The IRA of today is vastly different than it was five years ago. With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that increased contribution limits, especially for those 50 and over, and liberalized the rules regarding rollovers and portability of assets between retirement plans, the stage is set for the IRA to become the dominant retirement account.

A steadily growing percentage of the more than $10 trillion in total assets now held in retirement plans is being channeled into alternative investments (trust deeds, mortgages, tax liens, real estate, private equities, limited partnerships, limited liability companies) using self-directed accounts (SDAs) rather than conventional assets such as mutual funds and stocks.

The IRS does not “approve” assets in retirement plans but they do indicate which will not be allowed. The following shows non-traditional assets that are generally accepted by IRA custodians and those that are prohibited.

Four Easy Steps to Create an IRA

Buying real estate with an IRA should be done in the following manner.

Step 1: Locate a self-directed IRA custodian. While traditional IRA custodians, such as brokerage firms, may claim to provide self-directed retirement accounts, most restrict the type of investments they allow to assets from which they will derive a commission. Independent (non-product source) IRA custodians allow individuals to select from a wider range of options, such as trust deeds, mortgages, tax liens, real estate, private equities, limited partnerships, limited liability companies, etc.

Once you have chosen a firm, ask them to send you a self-directed IRA kit and the necessary investment authorization form(s) for real estate or visit the custodian’s Web site and download the applicable forms.

Step 2: Complete the new account paperwork. This usually consists of an IRA agreement, fee schedule and disclosure statement. Read the documents carefully and fill in the requested information. Pay close attention to beneficiary designation. Failure to name a designated beneficiary will default to the ordering rules contained in the financial institution’s IRA agreement. Many IRA documents indicate that the individual’s estate will be the designated beneficiary if no one is named. Individuals transferring or rolling over funds from another IRA will also need to complete the IRA Transfer/Rollover Request form. Send these forms back to the SDA IRA custodian for processing, i.e., let the new IRA custodian send the transfer request to the old custodian.

Step 3: Fund the new account using one of two ways to move assets from one IRA to another:

• Transfer – A tax-free, non-reportable movement of assets between retirement plans. Generally, transfers occur between similar types of plans: for instance, from a Roth IRA to a Roth IRA.

• Rollover – A rollover is a distribution to an IRA owner of cash or other assets from one retirement plan which is then deposited into another retirement plan. A rollover may occur between IRAs, or between an IRA and an employer’s plan. A rollover is tax-free provided the entire rollover contribution is re-deposited to another IRA custodian within 60 days after the IRA owner received the distribution. Any amount not rolled over in time is treated as an early withdrawal and taxable in the year distributed.

Step 4: Authorize the investment. Once you find a property to acquire, sign an investment authorization instructing the custodian to buy it. Follow the instructions contained on the investment authorization and provide the IRA custodian with copies of the requested documents prior to funding. The document requirements will vary between IRA custodians, but may include a draft of the proposed deed to ensure that vesting will be properly reflected. You will typically be asked to write a check drawn from the account or wire funds to a third-party escrow company, and the title goes in the name of the IRA and the custodian.

As individuals get older and closer to retirement, they tend to be less interested in the growth of their portfolio and more interested in income and capital preservation – protecting the value of their portfolio from any declines. Real estate ownership within an IRA may help investors achieve these objectives.