Private Lender Alternatives Within the Alternatives

/Private Lender Alternatives Within the Alternatives

Alternatives Within the Alternatives

By |2018-08-07T02:37:47+00:00May 15th, 2018|IRA Approach, Private Lender|0 Comments

Don’t overlook pursuing lucrative segments with your tax-advantaged retirement dollars.

When individual retirement account (IRA) providers talk about how your self-directed IRA can invest in almost any alternative asset, we really mean it. Common strategies in real estate, precious metals and private lending may grab the headlines, but don’t forget about other potentially lucrative facets within those industries. Identifying an overlooked or disregarded investment model can prove especially valuable when coupled with the tax advantages self-directed retirement accounts offer.

Pre-tax plans like traditional IRAs allow you to defer taxes on your contributions (deposits) and only pay taxes on distributions (withdrawals) down the road. Simplified Employee Pension (SEP) IRAs and Solo 401(k)s, whose annual contribution limits are far higher to accommodate the earning potential of self-employed individuals, provide the same tax-deferred contribution benefit. Post-tax plans like Roth IRAs somewhat flip the script by charging account holders with paying full taxes on their contributions, but qualified distributions can be completely tax-free regardless of how large the account grows. If you can turn a $5,000 Roth contribution into $30,000 through a quality self-directed strategy, you’ll get to keep every penny of your $25,000 profit if you follow the IRS rules.

Health savings accounts (HSAs) provide an intriguing combination of pre-tax and post-tax benefits. Subscribers to single or family high-deductible health plans can make tax-deferred contributions to their HSAs and pay no taxes on distributions, regardless of the account holder’s age. To garner their tax-free benefits, distributions from HSAs must either cover or reimburse the account holder for qualified medical expenses. The list of qualified medical expenses is quite extensive. You don’t have to wait for some obscure medical emergency to take advantage of these big-time benefits.

Let’s examine the possible ways that you can apply your expertise in private lending to three somewhat specialized (yet increasingly popular) investment opportunities, all while yielding the tax benefits of IRAs, 401(k)s, HSAs and other such accounts.

Cryptocurrencies

Popular cryptocurrencies like Bitcoin, Ethereum and countless others exploded onto the investment scene last year. For those familiar with Bitcoin, its 2009 debut and 2017 low price of roughly $775 per unit may seem like distant memories. The pioneer crypto achieved an all-time high of approximately $19,200 just before the New Year, bringing an early Christmas bonanza of profits to early investors who cashed out at that time (all price figures courtesy of www.tradingview.com). The market has since pared those remarkable gains (Bitcoin sat at around $6,820 as of April 1), but enthusiasm appears to be alive and well. Similar price spikes in other cryptocurrencies have prompted otherwise skeptical investors to try to find the next millionaire-making token.

As a private lending professional, you may have considered ways to tap the cryptocurrency investment arena without succumbing to the rapid price swings of direct ownership. Although doing so would carry its own set of risks, you could accept cryptocurrencies as collateral for a loan of fiat (government-backed) currency. Should a borrower default on his or her loan, you may find cryptocurrencies easier to collect than property or security assets. If you envision broad applications of the blockchain technology on which cryptocurrency exchanges are based, financing blockchain-based businesses could be another avenue. The crypto-craze has inspired new tech companies to try to harness the blockchain to revolutionize supply chains and utilize smart contracts in everyday business.

Some of these startups have been using initial coin offerings (ICOs)—public offerings of equity-based tokens—as a means to raise capital, but fraud and consumer confusion in this space has drawn increased scrutiny from the U.S. government and outright prohibition by others around the world. In a statement released on the Securities and Exchange Commission website, Chairman Jay Clayton pointed out that “enthusiasm for obtaining a profitable piece of a new technology ‘before it’s too late’ is strong and broad. Fraudsters and other bad actors prey on this enthusiasm.” Considering this sentiment, it’s possible that legitimate ICO companies, in an effort to avoid subpoenas and other crackdown measures, may seek more traditional financing to fulfill their visions if they’re not yet positioned to offer publicly traded shares.

