want to be able to take a distribution "in kind," when it comes to the eventual distribution of IRA assets, or for minimum required distributions after age 70-1/2."

You can never own collectibles in your IRA. That includes, but is not limited to items such as stamps, furniture, antiques, artwork, baseball cards, comics, gems and jewelry, and fine wine. And as a general rule, life insurance cannot be owned by your IRA (with some esoteric exceptions).

You can purchase real estate in your IRA. But the IRS will scrutinize the deal carefully to make sure you or your family do not personally benefit. So you can't buy your home, or a vacation home, or your brother's home in an IRA. But income-producing real estate, if properly titled and held by a custodian, can be included. You won't get the benefits of depreciation or capital gains when you sell the property. The income from the rental will be tax-sheltered by the IRA ownership, and you can take profits and reinvest in other real estate without paying taxes - until the money is withdrawn as ordinary income upon retirement, (unless it is a Roth IRA). However, if your rental property needs a new roof or major repairs, the money to do that must come from assets already within the IRA, so be sure to maintain some liquidity.

Finding a Custodian

If you're considering alternative investments, the most important thing is to find a custodian that charges reasonable fees and provides the services you need, depending on the purchases you want to make.

Goldstar Trust (www.GoldstarTrust.com) has developed special expertise in precious metals IRAs, with more than 37,000 accounts holding $2.2 billion in assets, much of which is in precious metals.

Millennium Trust Company (www.mtrustcompany.com) is another of the larger diversified trust companies with nearly $10 billion in custodial assets in nearly 240,000 client accounts. They act as custodians for investments ranging from hedge funds to real estate to private placements, as well as mortgages and precious metals and bullion coins.

Equity Trust (www.Trustetc.com) with 130,000 IRA accounts and $12 billion under custodianship has a more diversified expertise, including real estate, private lending, purchasing notes, and private placements, as well as precious metals.

If you have a substantial IRA that you've built up over the years, or have rolled over from a company 40l(k) plan, you might want to diversify out of the more traditional universe of stocks and bonds - just to give your portfolio a different kind of balance. It's worth exploring. And that's The Savage Truth.

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