Asset Optimization Blog - Ken W. Stone
Is a Self Directed Retirement Account Best?
In Retirement Planning by Ken Stone (April 15, 2008 9:26 pm)
Here’s the background: a couple of weeks ago I attended a continuing education (CE) session on self directed retirement accounts. I haven’t felt good about these since they first made a serious push onto the real estate scene several years ago - but I thought I’d attend, and see what I could learn. Let me quickly say this: my opinion of this approach to retirement planning did not change – I’m still not a fan.
If you’re a bottom line person here’s my bottom line: While a self directed retirement account may be appropriate and suitable for some investors, the group is very small and elite. Realtors and Mortgage Lenders have no business making recommendations to consumers that they self direct their retirement accounts – and further, that they purchase investment real estate with their retirement account.
The class I attended was put on for Realtors in my market area. I’m a mortgage lender – one of fewer than 200 Registered Mortgage Advisors (IARFC) in the U.S. and I need to complete 40 hours of CE a year to maintain this certification.
I have to believe the company putting on the class (they manage self directed retirement accounts – including: IRA, 401(k), Roth IRA, 403(b), etc.) is typical of the companies that manage self directed retirement accounts. That is, they’re looking for advocates in the industries that benefit from individuals and couples who choose to self direct their retirement money. Real Estate is obvious – since folks who choose a self directed retirement account can purchase investment real estate with their retirement account funds. The Realtors get paid a commission when these transactions close. Realtors are looking for more business of late – so the room was full of Realtors excited about entering a new market.
Let me be clear, I’ve got good friends and family who are Realtors – I’m a big fan of Realtors – the Realtors I work with are among the best. The point is that none of them would ever advocate a transaction simply for the purpose of generating a commission.
I’m concerned that a focus on self directed retirement funds, specifically investing in real estate, is in part about making business happen in a down real estate market - not necessarily on doing what’s best for the consumer’s short and long-term financial goals.
Let me point out some obvious problems with my perspective: I’m not a licensed Realtor – I’m certainly not speaking for that community. I’m also not in a position today to fund non-recourse mortgages (required for this type of investment real estate purchase). Critics could say I’m full of sour grapes because I can’t currently make money funding these types of transactions (and that’s true – I don’t make a commission for these types of loans – they must be referred to a local bank). My concern about this approach has nothing to do with my personal income – but you’ll have to decide for yourself if you think I’m shooting straight with you.
Finally the teachers of the class outlined the traditional financial planning response to self directed retirement accounts as negative. Their explanation: the financial planning community loses a source of revenue as the assets under management transfer from their portfolio. That’s fair – but what they failed to talk about were asset allocation models and evaluating investor risk profiles along with determining if a specific investment approach is appropriate and suitable (three critical functions that financial planners perform for their clients). This last point doesn’t have anything to do with me – I’m not a financial planner, nor do I have any financial interest in my clients working with any financial planner. Still, it was presented as a “they’re (the financial planning community) are out for their own financial interests exclusively.” This is factually wrong – as some financial professionals are obligated to act as a fiduciary – that is, exclusively in their clients’ best interests.
My rationale: No realtor or lender that I know is licensed to dispense investment advice. Isn’t a recommendation to move to a self directed retirement account specific investment advice? Further, isn’t a recommendation to invest in real estate (with retirement funds) specific investment advice? And: are Realtors and mortgage lenders generally trained and qualified to be helping their clients evaluate investment risks?
I’ve got a real problem with buying an asset class (real estate) that otherwise enjoys long term capital gains treatment outside of a qualified account – inside a tax deferred investment account (qualified retirement account) where distributions are taxed as income (necessarily a higher rate than long term capitals gains). Examples where this is true include IRAs, 401(k)s, 403(b)s, etc. Examples where this isn’t the case include ROTH accounts where the growth isn’t tax deferred since contributions are made in a post (income) tax environment.
There’s already a provision in the tax code for a tax deferred real estate investment (1031) AND there are strategies for avoiding the long term capital gains tax (other than as an estate planning strategy). I’ll continue these points in my next post!
To your optimized financial health,
Ken
2 Comments »
RSS feed for comments on this post. TrackBack URI
Leave a comment
Your blog is interesting!
Keep up the good work!
Comment by AlexM — August 16, 2008 @ 8:11 am
Pretty nice site, wants to see much more on it!
Comment by John Williams — August 20, 2008 @ 8:52 pm