Alternative Investments in an IRA_ Self-Directed Investing Strategies

Alternative Investments in an IRA: Self-Directed Investing Strategies

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Self-directed IRAs are types of Roth or traditional IRAs, that allow investors to save towards their retirement in a tax-advantaged way with the same type of IRA contribution limits.

The main difference between a self-directed IRA and other IRAs is the asset types that are owned in these accounts.

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Understanding a SDIRA (Self-Directed IRA)

Traditional IRAs usually only house mutual funds, bonds, stocks, and other types of common investments. A self-directed IRA provides a lot more possibilities. For instance, you are allowed to invest in privately held companies or real estate.

The process involves finding a custodian that will agree to these deals, and you are set to go. With any of the IRAs, you will need a trustee or custodian to hold your account on your behalf.

Invest in a Precious Metal IRA

Precious metal IRAs offer an opportunity to achieve a diversified retirement portfolio offering a hedge against a volatile and unpredictable market.

When you supplement your investments in paper assets with tangible precious metals, you can secure a safety net or shield that is very likely to move in a direction that is opposite to the paper assets when economic strife strikes.

You can also enjoy the tax advantages linked to conventional IRAs while protecting your hard-earned savings from market corrections that are not possible to predict.

What Percentage Should You Invest In Precious Metals?

The percentage of your savings or portfolio that you decide to put towards precious metals is going to depend on how sensitive you are to risk.

Savvy financial advisors typically suggest dedicating 5% to 15% of a portfolio to an investment in precious metals.

An asset allocation that is too large (more than 15%) in precious metals may result in you missing out on some of the higher returns that the other asset types may provide.

However, if you do not invest enough in precious metals like silver or gold, then your portfolio is exposed to risks that your other assets won't be able to counter.

Investing in Real Estate

The most popular investment opportunity in self-directed IRAs is real estate. You can choose from many different properties such as multi- and single-family homes, international, rental, or commercial properties.

It is also possible to invest in real estate without having to purchase a property outright.

Even though you can make direct purchases from the savings in your IRA, it is also possible to use your IRA to secure one of the non-recourse loans to purchase an investment property or include another IRA or an individual or individuals to partner in on your investment.

Some investors choose to establish LLCs (limited liability companies) with IRA savings and then use this LLC to purchase the property.

What are Mortgage Notes?

Are you interested in investing in real estate without having to look for the property, maintain it, or rent it out? Mortgage notes that also go by the name of trust deeds, offer a way for you as the investor to lend cash to another person to buy real estate.

This is known as private financing and the arrangement will mean that the borrower repays the lender (you) directly rather than having to use a bank to secure the mortgage.

The terms for a mortgage note will specify a principal amount, interest rates, the repayment schedule, and the interest type (variable or fixed). If the borrower can no longer pay or defaults, the collateral becomes yours.

What are REITs (Real Estate Investment Trusts)?

Real Estate Investment Trusts usually operate and own real estate that produces an income. This includes commercial, industrial, and residential properties. Some of the REITs own real-estate debt such as mortgages.

Even though you can purchase shares of REITs that are publicly traded similar to other types of stocks, private REITs won't be traded on any of the exchanges. However, you can sell and buy REITs if you have a self-directed IRA.  

Private Equity

The term "Private Equity" references investing in companies that are privately held, which means they have not been listed on public exchanges.

It offers one of the best ways to start investing in causes, projects, or people that you are passionate about. 

Another benefit of investing through your self-directed IRA is that you are allowed to invest in LLCs (limited liability companies), C corporations, limited partnerships, small businesses, REITs (real estate investment trusts), private hedge funds, startups, and private placements.

What is Private Lending?

Private lending allows people to invest in debt-based loans or financial instruments including mortgage notes, car financing, business loans, and personal loans.

Loans made by SDIRAs require promissory notes which involve a promise in writing to pay the debt back under very specific terms such as interest rates and repayment timelines.

One of the benefits of this option is that it provides an income stream that is steady where your income will grow tax-deferred (traditional) or tax-free (Roth).

Invest in LLCs (Limited Liability Companies)

While it is possible to invest in an alternative asset directly when you have a self-directed IRA, you can also choose to set up an LLC that your SDIRA will own to manage these investments.

This is a strategy that provides less paperwork, checkbook control, faster transactions, liability protection, and minimized administrative fees.

What is a Checkbook IRA?

Checkbook IRAs will mean you won't be needing consent from a custodian for investments. You also won't be liable for costly custodian fees.

While a self-directed custodian-controlled IRA will allow you to make investments in alternative assets, you will need consent from the custodian to execute and enter into transactions.

This may result in hefty custodial fees and long delays. Custodian-controlled self-directed IRAs seem to be more popular for investors that have investments that involve less frequent transactions.

A Checkbook IRA allows you to complete all your transactions through a physical checkbook in your IRA. This can make it a lot easier to access funding, deposit income, and pay bills.

Over and above saving some money when you avoid custodian fees, a Checkbook IRA will increase transaction speeds. A Checkbook IRA is ideal for the investor that values privacy and speed and wants more control when it comes to their IRAs.

