Over-zealous advertising may dangle a “dream retirement” across your screen in the hopes of selling their potentially suspect investment products. You may dismiss such chatter but still wonder if you can retire comfortably without taking a chance on a dubious offering or without implementing some sort of financial genius. Retirement may seem like an intimidating landscape, but self-directed investors continue to unhinge this negative stigma.
Anyone can build the retirement they want. Jeff proved that experience and dedication go a long way toward achieving one’s goals. You don’t even need a high school diploma.
After joining the Navy and earning his GED, Jeff attended trade school and earned his living as a blue-collar worker. He practiced two investment strategies back then – day trading stocks and managing real estate. Having experienced mixed (mostly negative) results as a day trader, Jeff grew tired of balancing his time between his rental properties and the demanding hours of his career. He set his sights on retirement instead. Jeff still wanted to master the stock market but also knew he could better manage his real estate investments—and possibly acquire new properties—with his new-found free time as a retiree. He had also learned about self-directed IRAs from his accountant. In 2008, Jeff officially left the workforce and rolled $390,000 into an IRA with New Direction.
Jeff’s new retirement plan held two properties and a brokerage account by the end of his first year. His real estate performed well, but he continued to struggle in the stock market. Jeff allocated $100,000 toward brokerage and lost nearly half of it, at which point he walked away from Wall Street for good and dedicated his full attention toward his tried and true approach. He couldn’t fulfil his lofty goals with cash alone, so he utilized debt leverage to boost his purchasing power and fortify his account with additional real estate assets. Through a combination of equity and financing, Jeff’s IRA obtained five total properties. He also assisted his wife with her own real estate IRA.
Jeff came face-to-face with unrelated business income tax (UBIT) when he sold one of his financed properties. Per IRS regulations, any unrelated debt financed income (UDFI) may be subject to UBIT even if said income remains situated in an IRA. Jeff’s account was therefore on the hook for UBIT having liquidated the debt-leveraged real estate. It was a valuable lesson that helped reshape his investment blueprint. Debt played a key role in building Jeff’s real estate IRA portfolio, but it was time for those same lucrative assets to eliminate debt and any future UBIT obligations.
Before long Jeff’s four remaining properties were owned outright by his IRA, bringing an end to UBIT payments and securing the full tax advantages of his real estate profits. He also helped his wife refinance one property and pay off another. Today Jeff seeks to avoid debt if at all possible, but he also considers the more aggressive strategy he may have adopted had market conditions, property management options, and other such factors come to fruition in different ways.
In less than a decade, when he was already retired, and as a self-proclaimed “pretty conservative investor”, Jeff built a $1.1 million self-directed IRA from his initial rollover of $390,000. He achieved this success despite the UBIT his IRA paid, the initial losses he sustained in the stock market, and having taken fairly sizable distributions over the last several years. As Jeff put it, “not bad for a high school drop-out!”