Top 9 Alternative Investments To Make With a Self-Directed ...

When considering diversifying your portfolio and potentially increasing your returns, investing in alternative assets can be a beneficial option. One method to invest in these assets is by utilizing a self-directed Individual Retirement Account (IRA). Unlike traditional IRAs, self-directed IRAs offer the opportunity to invest in a broader selection of assets beyond stocks, bonds, and mutual funds. Provided below are the top ten alternative assets to contemplate investing in with a self-directed IRA.

Real Estate. Investing in real estate is a popular choice for self-directed IRA investors. You can purchase rental properties, commercial properties or even invest in real estate through a crowdfunding platform. The income generated from rental properties can be tax-deferred or tax-free, depending on your IRA type.
Private Equity. Private equity refers to investments in privately held companies. This can include startups, small businesses, or even larger private companies. Investing in private equity can be risky, but it can also lead to high returns if you choose the right companies.
Precious Metals. Investing in precious metals like gold, silver, and platinum is a popular choice for self-directed IRA investors. These assets can provide a hedge against inflation and economic uncertainty. You can invest in physical metals or through exchange-traded funds (ETFs) that track the price of these metals.
Cryptocurrencies. Bitcoin and Ethereum have become increasingly popular in recent years. While they can be volatile, they can also provide high returns. Many self-directed IRA custodians now allow investors to invest in cryptocurrencies through their IRAs.
Private Debt Private. debt refers to investments in debt instruments like private loans, notes, or bonds. These investments can provide regular income and potentially higher returns than traditional fixed-income investments.
Timberland. Investing in timberland can provide both income and capital appreciation. Timber can be harvested and sold for profit, and the land can also appreciate over time.
Farmland. Investing in farmland can provide regular income from farming operations and potential appreciation in the value of the land. You can invest in farmland directly or through a farmland REIT.
Energy. Investing in energy assets like oil and gas wells, renewable energy projects, or energy infrastructure can provide regular income and potential capital appreciation. These investments can also provide a hedge against inflation.
Intellectual Property. Investing in intellectual property like patents, trademarks, and copyrights can provide regular income from licensing fees and potential capital appreciation. This is a unique asset class that is not often considered by traditional investors.

Before you decide to invest in any alternative assets with a self-directed IRA, it is imperative that you conduct proper research and collaborate with a trustworthy custodian. These kinds of investments can be intricate and come with added risks, hence it is crucial to have a clear understanding of the potential benefits and drawbacks before making an investment.

Before you invest in alternative assets with a self-directed IRA, it is important to think step by step and conduct thorough research. This will allow you to diversify your portfolio in a unique way and potentially earn higher returns. It is worth considering various options such as real estate, private equity, precious metals, cryptocurrencies, private debt, art and collectibles, timberland, farmland, energy, and intellectual property. However, in order to ensure a secure investment, it is crucial to work with a reputable company and establish your account properly.

How to Invest With Your Self-Directed IRA

A Self-Directed IRA (SDIRA) is an account that provides tax advantages and helps you save for retirement. This account offers increased flexibility by allowing you to invest in certain alternative options, in addition to the usual investment choices like stocks, bonds, and mutual funds that are available with traditional IRAs and Roth IRAs. Moreover, a Self-Directed IRA gives you the ability to personally manage your investments, providing you with greater control.

Although Self-Directed IRAs provide these distinct investment choices, certain industries are more advantageous than others. Given the abundance of investment options available, conducting some research is necessary to identify the most appropriate asset classes, industry exposures, and risk profile for you. To kickstart your exploration, we have delineated the primary advantages of a Self-Directed IRA and provided a sampling of available investment options.

Potential benefits of investing with a Self-Directed IRA

Investing in alternative assets offers the advantage of diversifying your portfolio with assets from various industries that are usually not strongly correlated to the stock market. In addition to safeguarding your portfolio during an economic decline, alternative assets also protect against inflation, which can particularly affect paper assets like bonds and equities. By directly investing in income-producing or value-generating opportunities, you can eliminate intermediaries and lower fees.

A Self-Directed IRA can be advantageous for maximizing your investment strategy with regards to taxes. Investments that generate interest and short-term capital gains provide taxable income that is subject to taxation at your highest tax rate, which can be as high as 37%. It is advised to hold these investments in your retirement accounts. Conversely, investments that generate long-term capital gains are typically taxed at a lower rate of 0%, 15%, or 20%. These benefits, combined with the tax advantages associated with having an IRA, make Self-Directed IRAs an attractive choice for investors, regardless of their level of experience.

