[Editor's Note: The following is a guest post from Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group. I met him at this year's FINCON personal finance blogger convention. He has unique expertise in an very rarely covered area of investing... the self-directed IRA. Fortunately, he agreed to share some this expertise with readers of Lazy Man and Money.]
His self directed IRA is worth over $100,000,000
I’ll bet your first thought is that this headline is an exaggeration. In fact, it isn’t. There is at least one person who has accomplished this feat with their IRA and there could be as many as 314.
According to a GAO report released on November 9th 2014, 314 people had an IRA worth more than $25,000,000. Unless you live in a cave and don’t own a TV, smart-phone, or computer (which means you wouldn’t be reading this) you know who he is. While you may not know him personally, you probably know all about him, his family and details about his life that most people wouldn’t care to disclose. You may have even voted for him… Yes in 2012 you may have voted for him. This man’s name is Mitt Romney.
The Mitt Romney IRA
According to public disclosures required to run for public office of the President of the United States, Mitt Romney is said to have $100,000,000 or more in his self directed IRA. While the recent GAO report does not disclose who these people are that have IRA account balances of over $25,000,000, it does state that there are 314 of them. There are also 791 people with IRA account balances of between $10,000,000 and $25,000,000, and 7,952 people with IRA account balances of between $5,000,000 and $10,000,000. That is over 9,000 people who have extra large IRA account balances.
Mitt Romney worked at Bain Capital for 17 years and 7 years prior to that at Bain & Company for a total of 24 years. Add that to the 11 years after that (2012) and Mitt Romney had 35 years to accumulate $100,000,000. During that time period the maximum contributions allowable to a 401k plan was $30,000 and up to $35,000 in 2001. Let’s say Mitt contributed $30,000 annually to his 401k plan and earned 20% annually, he would have $100,000,000. Considering Warren Buffett only made 19.7%1 annually for 43 years, this means Mitt Romney is a better investor than Warren Buffett.
These self directed IRA numbers are not unreasonable
Peter Thiel is also known to have an extra large Roth IRA (which allows you to have tax-free growth) due to his early-stage investment in Facebook and other private investments. There are numerous other similarly successful investors who have used this secret knowledge about self directed IRAs to benefit from tax-deferred growth.
But let’s be realistic...
You don’t need $100,000,000. What would you do with it?
I personally think Monty Brewster had the right idea. If you haven’t seen the movie, it is a classic.
While spending $30,000,0000 in 30 days or running for Mayor are interesting ideas, most people don’t need $100 million dollars. You don’t even need half that. Most of the IRA account holders would be happy with even fraction of $100 million.
Regardless of your ideal amount needed for your retirement, hopefully this insight into some very wealthy and smart investors will give you an idea about how you can take advantage of this knowledge and grow your own self directed IRA.
Here is how you can start using your self-directed IRA to take control over your retirement
The first step is to start contributing to an IRA or 401k. Hopefully you already have an IRA or 401k. If so, then you have already taken the first step.
The next step is finding a suitable investment or investment strategy. I would suggest that you first think through what you are an expert in and how you could profit from that knowledge. If you are a farmer, consider investing in a farm, crops, livestock, or commodity futures. If you work in the world of real estate, find a solid investment property, tax lien, or private mortgage to invest in. If you work with business owners, find a private enterprise that needs capital to grow and invest in that company. There are virtually a limitless supply of investments or investment strategies to consider. As Peter Lynch said, “Invest in what you know.” If you follow this sage advice, you will be ahead of most investors.
What is an alternative investment?
Alternative investments do not have a clear definition. Some people use the term to characterize hedge funds, managed futures, or other similar type of fund. Other people use the term to describe a certain trading style: a long-short, hedging through options, or specialized trading strategy. I would characterize any fund, strategy, or individual investment that is publicly traded or holds publicly traded securities as a traditional investment.
Alternative investments would be defined as non-publicly traded investments. Examples of these investments would be: real estate (commercial, residential, multi-family, raw land, timberland, farmland, industrial), private notes or mortgages, tax liens, equipment leasing, oil & gas LPs, private company stock, franchises, horses, livestock, intellectual property, and more.
Why limit yourself to the stock market? Don’t let Mitt Romney have all the fun. The world is your oyster when it comes to investments. Find investments that work for you.
Can I make these investments at my brokerage firm?
Technically you could, but it is unlikely that they will allow it. Most broker dealers (brokers) and custodians are not equip to handle alternative assets effectively, so they don’t allow it. There is a high likelihood that you will have to seek out a self directed IRA custodian to custody these alternative investments. My company, Innovative Advisory Group, has created a list of self directed IRA custodians to help with your search. Contact us to request this list.
How much money do I need to set up a self directed IRA?
While some mutual fund companies will allow you to set up an IRA with $500 or even as little as $100 in monthly contributions, that may not be a beneficial approach with self directed IRAs. Each self directed IRA custodian charges fees for their services and there is no uniform approach to how they charge. Some charge per transaction, some charge a percentage based on the assets which are held at the custodian, and others charge a combination of both. You can learn more about self directed IRA custodians by reading my detailed article on choosing one.
Are there any risks to using a self directed IRA?
The short answer is... Yes
Any investment carries risk, whether it is AIG, Lehman Brothers, Johnson & Johnson, or any other publicly traded stock or bond. You should always fully understand the risks in the investment you are making.
The primary risks with self directed IRAs you should be aware of are:
- Prohibited transactions – You need to know the self directed IRA rules.
- Disqualified persons- certain people cannot be a part of self directed IRA investments.
- Annual Valuations – These are a requirement. Make sure you get the correct type of valuation.
- Improper risk management and due diligence- always do your homework on any investment.
- Fraud from investment sponsors (see SEC alert) – know what you are investing in.
Why don’t more people use self directed IRAs to grow their retirement savings?
This is primarily due to a lack of knowledge that it is possible to invest in alternative investments with a self directed IRA. Less than 5% of the IRA account owners hold alternative investments in their IRA, and less than 20% of the population has even heard of the self directed IRA2. Many people learn things through advertising, and since none of the self directed IRA custodians do mass marketing in a traditional way, it is not surprising that only a small segment of the population is using this IRA secret.
Is a self directed IRA right for you?
Everyone should use a self directed IRA or similar retirement account to save for their retirement. This is essential if you want to benefit from tax-deferred growth in order to live comfortably when you retire from your job. However what you should invest in with that retirement account will be unique to each person. Investing in alternative investments with a self directed IRA is not for everyone. Due to the many caveats in the Internal Revenue Code, you should only consider this approach if you have professional guidance, or you have a strong grasp of the rules.
About the author: Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group (IAG), an independent Registered Investment Advisor. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and non-traditional investment markets. Kirk has an extensive understanding of the regulatory and financial considerations involved with investing alternative investments in self directed IRAs and 401ks. He received a BA degree in Economics from Trinity College in Hartford, CT. For more information on Kirk or Innovative Advisory Group you can visit www.innovativewealth.com
Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC.
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