A 401(k) is not the end all be all to saving for retirement. In 1974, when the IRA code was written, investing IRA money in other entities became entirely legal. These self-directed IRAs require hiring a custodian or trustee to hold the assets, but allow the holder of the account to invest in a wide variety of options that exceeds the traditional stock, mutual fund, and bond options. In fact, the IRA code doesn’t actually describe what a self-directed IRA can invest in, only what it cannot invest in, meaning as long as an investment isn’t against the restrictions, the sky is the limit. However, before delving into the investment options available, it is important to understand the limits.
According to the IRA code, IRA money is not allowed to buy an investment from, or sell an investment to a disqualified person or entities that might have conflict of interest. The list of disqualified people include family of the holder of the account, a fiduciary, service providers of the IRA, and any entity that a fiduciary or service provider owns more than 50% of. The code also does not permit IRA investments in life insurance, stock of S corporations, alcoholic beverages, or in collectibles such as artwork, rugs, antiques, gems, stamps, jewelry, coins, and other tangible personal property. Aside from these restrictions, when it comes to self-directed IRA investments, everything but the kitchen sink is possible.
One of the most common alternative investments –meaning investment other than a bond, mutual fund, or stock – for self-directed IRAs is real estate. Real estate can be a good long-term investment, and it can potentially generate higher returns and be less risky than the stock market. All forms of real estate investing are possible, including both residential and commercial properties, home flipping and property renovation, development, farmland, raw land, new construction, and rental properties. The property does not need to be within United States borders either, international property is a legal investment.
Though real estate is the most common and well-known self-directed IRA investment, IRA money can be used for private equity as well. Private equity includes private stock offerings, leases and lease options, joint ventures and limited liability corporations. Using IRA money to fund a start-up business, or other for-profit venture that is not managed by the holder of the IRA account, is also permitted. An example would be using money to fund a golf course. Tangible property, such as horses, equipment, new inventions, and parking lots, interest in a business, and even buying into a company one works for, are all possible investments. This is a just a short list of options. All private equity investments that do not violate the IRA code are allowed.
Some of the additional investments for a self-directed IRA allowed under the regulations of the IRA code include American depository receipts, foreign stock, hedge funds, royalty rights, mineral rights, stock mortgages, and commodities such as sugar. Though most metals are against the requirements, legal investments are allowed in precious metals such as gold, silver, platinum, and palladium.
Self-directed IRA investments are often chosen by the IRA holder’s area of expertise. A custodian or trustee is not in charge of making the investments, they merely hold onto them. Therefore the IRA holder is entirely responsible for the investments he makes, which is why investing in what they are already an expert in is a good idea. For example, a Doctor funding a clinic and collecting the profits would be an expert investing in what he knows.
When it comes to saving for retirement, there are more options available then the traditional stock, mutual fund, and bond options. A self-directed IRA may not be the best choice for everyone, but it is good option for those seeking to earn a higher ROI in the long run. For more information on investments for self-directed IRAs, please feel free to contact us.