Bridge Loans

Titans of industry like PayPal have recently dipped their toes into private lending, providing consumers with the confidence of trusted brands without the negative stigmas of big banks. Specifically, these companies have begun offering easy access to financing for retail purchases. Anyone looking to buy a TV through their laptops or smartphones can choose between “buy now” or “show me financing options” and acquire a mini-loan if they select the latter. Furthermore, consumer perception has soured toward payday lending and its predatory practices. Scrupulous private lending professionals can help fill this growing demand for short-term, small balance loans with their self-directed IRAs.

Because retirement money must maintain legal separation from personal money, you can most easily initiate bridge loans by obtaining checkbook control of your IRA funds. To do so, instead of lending money directly from your IRA, you can open a private entity (typically an LLC) with your IRA. The LLC will be the asset within the account and, upon naming yourself as manager and funding the account with your IRA money, you’ll be able to personally initiate loans on behalf of your IRA-owned LLC. Having direct access to your IRA money can allow you to follow your preferred qualification and due diligence procedures and dole out loans as quickly as you deem appropriate. In truth, this strategy can apply to any lending activity, but it affords a degree of flexibility for borrowers who need smaller amounts for shorter periods of time.

Earnings from interest payments must return to the LLC (and the IRA by proxy) and may never flow into your non-retirement account. Intentional and unintentional prohibited transactions like this happen more frequently with LLCs in retirement plans, so the IRS may be inclined to take a closer look. To ensure full IRS compliance of your self-directed retirement account, don’t hesitate to consult with your IRA provider, an attorney or a tax professional.

Real Estate

The success available through real estate investing is certainly no secret, but this hands-on field isn’t everyone’s cup of tea. Mortgage origination can expose your note portfolio to a steady demand for property, but not without magnified dangers. Anyone looking to avoid the banks may do so with good reason; less-than-stellar credit can bring a high degree of risk to a six-figure loan, even if you try to balance the risk with a higher interest rate.

Fortunately, you can enter the real estate market without threatening your bottom line with these possible pitfalls. As with any alternative asset, self-directed retirement investors can take full advantage of property ownership as well as other, more specialized segments of the industry. Smaller loans to help land owners develop property or achieve other such goals have become more in vogue, especially as online marketplaces for these opportunities continue to expand. Just as individual investors can explore internet platforms, acquire factions of larger loans and earn a percentage of the interest, private lenders can comb the internet for eager real estate investors who need capital.

More to Consider

Should one or all these investment scenarios capture your interest, there are a few distinctions between investments with personal funds and investments with your IRA worth bearing in mind. It may help to remember that the IRS regards your retirement account as the investing entity, even though you’re the engine that makes decisions and drives transactions. All applicable paperwork must be titled in the name of your IRA, and an authorized representative from your IRA provider must provide signatures where required. For instance, the investor “name” specified on a loan or security document would be “IRA Custodian Company, FBO

[For Benefit Of] John Q. Client Traditional IRA [Account Number] #1234567.” Instead of signing on the dotted lines, you would sign as “read and approved” in the margins or otherwise away from the actual signature lines. This will notify your IRA provider that you, as the account holder, approve the transaction in question without actually signing on behalf of your account.

Due to strict IRS rules surrounding self-dealing practices with one’s retirement money and assets, an IRA cannot provide direct benefit to or receive direct benefit from disqualified persons. These persons include the account holder; linear family members of the account holder, such as parents or children; any spouses of the aforementioned individuals; or any person or company with fiduciary responsibility over the retirement account involved. Nonlinear family members, business partners and friends who don’t fall into one of these disqualified categories may conduct business with your IRA at their (and your) leisure.
The beauty of self-directed retirement investing lies in your creativity. If none of the options discussed here appeal to you, you have the power to find the niche that will. Just about any private lending segment that you can legally pursue with your personal funds can also be pursued with your tax-advantaged retirement dollars. With a full spectrum of investment opportunities at your disposal, you can hedge your bets against Wall Street and help protect (and hopefully grow) your retirement nest egg despite the volatility that may exist in other markets.

By |2018-08-07T02:37:47+00:00May 15th, 2018|IRA Approach, Private Lender|0 Comments

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