I have a client whose lawyer son is trying to persuade him to invest in something that I think is somewhat dicey. At least I haven’t run across anything like it. Here’s the deal:

Client and wife have already fully funded their Roth Ira’s for 2007. They are considering opening a new Roth IRA. They would then invest in a Collaterlized Debt Obligation in which they would loan the institution $50,000 which would then lend the money to an individual to mortage his condo (can we say sub prime). The bank would have the first lien, my client the second lien. “Guaranteed” yearly yield of 10%. The note would balloon in 5 years. They would place the CDO into the Roth IRA. The lawyer son claims that the CDO has no FMV so they can put the note into the Roth, even though they have already fully funded their Roth’s for the year and even tho the $50,000 is way more than the max. The interest would be paid into the Roth and the $50,000 would come back to the client as a return of principal in 5 years. Client is 60, so he could then take the money out of the Roth tax free. What a deal. Client thinks that this “loophole” is the greatest thing since bubble game and would like to ladder it at $50,000 a year. They would use this as part of their fixed income allocation. I smell trouble. I can’t see how the IRS would let this fly. Also if it sounds too good to be true, then it probably is.

Does any of this make sense? Has anyone run across this before? Assuming it is legit, what other reasons would there be for avoiding this like the plague?

Thanks.

Michael Terry