Invest in Cryptocurrency

Cryptocurrency IRAs account for retirement where you invest in and store cryptocurrency.

These accounts are subjected to the same standards when compared to investing in other asset classes, which includes the tax advantages. 

One of the differences when it comes to this type of account is the storage since your assets which is the cryptocurrency will be stored in digital wallets, and how the crypto is exchanged over the stock markets in convergence with your trustee or custodian (the holder of your IRA).

Crypto IRA Benefits

The future potential relating to cryptocurrencies as one of the asset classes is significant.

While environmental concerns, an ever-changing legal landscape, and a global attitude that is uneven towards recognizing cryptocurrency as one of the currencies contribute to its volatility, overall crypto has increased in popularity, legitimacy, and value and it is following a consistent upward trend.

If this particular trend continues, the return potential for retirement for people that have invested in a crypto IRA could be huge.

Investing in Tax Liens

You can also use your retirement funds to purchase tax liens. Purchasing tax lien certificates are often surprisingly safe investments, and using a Self-Directed IRA is a highly tax-efficient method to finance tax lien purchases.

Investing in tax lien certificates offers a way to introduce real-estate exposure to a portfolio without having to invest in property. While experienced investors often bring in decent returns when investing in these tax liens, a novice can get easily burned.

When the owner of the property fails to pay their taxes, a municipality in that local area can sell the tax lien of the property, which provides a way to foreclose on this property when an owner has fallen behind in paying taxes.

The winners of tax lien certificates are usually the investors that are prepared to accept low-interest rates (usually the lowest). Most of the tax liens at auctions are sold at a rate of between 3% to 8% nationally.

The owner of the property has a "redemption period", which is usually between 1 to 3 years to cover the taxes plus the interest.

If the owner has still not caught up on the payments when the "redemption period" ends, the holder of the tax lien will be allowed to initiate the proceedings for foreclosure, which means they gain ownership of this property. 

However, this only happens rarely since these taxes are usually paid back before the end of the redemption date.

Reasons to Invest in Alternative Assets

Alternative assets include a broad range of asset classes that traditional retirement-plan custodians such as employer plans, brokerage accounts, banks, etc. don't allow.

This is the reason why many people are turning to self-directed IRAs, to access other options besides CDs, mutual funds, bonds, and stocks.

The only investments not permitted in a self-directed plan include collectibles and life insurance, which offers an extensive range of options to grow your retirement wealth.

Here are some good reasons to invest in one or more alternative assets:

  • Avoid the constant stress relating to stock-market volatility
  • Make use of the assets that are going to offer an increased earning potential and unique diversity for your portfolio
  • Rely on your expertise and knowledge to add more security to your retirement
  • Invest in sustainable and responsible investments that are matching up to your main values
  • Obtain access to a range of tangible assets such as commercial and multifamily property, precious metals, mobile homes, and rentals, along with forex and futures, crowdfunding, private lending, and other types of investments.
  • You can also carry on with trade options like stocks or bonds when you desire since traditional assets are also allowed in self-directed IRAs

Many of the alternative assets often earn a higher income over a much shorter timeframe when compared to traditional assets.

You can use long and short-term assets to make the most of the growth in a self-directed IRA within a zone that you feel comfortable with.

When the choices that you make for investments are based on knowledge, this can help to increase your opportunity to reach the goals you have for your retirement.

What are the Limitations Involved with Investing in Alternative Investments?

Investors that invest in an alternative asset need to be mindful that they don't get involved in an arrangement or transaction that the IRS has prohibited.

A prohibited transaction can start with the investment advisor, the owner of an IRA, a family member, or the custodian or trustee of the IRA performing certain transaction types, including the exchange, transfer, loan, or sale of a property between the parties that have been listed and the IRA account.

Failing to stick to the rules and regulations could result in these transactions becoming taxable, and the entire IRA as well. Other transactions are prohibited, and your IRA custodian should be telling you what these are and ways to stay away from them.

Even though alternative investments often play an important role in investment portfolios, every investor should know about the rules and risks associated with them.

How to Tell if a Self-Directed IRA is Right for You?

Since you will be the one to direct most of the decisions relating to your account, including transactions, communicating instructions, and managing paperwork, a degree of dedication will be required.

It is a common misperception that self-directed IRAs are best suited to more aggressive investors. It can also work well for you when you are specialized in a specific industry. 

For example, if your career was mainly spent in company funding and equity, or real estate, then an SDIRA might be the perfect fit.

Before making any investments in an SDIRA, you need to consider the risk and potential involved.

You need to feel confident about the investments you are about to make. The risks that you take need to align with what you feel comfortable with for your retirement.


Self-directed IRAs provide better diversification, increased potential returns, and more flexibility when compared to conventional IRAs.

However, SDIRAs may involve more risk, rules, and work. Alternative investments that can be held in an SDIRA are usually chancier when compared to blue-chip bonds and stocks in standard IRAs. 

This is why SDIRAs are better suited to investors that have experience with non-traditional assets and have an interest in holding these in their tax-advantaged retirement accounts.

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