Alternative investments include a wide variety of assets that many individuals acquire to build retirement income. While everyone agrees a certain percentage of traditional investments, such as stocks, bonds, and mutual funds, should make up part of your portfolio, diversity is essential and the alternative asset class provides exactly that.
But, what are “alternative investments?” While many people understand that real estate can be held in IRAs, just as many are not aware of the extensive possibilities alternatives present. And there is no list of every possibility because, well, that list would be entirely too long. In fact, it would be so long that the IRS doesn’t even provide one. Instead, they simply state the assets not permissible in your retirement plans: Internal Revenue Code Section 4975 permits you to invest your IRA into any type of asset other than life insurance and collectibles, such as art work, antiques, stamps, etc.
For savvy investors, this literally means that the sky may very well be your limit. All you have to do is look around you to discover alternative options that qualify. And the possibilities are nearly endless. In order to help put this into perspective, we’ve created a short list of permissible assets that have the potential to build retirement income in self-directed IRAs. While Advanta IRA neither sells investments nor do we give advice, we can tell you what’s available—and you can take it from there.
Alternative investments include:
- Single and multi-family homes
- Improved and unimproved land
- Rentals (condos, townhomes)
- Commercial property
- LLCs, LLPs, and trusts
- Farm land
- Foreign land
- Tax liens and deeds
- Private lending options (mortgages and other loans)
- Oil and gas rights
- Mineral rights
- Accounts receivable
- Warrants and structured settlements
- Commercial paper
- Convertible notes
- Businesses and/or franchises
- Futures trading
- Foreign exchange (forex)
- Energy options (solar, wind, coal mining, etc.)
- Sustainable (or socially responsible) investments
- Private equity and private stock
- Precious metals (gold, silver, platinum, palladium)
- Equipment leasing
- …and much more
That last bullet point should be the most impactful. “And much more…” Just think of the possibilities, many of which surround you every day. See a parcel of undeveloped land that lies on the edge of an expanding city? Or, how about a commercial building for sale that presents prime office spaces that could be leased? Have a friend that is looking for a loan? Do you think you could make a go breeding horses or raising cattle? Do you know a bit about the restaurant industry or the value of gold coins? Do you know of a company seeking venture capital through crowdfunding options? We’ve even seen clients invest in alpaca farms and the Iraqi dinar—do those things interest you?
If the answer is “yes” to any of those questions then understand this: all of those options are allowed assets in self-directed IRAs. Depending on the circumstances, all of those options can potentially build tax-sheltered income in your portfolio at a faster pace than traditional stocks or bonds.
To make things a bit clearer, let us explain how a few alternatives can earn income in your retirement plan. Take private lending as one example. Your IRA can play the part a bank typically does in extending mortgage loans. This is also called hard money lending because the rule-of-thumb is the property that would be financed via this loan is held as collateral. Income is gained by the terms of the interest rate on the loan and flows directly into your IRA on a tax-free or tax-deferred basis. If the borrower defaults, your IRA becomes the owner of the property and has the option to sell it—creating another avenue of income for your retirement plan.
Crowdfunding is another popular investment option these days. Imagine what could happen if your IRA funds participated in financing the next new, wildly successful start-up company. Yes, these opportunities are available and if you’re lucky, the returns could far exceed any gained on the traditional bond or mutual fund. Understand that the risk here is also greater: you could lose every dime of your initial investment. However, plenty of individuals have been successful in this realm.
It is imperative to clearly understand that no investment is guaranteed to earn income. However, one thing self-direction offers is guaranteed: When you self-direct your retirement plan—YOU control your own investing funds and decisions instead of allowing a broker or other party to do so. You put yourself in the driver’s seat in a car of your own choosing that can potentially lead you down that yellow brick road to a successful financial future. More and more individuals prefer to exercise this control and actively participate in acquiring their own assets they believe will successfully earn income in their portfolios.
The process is fairly simple, although due diligence is critical. You want to thoroughly investigate all aspects of any potential asset and also ensure your IRA operates within the boundaries set forth by the IRS. But, beyond that, all that is required of you is to identify an asset that interests you and determine if it’s a good fit for your portfolio. In other words, find what you know best—and invest.
If you have an idea that you would like to discuss, schedule a free consultation with us.