Did you know you can use your IRA or 401k funds for investments that are not the traditional stocks, bonds, and mutual funds?  There is a way to use your retirement funds to invest in things like real estate, secured and unsecured notes, privately held stock, precious metals, Limited Liability Corporations (LLCs), and private funds. 

I have been using this model for my personal investments since 2007, and at Hughes Private Capital, we have made it part of our mission to share this opportunity with others.

Why is this one tip such a big secret?

I’m referring to the lesser-known strategy of directing your IRA funds into investments like real estate, secured and unsecured notes, privately held stock, precious metals, Limited Liability Corporations (LLCs), and private funds — rather than the more traditional investments like stocks, bonds, and mutual funds. 

Unfortunately, most financial advisors don’t tell their clients about it because investing in private funds takes dollars away from their managed accounts. Of course, not all financial advisors do this. The good ones who are looking out for their clients’ best interests will tell clients about it, and to be fair, not all financial advisors even know about the option or understand how it works.

It’s a fact: many investors are uncomfortable with the stock market.  It’s not the specific performance of the market as much as the overall feeling investors have about it.  What investors are uncomfortable with — and rightly so — is what they’re unable to control when investing in the market.  That is one of the reasons why people are very interested when they learn that they can hold other types of investments with their IRA and 401k.

Below, I’ve compiled answers to some of the most common questions that people ask me about this — that your financial advisor may not want to answer or know the answer to.

Can I use my IRA or 401k for investments that are not the traditional stocks, bonds, or mutual funds?

Yes, in addition to traditional investments, you can also use your retirement account funds to invest in things like real estate, secured and unsecured notes, privately held stock, precious metals, Limited Liability Corporations (LLCs), or private funds.

If I wanted to invest in Hughes Capital’s investment opportunities or another non-traditional investment, would I have to invest my entire IRA or 401k?

Nope, it’s not all or nothing.  You can leave part of it invested as you have it now and set aside a partial amount to diversify into something else.

Let’s say I wanted to invest all or part of my retirement account into a Hughes Capital investment.  How would that work?

To invest your IRA or 401k in something other than the stock market or mutual funds, you need to have what’s called a Self-Directed IRA (SDIRA) or Self-Directed 401k.  A self-directed account gives you the freedom to choose where you want the funds to be invested.

Your retirement account must be placed with a custodian like Fidelity or Charles Schwab.  However, not all custodians allow retirement accounts to invest in nontraditional investments like real estate, LLCs, notes, etc.  Many custodians only allow you to invest in stocks, bonds, and mutual funds.  Don’t worry about becoming an expert in all of this and how it works.  Although Hughes Capital is not a retirement custodian, we can help get you set up with a custodian that allows you to make self-directed decisions with your retirement account into investments that are not tied to the stock or bond market, such as real estate.

What constitutes “prohibited transactions” and “disqualified persons” in a self-directed account?

The one thing to watch out for in a self-directed account is the non-self-benefiting rule.  You and your family members in a direct generational line up or down are considered “disqualified persons” and are not allowed to receive any form of compensation or benefit from the self-directed account or its assets.

This includes your spouse and any immediate family on both sides, such as parents, grandparents, children, and grandchildren.  Only the self-directed account can benefit.  It is, after all, in place to fund your retirement.

What does “self-benefit” mean?

First, think of your self-directed account as its own entity.  Any IRA or 401k income received must go into the account and any IRA or 401k expenses paid must come out of the account.  Just like when you invest in the stock market, in order to put money in or take it out, you have to follow the rules.  It works the same way with a self-directed account, but it’s not as intuitive or clear cut.  This is best explained by using a couple of examples.

Example #1

You have purchased a single-family rental home with your self-directed account, but it needs a few repairs and some landscaping before you can rent it out.  You think this would be a perfect time to get your kid’s lazy butt out there to teach him or her how to do some of these repairs and earn some spending money.  This would violate your self-directed account since a direct descendant can’t be paid or benefit through the self-directed account.

Example #2

You decide that the best place to buy a rental home is your favorite vacation spot.  It would be great because you could rent it out, and when it wasn’t being used, you and your family could use it.  Again, this would violate your self-directed account since you would benefit from it.  There are many ways to purposely or accidentally violate your SDIRA or self-directed 401k account — especially when investing in real estate on your own.

This is not to say that you can’t do it on your own.  Many people manage their self-directed accounts successfully.  Just go in with your eyes open and make sure you understand all the rules before starting the process.