You’ve got some investments but you’re worried about the future. You’ve done your research. You know it’s critical that you diversify your holdings. You know that putting money into appreciating assets that produce high-demand products and a passive income just makes sense. But you don’t have the funds to make it happen.
Or Do You?
If you are a U.S. citizen or resident interested in buying farmland or other agricultural projects, the fact is that you’re probably sitting on a bundle of investment cash and don’t even realize it. It’s your Individual Retirement Account (IRA). That’s right, you can use funds in your IRA, SEP or 401(k) to purchase the perfect diversification investment – managed farmland.
It’s called a Self-Directed IRA (SDIRA), sometimes known as a Checkbook IRA. And, yes, your SDIRA can be a Roth account. An SDIRA allows you to use the funds in your retirement account to invest in alternative assets outside of the usual stocks, mutual funds and bonds. With just a few exceptions, the IRS generally doesn’t care what the investment is or where it’s located.
Like a regular IRA or 401(k), there are rules regarding the amount you can contribute annually, when you have to take a distribution, etc.
Remember, this isn’t new money; it’s just a roll-over from an existing IRA, SEP or 401(k) to a different account so you can make alternative investments so you don’t need to worry about donation limitations in the initial set-up. Have you changed jobs? That old IRA that you had at your previous job can be rolled over into an SDIRA and help secure a strong financial future.
There are also rules regarding what you can invest in and how your IRA or 401(k) must be administered.
The rules really boil down to that you can’t invest in collectibles, life insurance or engage in self-dealing. Admittedly, that’s an oversimplification, but you can find much of that information from your plan administrator or in the IRA Online Resource Guide. I strongly recommend that you read it carefully!
SDIRAs have tremendous flexibility and offer new opportunities for investment, but there are some rules that are hard and fast and the IRS doesn’t play around when it comes to enforcement.
How Do I Get Started?
First, you’ll want to find a plan administrator or custodian to manage the paperwork, take care of tax-related recordkeeping and provide the education you need to stay on track. There are dozens of excellent firms out there that can help you get started. The Ultimate List of Self Directed IRA Custodians and Administrators is a great place to start.
Having been in the business of selling managed farmland for several years, I can say that well over 50% of my clients hold their land in an SDIRA. I have the majority of my farmland holdings in a self-directed 401(k) with Midland Trust because of their experience in off-shore real estate investments, their great customer service and reasonable management fees.
Your administrator will help you transfer funds from your existing IRA, SEP or 401(k) to a new self-directed account. The paperwork and getting your account set up usually take just a few days. Transferring the funds will take a bit longer, but the whole process typically takes no more than a couple of weeks.
Be aware that some large IRA companies may push back on a transfer of funds from the account you have with them. Let’s face it, they make a lot of money from the assets you have them managing. Be persistent because they cannot keep you from transferring from one administrator to another. Remember, this is not a distribution (for which you could be taxed); it’s a rollover from one plan to another.
An exception is if you participate in an employer-sponsored plan; you may not be able to move funds until you are 59 ½. This matches the age you are allowed by law to begin distributions.
Once the funds are in your self-directed IRA or 401(k), you’re ready to buy your farmland, greenhouse or other nonstandard investment opportunities. Your new SDIRA custodian will take care of all the IRS tax reporting requirements.
How Do I Make A Purchase?
First, you’ll need to choose your investment. I’ve been through this process as both an investor and as a sales representative. Please don’t hesitate to reach out to me so I can help you with your research and answer any questions you may have.
The purchase process is pretty simple. Once you’ve signed the contracts for the purchase of your asset, you can either have your administrator wire the funds directly or set up a checking account for your IRA and do it yourself. If you choose the latter method, just make sure you don’t use that account for anything but purchasing IRA assets and the expenses related to them.
Your SDIRA administrator will walk you through the entire process and give helpful suggestions to make it as easy as possible. One of the advantages of having a checking account associated with your SDIRA is that if a high-yield opportunity arises that requires quick action, you’re prepared to move forward and profit.
What Are My Responsibilities?
SDIRA owners will, of course, select and purchase their chosen investment, but they also will need to maintain the bookkeeping, provide an annual valuation of the assets to the administrator and don’t break the rules.
Again, the rules boil down to not making prohibited investments and you are prohibited from “self-dealing.” Self-dealing includes any activities that avoid the intended use of an IRA. Basically, you can’t buy or sell something from or to your IRA personally or use any asset that your IRA invests in; this includes family members. The usual example is that you can’t buy a home with your SDIRA and then live in it yourself. All of the rules regarding prohibited investments and self-dealing are covered in the IRA Online Resource Guide.
If in doubt, don’t buy it. Check with your administrator before every purchase to make sure your investment qualifies. That quick 10-minute phone call will not only give you ease of mind but potentially keep you out of hot water with the government.
How Is My Investment Titled?
If you own land or other real estate, you can either title your purchase in the name of the IRA or you can have it titled in the name of an LLC or other legal entity, which is in turn owned by the IRA.
Most of my clients (myself included) use a U.S. LLC because it gives some flexibility; you can add additional assets to the LLC, your IRA administrator may only charge a single fee since they are managing a single asset (the LLC instead of multiple, individual assets) and if your farmland changes hands as a result of you passing away, you don’t need to re-title the assets since they are owned by the LLC.
As with any financial decision, make sure you consult with your accountant or other financial advisor before proceeding; in some circumstances, there may be tax implications. Most questions can also be answered by the professionals managing your SDIRA.
What’s Next?
Isn’t it time you invest your hard-earned retirement money the way you want to without the limited options most IRAs offer?
Check with your current IRA company to see if funds can be transferred and then get going. Choose an SDIRA administrator and start putting your money into assets that aren’t correlated with the stock market, provide a high-yield potential and truly diversify your portfolio… become a farmer by purchasing managed farmland!
