A retirement account that can hold notes lets you invest in what you know, with the tax advantages of an IRA. In this interview, Richard Desich, founder of Mid-Ohio Securities, explains how a non-bank custodian works, what opening an account involves and which plans suit which earners. Contribution limits are those in effect at the time of the interview and have changed many times since, so check current IRS limits before acting on any figure.
What a non-bank IRA custodian does
Q: First, tell us a little about the company’s background.
Mid-Ohio Securities was incorporated in 1983, and our principal partners have approximately 60 years of experience in the brokerage business. The company is a member of the National Association of Securities Dealers and the Securities Investor Protection Corporation.
The Internal Revenue Service authorized us as a non-bank trustee/custodian for Individual Retirement Accounts on January 28, 1983.
Q: What makes your company different from a traditional IRA trustee or custodian?
We specialize in non-traditional investments. Our clients hold special assets such as real estate, private mortgages, notes, judgments, limited and general partnerships, accounts receivable, factoring receivables, mobile homes, viaticals, structured settlements, equipment leases, auto paper, tax liens and other IRS-approved investments. We can hold all the traditional investments as well, including stocks, bonds, mutual funds and options.
Our staff has a great deal of experience with these investments and with the IRS regulations governing their use in retirement accounts. We can tell people what is and is not a prohibited investment for a retirement account. Many of our senior staff, including me, have owned investment real estate, so we understand it from the client’s point of view.
It is important to understand that we do not make any recommendations about our clients’ investments. We help them put their own investments to work in their retirement plan.
Opening an account that can hold notes
Q: What is involved in opening a retirement account that can invest in notes?
First we discuss the advantages of the various types of accounts and help the client decide which is best for them. They fill out a one-page application, answer five questions, and the account is open.
When they contribute to the account, they get a tax write-off (depending on which plan they have). We hold the money in escrow, and when they direct us to make an investment, we do it with those funds.
Q: What does this cost?
There is a small setup fee and an annual fee that rises with the size of the account. Some might think that’s a lot, but it is very reasonable for what we do. A bank retirement account might cost nothing, but you could only earn bank rates on your money. A stockbroker’s self-directed IRA would probably cost less, but you could only invest in their approved list of stocks and bonds. Neither option lets you hold non-traditional investments.
Our fee covers buying and selling investments as you direct, collecting payments on the notes in your account and putting them into a money market fund, distributing money, sending 15 statements a year and much more. A bank would charge 200 to 300 percent more to do that.
Q: Does someone have to live in Ohio to have an account with you?
No. Mid-Ohio is a national firm with clients in almost every state.
Choosing between a SIMPLE IRA and a SEP
Q: What types of plans do you recommend?
We suggest either a SIMPLE IRA or a SEP (Simplified Employee Pension plan).
For someone making less than $40,000 a year, we recommend a SIMPLE IRA. At the time of this interview they could contribute up to $6,000 of their earned income, plus another $2,000 to an IRA, for a total of $8,000. This is ideal for someone with, say, a part-time job making $10,000, $20,000 or $30,000. They can put a large percentage of their income aside in a tax-advantaged plan for retirement.
For someone making more than $40,000 a year, we recommend the SEP. For example, someone making $100,000 could put 15 percent, or $15,000, into a SEP.
Q: Do you recommend Roth IRAs?
At the time, you could contribute up to $2,000 a year of after-tax income to a Roth IRA. We highly recommend having both a Roth and a SIMPLE IRA or SEP.
Look at the advantages. If you, your spouse and each of your two children put $8,000 a year into retirement accounts, that’s a $32,000 tax deduction every year. That $32,000 can be invested in things you know about, such as notes. And the government pays for almost half of it.