Steps to investing with your Self-Directed IRA

While the steps for investing in alternative IRA investment options vary slightly across industries, there are preliminary steps that apply to all options regardless of the asset class.

1. Make a decision regarding the asset class you wish to invest in.

To make informed investment decisions, it is important to have knowledge about both the asset class and industry you are investing in. Allocate sufficient time for thorough research. Additionally, consider how your self-directed individual retirement account (SDIRA) will complement your existing portfolio. It may be beneficial to determine who will oversee your investment, and in such cases, seek out third-party specialists who specialize in alternative assets.

2. Decide on the method of funding for your IRA.

It’s important to determine the source of your investment funds before opening a Self-Directed IRA. If you currently have an IRA, you have the option to transfer or rollover funds from your existing account. However, it is crucial to fully comprehend the regulations set by the IRS regarding the timing and frequency of rollovers in order to make informed decisions.

If you do not currently possess an IRA, you have the option of establishing an LLC in order to safeguard your assets.

The first step is to find and employ a custodian.

In order to ensure compliance with government and IRS regulations, it is essential to hire a trustworthy custodian to hold your investments. This neutral third party will not offer financial guidance or manage your investments, however, it is crucial to carefully evaluate their expertise, portfolios, reputation (such as checking the Better Business Bureau), and ensure their fees are competitive.

Begin by accessing your Self-Directed IRA

Once you have found a custodian whom you trust, you can collaborate with them to move funds from your existing retirement accounts and initiate investments. It might be a good idea to consider employing the services of a financial advisor to assist you in making optimal choices aligned with your retirement objectives.

What to consider when weighing your IRA investment options

Investment risks by industry

Given their illiquidity, alternative investments can pose a challenge when it comes to converting them into cash when required. Therefore, it is advantageous to have a good understanding of the industry in which you intend to invest before committing any funds. Even seasoned investors can face difficulties maneuvering a new asset class, hence collaborating with a knowledgeable third party specializing in your prospective investment area should be considered.

Prohibited transactions

Prohibited transactions typically revolve around “disqualified persons,” meaning the account holder, beneficiary, or any family members such as parents, children, and their spouses. The IRS imposes restrictions on how these individuals can use and benefit from your Self-Directed IRA. Certain prohibited transactions include utilizing your SDIRA as collateral for a loan or buying a personal residence.

Prohibited investments

Violating IRS regulations regarding your IRA investment choices will result in the loss of tax advantages for your retirement fund and may incur extra charges and/or penalties. The specific restrictions on prohibited investments differ based on various sectors and specific assets. Here are a few examples of investments that the IRS prohibits to provide you an understanding of their prohibition.

Antiques : Artwork, antiques, and collectables cannot be held by IRA accounts. This includes baseball cards, stamps, furniture, and jewelry. You can lend money to people who buy these things though or invest in a company that is in the business of collectibles.
Coins : Most gold coins are prohibited from IRA accounts. The few permitted coins have a high mineral content and are not seen as collector coins.
Life Insurance : In general, you cannot use the funds in your SDIRA to purchase a life insurance policy.

To maximize the benefits of your retirement plan, it is important to carefully consider the advantages and risks associated with the various IRA investment options available. This guide will assist you in narrowing down your choices and selecting the most suitable opportunity for achieving your retirement goals. Begin exploring your options now.

BONUS: Real estate IRA investment options

Investing in real estate is a well-liked IRA investment option, especially for those who already own property. It is a familiar asset that has been considered a reliable investment for many years, as it helps build equity. However, investing in real estate with a Self-Directed IRA is not the same as purchasing a home for personal use. The IRS has established strict rules regarding the investment process, and making mistakes when purchasing real estate with your IRA can be expensive.

Rules for investing in real estate

No self-dealing: You cannot buy or sell the property to or from a related party.
No DIY improvements: Lifting a hammer or even a screwdriver to the property is prohibited. The IRS insists that all repairs and maintenance be done through an unrelated third party.
No personal use: You cannot live in or on the property.

Real estate: what you can invest in

After discussing the details of what is not allowed, we can now move on to the more captivating subjects, which are the investment options available to you. The positive aspect is that you have a variety of choices for investing your Self-Directed IRA.

Residential real estate: Single and multi-family homes, condos, and mobile homes
Commercial real estate: Office buildings, salons, gas stations, shops, or other businesses
Vacant land: Undeveloped lots
Trust deeds: Agreements between borrowers and lenders that property will be held by a neutral third party serving as a trustee
Mortgage notes: Documents signed at closing detailing the cost of the mortgage and its payment timeline