Thanks! Good memory!
Wasnāt me.
Real estate in an IRA has some negatives, for example you canāt work on it yourself, canāt mortgage it, all expenses (repairs, insurance, taxes,etc) must be paid from the IRS so you might need a lot of cash in there, you lose all the tax deductions for expenses and depreciation, etc. If itās not in a Roth, when RMDs roll around itās problematic and could force you to sell it.
A lot of these donāt apply to raw land, which might make it better suited for an IRA.
On Annuities, ours are insurance company contracts - with annual choice (with rates and values for the new contract year). We draw cash off these annuities - with free partial surrenders (within their guidelines) and have a maturity (end date). For example, from one contract, after 5 years we can begin annuity payments based on accumulation value as described in our contract. However instead, we are taking an income stream (if you convert to annuity payments, you cannot convert the value of annuity into an income stream).
Some people have pensions which are essentially annuity payments. So if you have a pension, your portfolio ārisk toleranceā is lowered with having that pension. At retirement, some people have choices on withdrawing some or all of the funds, and they then have annuity payments on what is remaining (some or all of retirement funds).
All our annuities have better value retention and returns than the bond market, and continue to be so - and we donāt go below our initial value (where bonds can - and even municipal bonds can āfailā). Our annuities have a surrender value and a death benefit value; of course the intention is to have the contract fulfilled to term end date. We have had various times that we have purchased these annuities (both of us in 2013, 2015, 2018, 2021) - reducing our risk exposure with our stock funds (now solely held in DHās large 401k). We have had a lot of growth with our stock funds, but understood our need to lower our risk. We have essentially been spinning off a lot of the growth we had in this 401k into these annuities.
One does need to understand how any annuity works - and our financial advisor knows and watches these financial products.
Dave Ramsey offers some excellent tools and wisdom on debt, credit, building up personal financial worth. He has exposed mistakes many people are making or have made. He personally had been over leveraged in CA on his real estate āempireā when he was young, and the banks called his loans - and that helped form his financial advice what it is, when he started at the bottom again back in Nashville. Borrowing to own a home, he allows that. He has ideas that everyone can earn more in their career ā which may not often be true ā but he āsellsā that. He started in real estate, and he likes owning properties and renting (so his children or their spouses are heavily involved in that). DRās overall business is very diversified, and he has a lot of income outside of what we know.
There are times when there is not really a good annuity choice, and other times when a specific annuity is a good choice - but again, purchasing any annuity is based on oneās individual situation.
Our overall portfolio is about the same, even though we experienced quite a downturn on 401k/stock funds, and had withdrawals last year from annuities ā we set a monthly amount, and financial advisor got the paperwork and how much we had withdrawn each month from the various annuities (following the rules of each annuity). This year we are withdrawing a little higher monthly amount, and should be signing paperwork this week to do so.
There are many worries outside our household and our family, and our financial security is not one of them. However we are looking to doing something with one of our DDs if down the road we need extra care (so we stay with home care versus facility care) - be it based on what is going on with their lives at that point in time. They are interested in preservation of our estate, and benefit from watching over us. DD1 is BSN (as am I). I worked in skilled care and rehab as a sunset career, and DD1 is very knowledgeable and caring.
@BunsenBurner - Yes, it was me and yes, Iām doing well. Havenāt been on CC in quite a while, but your post was sent to my email, and prompted me to return. Iām glad you mentioned me.
@busdriver11 - Yes, an IRA is a great vehicle for holding land.
First youād need to open an account with an IRA Custodian which allows self directed IRAās. I can recommend one or two if you like.
Then you have two choices. You could either instruct the Custodian to purchase the property in the name of your account, or you could set up a Limited Liability Company with your IRA (or multiple IRAās, such as you and your spouseās) as the LLC members, and have the LLC purchase the land.
The LLC route sounds more complicated but is actually easier in practice because it allows you to be the Manager of the LLC, giving you direct control of purchasing and administering the investment, including opening a bank account under your control, and allowing you to perform simple tasks, such as signing the purchase agreement and closing documents, and paying the annual property taxes without the tedious process of instructing and authorizing the Custodian to perform them on behalf of your account.
Iāve done it both ways, and greatly prefer the LLC approach. Our IRA LLC holds raw land, makes high yielding construction loans, and owns a few stocks; as Managers, DW and I are permitted to administer all aspects of this without the Custodianās involvement.
Itās really not too expensive to set up. I believe our Custodian charges around $500/year for the IRA, and setting up the LLC was a one time cost of maybe $1000.
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Glad to hear you are doing well @sherpa!
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I assume the LLC has to prepare and file a tax return with the minimum of $800 payment to the IRS?
We file a return for the LLC annually, but thereās never any tax due.
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Oh, I think thatās a CA-organized only LLC tax. 
Thereās no minimum at the federal level, however states may have their own minimum. In MA itās $456.
