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Investor Insights Blog|Self-Directed Investments Give Musician the Freedom to Help Charities

Real Estate

Self-Directed Investments Give Musician the Freedom to Help Charities

saxophone player

Sounds of live music are commonplace near Nashville, TN. Twenty minutes northeast, in Hendersonville, the tunes of one local jazz and R&B band are used to benefit local charities.

Don, an Equity Trust client since 2002, founded the band more than a decade ago. Today, at over 70 years old, Don recalls the path that allowed him to dust off his saxophone and use it to help children’s charities in the Hendersonville area.

He credits the freedom gained from a blossoming self-directed IRA portfolio for the ability to pursue his passions and make a meaningful impact in retirement.

Experience in Insurance and Real Estate Sets the Stage for Future Self-Directed Investing

Don’s many years of work in the insurance industry provided an introduction to the investment flexibility of self-directed IRAs.

Although he knew it was possible to invest in real estate, promissory notes, and other alternative assets with retirement funds, it was not an approach he would pursue until decades later.

“I read the laws (pertaining to IRAs) when they first came out in 1974, so I knew you could do some of these things,” Don recalls. “But I was too busy working on my business to really get into it.”

In the early 2000s, after he retired and sold his business, Don began research into the topic.

“I spent about a year studying self-directed IRAs,” Don says. “I would go to my office five days per week and block off time to research.”

After completing his research, Don felt ready and opened a self-directed IRA at Equity Trust in 2002. A few years later, his wife opened a SEP IRA because she qualified for a small business retirement account as a Realtor.

Building Retirement Wealth through Private Loans and Real Estate

Over the 15 years that followed, Don actively invested with his self-directed IRA. He used his background and experience to issue numerous loans to smaller insurance agencies over the years.

He also uses his IRA to invest in single-family real estate and condominiums through rental, lease and buy-and-sell transactions.

“I already had real estate investing experience, so it made sense to me,” Don says.

I think people are better off investing in what they know, but even then due diligence is critical.

Don, Nashville, TN

In November 2015, Don and his wife co-invested with their retirement accounts to purchase an office condo in Hendersonville.

The opportunity arose when Don learned of a friend who needed a location for his commercial real estate business.

After deciding it was a sound investment choice for their retirement accounts, Don’s IRA purchased 62 percent of the office condo, and his wife’s SEP IRA purchased the remaining 38 percent, using a concept commonly referred to as “Partnering.”

Don leases his IRA’s 62 percent ownership interest back to the company owner as a triple-net-lease and his wife sold her SEP IRA’s 38 percent ownership interest back to the company owner as a carry-back mortgage.

“This created between $2,000 and $3,000 of income per month (combined payments to both Don and Elaine’s accounts) we can use in retirement,” Don says.

Using Self-Directed IRA Earnings in Retirement While Building a Tax-Advantaged Legacy

Earnings from Don and his wife’s self-directed IRA investments help support their retirement. The couple regularly takes cash distributions from their accounts using Equity Trust’s online account management system, myEQUITY.

“Someone asked me what I do in retirement,” Don says jokingly. “I told them, I try to just go to the mailbox.”

Don is able to take a long-term approach to his retirement funds because he maintains performing assets in his IRA and continues to invest in retirement.

“Since age 59½, my goal has been to enjoy a nice income off the earnings while preserving the principal amount so I can leave the account to my grandkids,” Don says.

“So far, so good,” he says proudly.

He doesn’t feel his investments or returns are extraordinary, but is pleased with the results.

“A lot of my investments over the years have been small, but those earnings have paid the bills for a long time,” he says. “It may not be a major deal to high-net-worth investors, but it’s been a major deal for my family. It’s really been a blessing.”

Don still blocks off a few hours each week to focus on his self-directed IRA investing, but believes he has a good system in place.

“I set it up so that as long as my brain still works, I can do what I’m doing,” he says.

“I’m too old to rip out a wall of a house as a real estate investor outside my IRA, but I’m not too old to do what I do as an investor with my retirement account because I don’t perform any of the labor.”

Gaining the Freedom to Make a Difference: The Garage Band Revival

A little over ten years ago, Don picked up his saxophone again and started a 14-piece jazz and R&B band of local musicians. The band, Garage Band Revival, raises money for charities in his local community.

“The band does two things,” Don says, “we either play for free at an event a charity is hosting or, if we’re hired to play at a private or corporate event, we select the charity and our ‘fee’ requires the event organizer to write a check to the charity we select.”

The band supports local charitable organizations, especially those dedicated to helping children. Two charities the band regularly supports include Children Are People, Inc. and Court Appointed Special Advocates (CASA) for Children.

Don feels children’s organizations have an opportunity to make a lasting difference.

“If you can get the kids off the street and get them educated early, you have an opportunity to impact a life for decades to come.”

Managing the band, which began as a fun way to give back, has turned into a full-time job for Don.

“If it wasn’t for my IRA, I wouldn’t have the freedom to do this,” he says. “It’s a lot of work to run the band, practice, and coordinate events, so if it wasn’t helping charities I wouldn’t be doing this at 70 years old.”

Even still, Don is quick to deflect praise. “This band isn’t about me,” Don says. “It’s really about people coming together to help charities. There are so many wonderful people involved, it’s a blessing to be able to give back through music.”

1

Can I roll over a 401(k) account into a self-directed IRA?

Yes. A self-directed IRA gives you the ability to diversify your portfolio with additional investments that are permitted by the IRS, in a tax-free or tax-deferred environment.

2

I plan to purchase a rental property with my IRA. Does the rental income have to go back into my IRA?

Yes, all income generated by an IRA-owned property must return to your IRA. This ensures that you retain the tax-deferred or tax-free status of the investment.

3

What’s the difference between a self-directed IRA and a traditional IRA?

A self-directed IRA is technically no different than any other IRA or 401(k). A self-directed IRA is unique because of the investment options available. Most IRAs are used for stocks, bonds, mutual funds and CDs. A self-directed IRA allows those types of investments along with real estate, notes, private placements, and other investment options.

The above case study is for educational 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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