Roth IRA & Timber Rights/Tree Farm

[terminator]

I'm hoping someone here might just know the answer to my question offhand. I've tried doing some research on Roth IRA contributions, but haven't been easily able to find the answer I need.

I started a tree farm this spring. Basically, it's a thousand trees on about six acres of land. I own, through a holding corporation, the land as part of a much larger parcel that is for both recreational and investment purposes. I was telling some friends about the tree farm over lunch when all of a sudden it hit me that -- if possible -- I should own the timber rights in a Roth IRA.

Let me give a brief summary of the economics involved. I already own the land, so there was no real cost there. The trees themselves cost about $3k. The related items (stakes, protectors, etc.) cost another $4k or so. If they do well there's a reasonable chance that they will be worth $1MM in 30-40 years (give or take some on both the value and time).

I don't think there could there be a more perfect investment for a Roth IRA, given the dollar figures involved.

I am married. If necessary, we could split the entire investment cost for the timber rights between us for two Roth IRAs (i.e. $8k instead of $4k).

My questions are: (1) does anyone know what the rules are for Roth IRA contributions and whether timber rights can be an asset for a Roth IRA, and (2) if so, how would I legally hold the timber rights? Also, does anyone have any good links to a Roth IRA website that would explain this?

Thanks for any input . . .

 

[terminator]

Just to note, the only thing I could find that seemed to touch on my situation was this from IRS Publication 590:

"Finally, IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option."

 

[wabmester]

Google IRA "prohibited transaction".   I don't think you can do it.

Example links:

link

link

 

[terminator]

So if I already own it then I'm prohibited: (1) from selling property (timber rights) to my IRA, and (2) from maintaining the tree farm for my benefit.

Hmm, so if I buy an existing tree farm from a third party and also pay that third party to care for it, I could use a Roth IRA.

I can understand the first reasons since it helps to avoid the valuation issues that come from self-dealing, but the difference between hiring a kid to care for the property and doing it myself seems odd. Anyway, if that's the law, that's the law.

Thanks, wab for the links. I've seen the fairmark.com site, but hadn't read the section on prohibited transactions. Like so many things, it's hard to find what you need when you don't know to look for the special phrase like "prohibited transactions."

 

[Alex]

So if I already own it then I'm prohibited: (1) from selling property (timber rights) to my IRA, and (2) from maintaining the tree farm for my benefit.

Hmm, so if I buy an existing tree farm from a third party and also pay that third party to care for it, I could use a Roth IRA.

I can understand the first reasons since it helps to avoid the valuation issues that come from self-dealing, but the difference between hiring a kid to care for the property and doing it myself seems odd. Anyway, if that's the law, that's the law.

Thanks, wab for the links. I've seen the fairmark.com site, but hadn't read the section on prohibited transactions. Like so many things, it's hard to find what you need when you don't know to look for the special phrase like "prohibited transactions."

You should check with a company that does true Self Directed IRA's - not Fidelity et. al. http://www.trustetc.com/index.html
http://www.amlife.us/retire.html
http://www.myselfdirectedira.com/
http://www.pensco.com/about/PENSCO.asp

 

[Martha]

If anyone is considering having businesses in an IRA, whether tree farms, rental property or laundermats, be sure to do your research. You may very well have what is called unrelated business income which your IRA will have to pay taxes on at the trust rate. Also, you don't get the advantage of depreciation that you do when these types of assets are held outside of retirement plans.

The Fairmark site has pretty good info on these issues.

 

[farmerEd]

Can't answer your IRA question, but what kind of trees are you planting that you think will grow in value from $3000 to $1M+ in 30+ years? (or $3 dollars per tree to $1000 per tree to state in another way)