Guidant Financial Group Blog

An article posted today on Bloomberg.com addressed the idea of investing retirement money in a Hollywood movie (see Investors Finance Hollywood Movies Using Retirement Money).

We have actually had several prospects inquire about the possibility of investing IRA money in a movie production and have even had a few move forward on the investment.

What we do want to address about the article, though, is the stance that the two financial planners take on the idea of a self-directed IRA.

One thing that the article should have addressed is how most financial planners get paid, and how that factor affects the financial planner’s advice. Most financial planners obtain their fees based on Assets Under Management (AUM). As a consequence some financial planners either advise against alternative investments for a client’s IRA, or don't even mention the option to clients. That’s because they do not receive any fees from investments outside the securities market. This could be a disservice as there are many people out there who could benefit from diversifying their retirement funds into non-traditional assets as well as the stock market.

We are, in no way, saying that all financial advisors who are paid based on AUM are going to provide biased advice; In fact, we highly encourage investors to obtain the advice of a financial planner or advisor when considering investments. We do recommend, though, that retirement-account holders keep in mind how a planner is paid when deciding who best to work with and whether or not they will get the best advice for their investment needs.

I did see that the article quoted John Deyeso who is a fee-based advisor. This is great because he is obviously not basing his opinions on whether or not he will receive commission on the investments.

We do disagree with his statement, though, that the IRA was not intended for alternative investments. This is simply not true. There is no support for that proposition in either the Internal Revenue Code or the legislative history regarding IRAs.

The IRA was intended to move the responsibility of retirement savings from the employer (as in pension plans and defined benefit plans) to the employee (today’s 401(k) and IRA). The IRS left investment choices up to the discretion of the account holder, excepting life insurance and collectibles.

They did specify prohibited transaction rules under IRC § 4975 that taxpayers must observe when investing their retirement funds. The statutory exemptions under § 4975(d) list a host of activities that are exempt from the prohibited transaction rules, including providing office space and other services. The Treasury Regulations go into great detail about acceptable arrangements for real estate leases, for example. If it were intended just for securities – this language would be irrelevant. If the IRS truly intended to narrow the individual retirement accounts investment options to solely include securities, it would have made that clear in the Internal Revenue Code or the Employee Retirement Income Security Act (if you have ever looked at either of these, you can see that they are definitely not at a loss for restrictions and regulations where they see fit!).

Not to put too fine a legal point on it, but the IRS issued a Field Service Advisory back in 2001 that is enlightening. IRS FSA 2001128011 addressed a situation where a taxpayer and his children set up separate IRAs that then invested into the stock of a foreign sales corporation (FSC). In analyzing the prohibited transaction rules, the IRS stated:

There is no specific Code provision or regulation prohibiting an IRA from owning the stock of a FSC. The type of investment that may be held in an IRA is limited only with respect to insurance contracts, under section 408(e), and with respect to certain collectibles, under section 408(m)(1).

There you have it from the mouth of the IRS.

Some commentators would have you to believe that IRAs were not intended to hold non-traditional investments. The IRS, the agency charged with the administration of the tax laws pertaining to IRAs, disagrees.

In addition, some self-directed IRA companies have been in business for more than 25 years – if the IRS had decided that self-directed investments were not consistent with the intended purpose of IRAs, they would have made a ruling against these alternative investments some time ago.

We love seeing any article on self-directed IRAs and this one did a great job of letting people know that there are more options out there for their retirement funds. We just wish that they had called us for a rebuttal!