If all of the LLC only has retirement accounts as members, there will never be any State or Federal income tax due. It might be that the LLC isnāt required to file a State return.
Weāre in Washington state, which has no income tax, so for us itās a nonissue.
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In MA, that $456 is basically a fee just for existing. Do you get out of it by entwining the LLC with tax advantaged retirement accounts?
I couldnāt find an easy answer on line, seems like a case where professional help is essential.
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Thank you for the information, @sherpa! I think I heard of the self directed IRA from you in the first place. That is some very useful information, and if you can recommend a good IRA Custodian, Iād appreciate it greatly. It sounds like itās far more useful to have the LLC, seems like such a pain to have to instruct the Custodian to do every little thing on our behalf otherwise. We are also in Washington State. It hasnāt been easy to find decent land, but whatās out there seems to have been on the market for a long time, so weāre hoping people will drop their prices if we find the right property. Wasnāt quite sure if it was worth it to do the self-directed IRA, as weāre not looking at putting large amounts into it, but it doesnāt sound terribly expensive.
And I am also glad that youāre doing well!
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Iāll bet CA gets its āpound of flesh,ā no matter IRA or not, but Iām speculating.
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It looks like thereās an annual fee of $60 in WA for the annual report, but thatās about all I see. Wow, CA sure charges a lot!
In general, I wonder if real estate is not the best investment for a tax-deferred account as you may be foregoing tax deductions like depreciation.
You can set up a single member LLC and designate them it as a disregarded entity, which means it does not need to file a tax return. The tax-relevant entries are included in the ownerās return directly.
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@shawbridge - Thatās partly true. But I see two cases where real estate works well in a tax deferred account.
1 - Land, where thereās no depreciation,
2 - A short term flip, where it would otherwise be ordinary income.
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@sherpa, I agree on both points. But, for a rental property that I did not expect to flip quickly, Iād keep it out of a tax-deferred entity.
I did at one point have a self-directed tax-deferred account. It held a private hedge fund investment. If I remember correctly, it may also have been part of a 412I/415i defined benefit plan. It was a bit of a pain, but it was the only way to hold that investment in a tax-deferred entity. Since the hedge fund produced short-term trading profits (and in those days, my state had double the income tax rate for short-term profits), it was definitely worth it.
@notrichenough, you have to pay the $456 fee no matter what. It is good to hold real estate in an LLC (maybe even an out of state LLC) because MA considers real property an asset of the estate automatically, I think, even if you have moved out of state. So, IIRC, if you move out of state but die owning real estate in MA, you are liable for estate tax in MA. But, if you transfer the real estate to an LLC , the asset is now a security and not real property and hence if you die after having moved out-of-state and give your heirs your LLC interest, the LLC interest does not become part of a MA estate.
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In our case, we are looking at land. Eventually making some improvements or utilizing it for timber, so I donāt think depreciation would be available anyways.
But I do wonder about the tax aspects. If we were to use non retirement funds for land and sold it, weād pay a max of 20% in taxes on the gain. If we put it in a self directed IRA and then sell that, we pay whatever our tax rate is (higher, for sure) on the gain. That is, if I understand it correctly.
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Thatās basically correct, except that the tax on long term gains can actually be higher, because of the Medicare surtax on investment (technically the Net Investment Income Tax) of 3.8% on investment income, which kicks in on incomes above $250K for a married couple, $200k for singles.
If you have a piece of land with a significant gain, say several hundred thousand, in a non-retirement account, that gain will be taxed at the maximum rate plus the 3.8% in the year of sale and thereās no getting around it, leaving only part of the proceeds to to re-invested. But if this occurs in a retirement account, the tax is fully deferred and the proceeds can be fully re-invested, and you can time your distributions as you wish, hopefully maximizing the lowest marginal rates every year and avoiding the higher rates. Better yet, you do it in a Roth and never pay a dime in taxes.
With this in mind, weāve been gradually converting our IRAās to Rothās, to the point that our LLC is over 92% owned by our Rothās and less than 8% by our traditional IRAās.
An interesting aside for those who want to go deep into the tall grass: We sold some land in 2022 which wasnāt in our retirement accounts. Because we have minimal ordinary income, some of this gain is taxed at 0%, and the rest at 15%. We considered doing 2022 Roth conversions on the remaining 8% of our LLC that is still in traditional IRAās but quickly found that a Roth conversion would increase our ordinary income to the point that weād lose all of the cherished 0% LTG rate, and it would also trigger the 3.8% Medicare surtax on the gain from the land sale. A very expensive proposition. So the final Roth conversions will wait.
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@busdriver11 - I just saw that you might be harvesting timber off the land. In that case, the IRA/LLC makes a lot of sense to me. I donāt really know, but I imagine timber sales would be taxed as ordinary income, so better to defer it in a retirement account. And the LLC because I canāt begin to imagine what a PITA it would be to have to give a custodian a lot of petty instructions to implement every aspect of the timber sales.
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