The Bottom Line: Self-directed IRAs move past stocks and bonds

There's a new investment philosophy in town. Described as "taking control of your retirement account" or "truly self-directing" your IRA, self-directed retirement accounts are everywhere these days, from banks and credit unions to brokerage houses and trust companies.

          "Most of my clients have self-directed IRAs," said Grant Johnstone, principal of Johnstone Financial Advisors, which sells the more traditional IRA investments such as stocks, bonds, mutual funds and certificates of deposit through the Wachovia Securities Financial Network.

          "Some people do that with the help of a financial adviser and some people do not. Either way, what we find is that the level of success a client has is based upon what kind of blend they have, and how they maintain that blend."

          These days, that blend may include nontraditional investments such as real estate, where title to the property is held within the IRA.

           "When it was first proposed to me four years ago, I didn't think it could actually be done," Johnstone said. "But within recent years I've seen where people were able to take on real estate interest within an IRA, and there are firms that specialize with that."

           One such firm is Pacific Northwest-based Bay Bank, which has branches in Seattle, Portland and outlying areas.

           "We're one of the few in the area, primarily because most investment firms don't touch it because real estate's not a financial asset they gain a commission on," said John Strohecker, Portland trust and investment officer with Bay Bank.

           Two-thirds of Strohecker's self-directed account holders either own property or are buying and selling properties within their IRAs, he said. The properties can be used only for investment.

           Investor Margie Beckett, a broker for Prudential Northwest Properties, said, "It's something I wish I would have known about years ago." Rent and profits from her real estate investments, if held within her SEP IRA, would have been automatically tax-deferred or, if held within a Roth, tax-free.

           Investors must follow basic IRA investment guidelines related to real estate. (The Internal Revenue code dealing with self-directed IRAs is at www.Self-Directed.info.)

          And investors should know the market. After all, the financial security of their retirement is at risk.

         "I don't do as well when I venture outside of investment areas I know," said Bob Law, a real estate broker whose IRA recently financed renovations on someone else' s apartment complex. When projects like this sell, the loan amount plus 12 percent interest and fees from 2 percent to 5 percent go back tax-deferred into his Keogh account.

          "I feel that I know the market here," Law said. "And if I have to go look at the property, I usually can."

          Either way, "in the self-directed realm, people really need to understand what they own," said Jeff Auxier, 46, owner of Auxier Asset Management. "If you want to speculate, don't do it with your retirement funds."

          After all, he said, you won't get a tax deduction for IRA losses.

         "It really comes down to this," said Bay Bank's Strohecker. "If someone has great experience in real estate, and they have an IRA and trust their instincts and real estate skills more than they trust their money manager or broker, then they're the prime candidate."

Send your finance questions to Jennifer D. Meacham at IRA@jennifermeacham.com. Jennifer is also the co-author of the best-selling book "IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment" (Square One Publishers, $16.95)

© The Oregonian, First Rights

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