Investing in Timber with Your Self-Directed IRA

Self-directed IRAs are widely used among investors who want to control their own funds and decisions to build wealth for retirement. While no investment is ever guaranteed, investing in what you know best can potentially increase your odds of success. Self-direction offers the control and flexibility you need to diversify your own portfolio, which is also a key element to fruitful retirement planning.

Self-directed account owners are able to choose assets they are familiar with—from a large pool of alternative investments that fall outside the boundaries of the traditional stock, bond, CD, and mutual fund. Alternative assets permissible in self-directed accounts are vast and include real estate assets, precious metals, futures trading and foreign exchange, private lending opportunities, and other ventures you may have heard of if you are familiar with these plans. Less well-known investments include accounts receivable, oil and gas options, cattle, businesses, foreign property and much, much more.

Another investment allowed in self-directed IRAs is in timber. While timber investments have been occurring for many years, self-directed investors of all levels can also consider these assets and choose to add them to their plans.

According to an article published by Investopedia: Major manufacturers of timber-related products have historically owned timberland to ensure access to the supply of trees. Increasingly, these companies are divesting their tree stock, and the associated management and farming issues, by selling it to investors and management companies with the financial and forest management knowledge to maximize production.

Different account structures have acquired assets in timberland, including pension funds (private and public), private equity investments via limited partnerships, and commingled funds. Investopedia states: This trend is expected to accelerate as more of the available timberland transfers from forest products companies, increasing the number of investment products and making the market more liquid and efficient.

With that in mind, if you are knowledgeable in the timber industry—or if you are willing to learn the ins-and-outs—you might decide these assets may prove to be a beneficial addition to your self-directed retirement plan.

There are two ways one can acquire timber assets—through direct or indirect investments. Indirect investments involve simply purchasing stock in a viable, publicly traded forestry company that owns the asset(s). Direct investments entail ownership of the asset by the investor—you.

Direct investments require a bit more work from finding the property to managing it, as well as financing harvests and plantings for future timber yields. These assets allow you to control harvest times to a degree—meaning you can generally wait to harvest and sell if the demand for the product is down. When purchasing these assets using IRA funds, it is critical that you also budget for any expenses these investments may incur and make sure you have additional funds in your IRA, as all income and expenses must flow directly into and out of your self-directed plan.

Indirect investments require less work outside of the due-diligence you should perform before buying into any investment. However, your returns are dependent on the market and often, companies sell timber even when the market is down in order to satisfy consistent dividend payments and related requirements.

The key to remember regardless of how you invest is that timber assets take time to mature. While indirect investments may not bear much of this burden (stock may be diversified in several different companies with multiple timber assets), direct investors must take note. Harvests typically occur approximately once every 15 to 30 years, depending on the purpose for which soft or hard wood is being cultivated. Savvy investors can choose to acquire interests in tracts of land across different regions that mature in varying time frames to reap the benefits of multiple harvests. Additionally, some uses for wood products (such as paper) do not require trees to be fully mature and those used for these purposes are harvested in a shorter amount of time than others are.

When considering any investment, make sure you seek the advice of qualified and reputable experts who can provide the information you need to make sound decisions. Some resources that may be helpful are the U.S. Forest Service and state forestry associations. Your financial advisor and tax professional can help you decide if timber investments are a good fit for your retirement portfolio.

If you have any questions about this article or wish to learn more about alternative investments in a self-directed IRA, please contact us.