For years, the primary retirement plan was a company pension plan. At retirement, a retiree would receive a fixed sum, or a pension, paid by the employer. By offering a superior pension plan, employers, the government and labor unions attracted good employees. Unfortunately for the employers, no one counted on life expectancies to increase by nearly 20 years, which has caused most large pension funds to be seriously underfunded. Some companies have chosen bankruptcy rather than pay the pension benefits promised to retirees.Companies are quickly replacing pension plans in favor of a 401(K). This program means employers no longer have to pay pensions, though some employers match employee contributions up to a certain amount. In 2014, the annual amount an employee can contribute to his/her 401(K) account is $17,500. If you are 50 years old or older, you can contribute an additional $5,500 as a catch up contribution for a total of $23,000 per year. Any matching contributions your employer makes to your account are added to the amount you can contribute, up to a maximum of $51,000 per year.

Employer based 401(k) programs are a great start.  However, instead of putting all your retirement funds in your employer’s 401(k) program, which only allows you to invest in a selected number of stocks, bonds and mutual funds, you can also start your own Individual IRA account with a Self-Directed Administrator/Custodian such as PENSCO*. You can direct your money into Income-producing real estate, which is a far better investment than putting your money in the stock market (see the article, “Ten Reasons Why Real Estate is a Superior Investment” in November 2013 Jacksonville Review or on our blog at You can transfer your existing 401(K) into a Self-Directed IRA, which opens up the possibility of investing even more into income-producing real estate, or you can start a new IRA that is self directed.

The in’s and out’s of self directed IRA’s.

Investment Choices for Self-directed investors

  • Real Estate: (Rental property, Commercial, Raw Land, Boat Slips, Mortgages)
  • Private Equities: (Invest in a LLC, Private Stock, Convertible Notes, Private Hedge Fund)
  • Promissory Notes: (Secured notes like real property or unsecured notes)
  • Other Alternative Assets: (Publicly traded foreign currencies, Precious Metals)

Tax Deferral

  • All investments grow tax-deferred. If held by a Roth IRA, your capital gains and interest earned are tax free. Because in most cases, you are not taxed until retirement in a tax-deferred account, your return on investment can accumulate faster, and that accumulated return may be reinvested tax deferred.


  • Diversification is a way to reduce risk in your investment portfolio, “Don’t put all your eggs in one basket”

You’re in Control

  • As the term “self-directed” suggest, you or someone you appoint makes all the investing decisions – what to buy, how to buy it, when to sell, to leverage or not to leverage.

Can’t Do

  • You can’t hold the property in your name it must be in IRA’s name
  • All expenses and revenue must go through the IRA
  • NO personal use of the property is allowed.
  • Maintenance and repairs must be done by a third party
  • You can’t take out the money until you’re 59 ½ years old.

Can Do

  • You can have partners, Tenants in Common, Limited Liability corporation (LLC)
  • You can leverage to increase your yield by getting a non-recourse mortgage loan or the seller can carry-back a loan. (see
  • Investments can be held in a traditional IRA, Roth IRA, SEP-IRA, Solo (k) or 401 (k)

We mentioned above that you can leverage your investment to increase your yield and here is how that works. You invest $100,000 in mutual funds and $100,000 in real estate both of which are appreciating at 6% a year. The only difference is that you can borrow additional money from a bank to buy more real estate, and leverage your investment. Say you obtain a 20 year amortizing loan at 5 percent. You borrow $300,000, so you have $400,000 to invest total.  After 20 years, your mutual fund investment has increased 6% yearly to $320,714, while your real estate investment has increased 6% yearly to $1,282,854. This is $962,140 more than the same investment in mutual funds, and a 300 percent increase in value with the same $100,000. That’s the power of real estate and the power of leverage.

The 20 years of mortgage payments have be covered by your tenant but you get all the appreciation and the tax benefits of the depreciation and interest write offs

It is a lot to consider but we have done this for ourselves and a number of clients. Give us a call, and we’ll show you how to do it 541-899-7788.

For additional information go to and read the ABC’s of Self-Directed IRA’s.

*PENSCO Trust Company