Put Some Horsepower in Your Client’s Retirement Plan

By Jeanette Arnholt, Specialty Channel Manager, Equity Trust Company
01/18/10

Out of the gate 2010 presents a host of new retirement planning opportunities for clients. Help clients grab the reins of their retirement plans by investing in what they already know.

While examining tax strategies and retirement planning options for 2010, don’t overlook the opportunities for clients already investing in an alternative asset they know and understand to include the asset as an investment option within their retirement plan. Combining their expertise with the advantages of a tax-deferred or tax-free growth IRA or small business plan can be a powerful investment strategy.

For example, clients who already have knowledge of or are presently investing in real estate, tax liens, oil and gas, or timber can apply that knowledge as they explore investment options for their retirement plan. Let’s do a walk-through with the growing area of livestock which includes horses, cows, alpacas, sheep, pigs and llamas.

Increasing Demand for Livestock

• Cattle/Swine/Sheep/Poultry – Across the globe, demand for meat has never been greater. For instance, China’s growing prosperity has brought about a lifestyle change that includes the former luxuries of pork and chicken. In the past 30 years, meat consumption per head in China has nearly tripled. The price of pork keeps rising, yet the butchers’ shops remain packed.
• Equine – So many ways to go here – from quarter horses to thoroughbreds, from miniature horses to specific breeds. Finding your niche in the equine world is a key component to a successful investment.
• Alternative Livestock – Livestock, like alpacas and llamas, are rare commodities. Unlike millions of heads of traditional livestock, there are less than 200,000 alpacas and 300,000 llamas in the United States. For miniature llamas, there are fewer than 700 in the country. Demand still outpaces supply.

A self-directed IRA enables you to diversify your portfolio and invest in a huge range of investments, with very few exceptions as defined by the Internal Revenue Code. So, if your clients have a true understanding of farm animals or a particular area of the equine industry, investing in what they know can be an advantage when it comes to adding positive numbers to their self-directed retirement account.

Information Clients Should Know About Investing in Livestock

• Consider your ownership options. Once you locate the livestock you’d like to invest in, you need to choose how you want to own it. There are three ways: 100% ownership, a percentage of ownership, or purchasing it with debt financing.
• You can’t purchase livestock you already own. The IRS prohibits your self-directed IRA from purchasing an asset, such as livestock, that you already own. This creates a prohibited transaction and your IRA may incur tax penalties. (see IRS Publication 590)
• You can’t keep the livestock on your property. Remember, with self-directed IRA investing, there should always be an arms-length distance between you and your investment. Housing livestock on your own property may constitute a prohibited transaction.
• Your IRA is responsible for upkeep. All expenses for your livestock investment are the responsibility of your account. For instance, if you need to purchase shelter or food for your livestock it must come directly from your self-directed IRA. Request funds from your custodian to pay for the goods and/or services on behalf of your account.
• Revenues return to your account. Any revenue generated by the livestock returns to your self-directed IRA tax-free or tax-deferred depending on your account.
• You can’t use livestock for personal use. Since you and your investment must be at arms length, you cannot benefit directly from an asset in your self-directed IRA. Put differently, you can’t go horseback riding on horse that your account owns. This is considered a prohibited transaction.

One note of caution: Clients who have an interest in an alternative investment should always work with their professional advisors to help make informed decisions that are right for their self-directed IRA and future.

Giddy Up

Whether your clients are searching for their investment niche or an additional investment avenue for their retirement plan, investing in their future with something they have a passion for can be rewarding personally as well as financially.

Jeanette Arnholt is the Specialty Channel Manager at Equity Trust Company, a custodian specializing in the investment of retirement funds in alternative assets.

Disclaimer: Equity Trust is a passive custodian and does not provide tax, legal, or investment advice. It does not endorse or recommend any contributor, company, or specific investments. Any information communicated by Equity Trust Company is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your legal, tax, and accounting professionals.