I Want to Own a Golf Course in My IRA: The Non-Traditional Asset IRA
It’s getting to be the time of year when people are thinking about adding to their IRA (Individual Retirement Account). This usually occurs around the end of the year up to the income tax filing date the following year (the norm is April 15th). Right now the rules say you can put in up to $5,000 (you can add another $1,000 if over age 50) if you have income, that income isn’t too high, and you are not doing this in addition to adding this on top of a 401k addition. This is all pretty standard except when you take it a step further and start talking about what kind of assets are allowed in an IRA. In my own example, a number of years ago I was approached by a gentleman who wanted to hold ownership shares of a golf course in his IRA. Now, by nature an IRA is self-directed (thus the individual in Individual Retirement Account), but what can and cannot go into an IRA?
Most banks, brokerage firms, and custodians like I use (as a Registered Investment Advisor) limit IRA investors to things like stocks, bonds, mutual funds, ETFs and certificates of deposit. However, the U.S. tax code says that the only assets off-limits in IRAs are life-insurance policies and collectibles (i.e. artwork and some types of coins). So, what are the ups and downs when someone wants to hold something like precious metal, alternative investments, or real estate? (I personally am a “farm kid” and agricultural land has always been close to my heart.)
Because IRAs are administered by custodians and sanctioned under the tax code, they can give investors a false sense that a financial-services firm or the IRS is evaluating the quality or legitimacy of their holdings. Not only are they not evaluating the holdings and making recommendations, because of this, custodians that are open to non-traditional assets are not plentiful in number. And, the custodians that do work with these non-traditional assets are not doing it on the cheap. A custodian is going to charge to be a custodian and the charge will very rarely be as cheap as what they would charge to hold a “regular” investment product like a mutual fund. Also, say you are buying and selling properties inside of this custodial IRA; each time there is paperwork that is associated with a transaction, I think you’ll find a charge associated with that paperwork.
Another “problem” that you can run into is that whatever is held in an IRA has to be annually valued. The big reason behind this annual valuation is that eventually a person has to take an annual required minimum distribution (the first one has to come out a year from the time the IRA owner turns 70½). To calculate the amount of this annual distribution, you have to know the value of the holding on December 31st of the prior year. This could lead to an annual appraisal and the cost associated with that. Think about it this way: if all your IRA owned was a piece of property and you had to remove a certain percentage of it, you could be forced to sell the holding to meet that requirement. And what if it doesn’t sell?
So, if you are considering buying precious metal or a racehorse in your IRA, make sure you understand the rules and the cost of the game.