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Real Life Examples
When Brian from Tennessee learned that he could self-direct his retirement account and his children’s education savings accounts into alternative investments such as real estate, he was eager to begin. One concern, however, was that there wasn’t enough money in his children’s accounts to invest in any real estate opportunity he might find.
Brian learned he could include his children’s accounts in his real estate investments to grow the accounts for their future education needs. As a result, he has helped incorporate his entire family’s accounts into investments to grow even the small-dollar accounts in a relatively short period of time.
Brian opened Coverdell Education Savings Accounts (CESAs) for each of his four children. He saw the savings potential: money saved in a CESA can be withdrawn tax-free when used for qualified education expenses.
I love that I was able to partner everyone’s accounts and make about $80,000 in profits [in one investment] for our family.
Brian, Equity Trust Client, Tennessee
An active real estate investor, Brian decided to try to grow his children’s accounts using self-directed CESAs.
A CESA’s annual contribution limit is $2,000. Brian was concerned that it would take a while to build up enough capital in the account to be able to invest in real estate. His purchasing power increased when he learned that he could partner with other self-directed accounts to make investments.
Brian thought it would be difficult to find a suitable investment property for less than $50,000 in the city of Nashville, but before long he found a vacant lot in the city for $8,000.
He partnered three of his children’s self-directed CESA accounts to purchase the lot. One child’s CESA invested $4,000, and his two other children’s CESAs each invested $2,000.
Brian saw potential in the lot because he spotted new housing construction nearby, as well as a mobile home park that was on the market.
“As I reviewed the potential of the area, I believed the value was going to change once they sold that mobile home park,” Brian recalls. “Once the mobile home park sold, additional houses were built continuing to push values up.”
The land was sold 60 days later for $60,000. The sale proceeds returned the CESA accounts in the same proportion as was used for the purchase.
After the lot sale was complete, the CESAs had a combined total of approximately $60,000. Brian began to look for a larger investment, where he could again partner the accounts together. He found two adjacent lots, one of which included a dilapidated house.
For this investment, five accounts partnered in equal proportions to produce the $120,000 purchase price: his Roth IRA, his wife’s Roth IRA, and three of his children’s CESAs.
“We didn’t tear down the old house; we only changed the way the property was marketed,” Brian recalls.
He divided the two lots into three and put it back on the market for sale. A year after purchasing the land, he sold all three lots for $200,000 to a developer who wanted to build homes on the site.
The profit went back into the accounts in the same proportion it came out of the accounts.
“I love that I was able to partner everyone’s accounts and make about $80,000 in profits for our family,” Brian says.
Brian had been investing in real estate for a while before he was aware that he could self-direct his retirement account, CESA or other accounts into real estate and other alternative investments.
Between his and his wife’s retirement accounts and his children’s CESAs, Brian’s family now has a total of eight accounts at Equity Trust.
He has learned that the self-directed investing process is different than when he completes real estate investments outside of a qualified retirement account. For example, closing documents must be titled with the account as the owner rather than personally (for example: Equity Trust Company FBO John Doe), and any expenses related to investments are paid from the account.
He found the self-directed investing process to be “straightforward” and that his investments were able to be completed relatively seamlessly.
“I like that Equity Trust is so responsive,” he says. “I can request paperwork, a wire transfer or check, and have it completed on time and correct.”
Brian and his wife continue to use their family’s accounts to invest in real estate and other assets. Brian hopes his investing will help him enter a “semi-retirement” phase of life more quickly.
In addition, Brian believes continued investment in the CESAs will help pay for the children’s private school and potentially college.
“I’ve got a good start on it,” he says.
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Case studies are provided for illustrative purposes only. Past performance is not indicative of future results. Investing involves risk including possible loss of principal. Information included in the above case study was provided by the investor and included with permission. Equity Trust Company does not independently verify all information provided by third parties.
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