INSIGHT ON PERSONAL FINANCIAL PLANNING – Self control – sophisticated investors put these lesser known retirement plans to work for you

Posted on Feb 1, 2012 :: Industries
Posted by , Insight on Business Staff Writer

Thanks to online access to financial data, keeping tabs on retirement plans can be as easy as glancing at a mobile Web app. But even with all this connectedness, there can still be a feeling of disconnect over one’s retirement destiny given Wall Street’s volatility.

Not for Scott DeWitt, a real estate broker with DeWitt Londre in Appleton. A year ago, DeWitt started up a self-directed individual retirement account – a type of IRA that allows him to invest locally in assets like commercial real estate. DeWitt says it gives him a level of control that more traditional retirement plans don’t offer.

Sure, there are other, more traditional retirement savings vehicles that allow investors to tweak their portfolios, or buy shares in real estate investment trusts (REITs), but a self-directed IRA allows holdings other plans do not, like actual real estate or precious metals. For people like DeWitt, that changes the whole meaning of being able to keep an eye on your savings.

“You are buying close to home,” says DeWitt. “You can actually see your investments.”

Self-directed IRAs – along with another type of retirement plan known as a solo-defined benefit plan or “Solo DB” plan – are two retirement plan types that are lesser known and under-utilized, say those familiar with these plans. They also may be well-suited to owners of small companies looking to build up their retirement savings while reducing tax exposure. Here’s the low-down on these plans:


Self-directed IRAs

A self-directed IRA, as the name implies, is a way for individuals to gain complete control over their IRA while expanding the range of asset choices, says Mark Welhouse of Welhouse & Associates, a wealth management firm in Appleton. While more frequently used IRAs are geared toward investments in stock funds, bond funds, or REITs, a self-directed IRA can buy real estate, precious metals, or even invest in closely- held stock, promissory notes, or corporate debt, says Welhouse.

As a result, these IRAs can be appealing to the small business owner who likes the idea of bolstering the local economy while acquiring solid assets like prime commercial properties that generate a steady income stream. “It really helps drive rate of return for the investor, and also really helps the local community,” Welhouse says.

He adds that many investors with self-directed IRAs have been acquiring commercial real estate, especially with bargain pricing the last few years for those who can pay with cash. An added benefit of a self-directed IRA, says Welhouse, is that it has a checkbook feature.

“The checkbook advantage provides money for investments that need immediate action such as real estate investments,” he says. “The good properties can go fast, so you have to be able to act quickly.”

DeWitt has used his self-directed IRA to buy some real estate, but also to buy notes on used cars at a car dealership. When the dealer sells the car, the IRA profits. DeWitt says he likes the flexibility of being able to invest in tangible assets with strong returns, the ability to help the local economy, and the speedy access to funds. “There is no waiting or approval processes – I can just write a check,” he says.

Self-directed IRAs aren’t for everyone, notes Welhouse. Investors typically can’t set one up on their own, needing the assistance of an attorney and accountant to establish the plan. The plans also need some annual review and maintenance. Welhouse estimates a self-directed IRA can be set up for around $2,300, with about $100 in annual maintenance. DeWitt says his plan cost about $2,000 to set up.

One reason for the higher cost is that typically, an attorney with special knowledge of these IRAs has to craft the paperwork, which establishes a limited liability company that facilitates the IRA and its activities, says Roy Fine, an attorney with Di Renzo & Bomier in Neenah. With the right advisors, says Fine, setting up one of these plans is not that difficult, but, he adds, “the investor has to have a certain level of tolerance for that extra effort in the hopes of getting a better return.”

Another reason why professional help with self-directed IRAs is important is that certain tax rules apply. For example, a self-directed IRA can acquire a house with an eye of flipping it for profit, but a home can’t be bought for personal use or used as security for loans.

Running afoul of such rules can risk the tax-deferred status of the IRA.

“You need some guidance, but the advantage of having a portion of your money in a self-directed IRA is that you can participate in some fantastic opportunities that produce very good, stable rates of return as opposed to the stock market roller coaster ride,” Welhouse says.


Solo DB plans

A Solo DB plan is like the corporate pension plans that were once common in corporate America, but geared toward higher income, self-employed people. Solo DB plans can be attractive to certain high-income baby boomers who are behind on their retirement savings, says Ed Klug, president of Edward Klug Investments SII, a financial advisory firm in Appleton.

“The ideal candidate would be a self employed person over 50 who expects to have a steady, high income and an ability to contribute at least $60,000 a year for at least three years,” he says.

The big draw for Solo DBs is that they can allow an individual to set aside large sums for retirement on a tax-deferred basis. The upper limit depends on a person’s age, income and actuarial calculations, but can exceed $100,000 per year.

“DB plans can allow you to set aside a lot of money in a short time period,” notes Klug.

The flip side, adds Klug, is that relatively few self-employed people can afford to set aside such big chunks of income for several years in a row. Also, the Solo DB is geared mainly to sole proprietors or those who work with family members since these plans have to cover all employees, with some exceptions such as part-time employees with limited hours.

Solo DBs also are relatively complicated to set up. With Solo DBs, an actuary is needed to calculate the annual contributions based on the target payment upon retirement, notes Donna Moder, a managing member with Retirement Plan Partners in Appleton. The plan would also need annual review and third-party administration, she says.

With these more complex plans, it may be best to consult with a financial advisor before forging ahead.