9 Financial Advisors Share Their Opinions On Alternative Investments In An IRA

Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed.  Learn more

Increasingly, many investors are considering alternative investments such as precious metals, real estate, cryptocurrencies, and hedge funds in a self-directed IRA for a diversified portfolio. That being said, it is essential to do thorough research into which alternative assets will be most effectual depending on risk profile and investment goals. In this article, 9 financial advisors share their opinions on alternative investments in an IRA.

Alternative Investments Inside IRAs Would Help A Lot Of People With An Additional Lever To Grow Their Wealth

 “Alternative investments inside IRAs would help a lot of people with an additional lever to grow their wealth. Most individuals do not have a brokerage account where they can invest in alternatives. Allowing assets within an IRA to be invested in assets can provide additional diversification and volatility reduction and may get more people interested in their own finances.”

Mike Kothakota, Ph.D., CFP(R), WolfBridge Financial 

For Those Looking To Use Alternative Investments Inside Of An IRA, It's Important To Still Have A Plan For Saving For Retirement

“The disadvantage of many alternative investments is the range of outcomes investors can experience compared to having a balanced stock and bond portfolio. It's not that alternative investments are bad, it's more that it's much harder to use them to reach a certain goal, such as creating an income stream for retirement. Therefore, for those looking to use alternative investments inside of an IRA, it's important to still have a plan for saving for retirement with a high chance of success.”

R.J. Weiss, CFP®, founder, The Ways to Wealth 

Alternative Investments Fit As A Good Diversification Strategy

 “This is a great topic to cover because alternative investments do have value.

Alternatives are things like real estate, precious metals, private stock, startups, and cryptocurrency.

Diversification – Alternative investments fit as a good diversification strategy. Just don't go too heavy in them because they tend to fluctuate more than traditional stocks and bonds.”

Simon Nowak, CEO, 3CreditScores.net

 The Depreciation Expense

“An alternative investment such as directly held real estate is not a good idea as you do not get to take advantage of one of the best deductions of depreciation expense. A self-directed IRA holding a real estate investment has gained in popularity over the years. Many people fail to realize that they are not able to utilize one of the key pieces of real estate investing which is the depreciation expense allowed. The depreciation expense is what allows rental income to be taxed advantaged as depreciation is an expense but not one where you right out a check to the depreciation gods but a deduction offsetting income.”

Michael Sander, Senior Vice President, The Creative Planners Group, Ltd

This Is The Best Time For IRA Savers To Start Exploring Alternative Investments

“As an investment analyst, I’m alive to the fact that the traditional investment assets like stocks have had the longest bull run since the 2008 recession. But I also believe that this bullish trend is about to tip and that the writing is on the wall as evidenced by the sharp decline of the S&P 500 in December 2018. This, therefore, makes it the best time for IRA savers to start exploring alternative investments like:

Hedge funds: I have two reasons why I invest and actively encourage my clients, friends, and acquaintances to stretch their portfolios and include hedge funds. The first is that hedge funds, unlike most other investments, are expertly managed. Secondly, their investments are highly diversified and this effectively shields you from any significant blow to your condensed portfolio. I believe that you are more likely to make higher returns and less likely to suffer an investment blow when you invest in a hedge fund than in any other form of investment.

Private equity investments: I will also advise that you consider directing your IRA savings to private equity investments. You will obviously need to go through a private equity firm and have a significant minimum investment but I can almost guarantee that the returns from private equity funds are unmatched. Better yet, you can decide to only invest in leveraged private equity investments that provide a safeguard for your capital. I believe that private equity investments are best for long-term oriented investors and remain well within your retirement goals given that you benefit from not just the quarterly earning calls but also rise in the value of your share capital.”

Edith Muthoni, Chief Editor, Learnbonds.com

Having Alternatives In A Well-Diversified Portfolio Can Lower The Long-Term Volatility Of Your Investments

“Alternative investments have historically demonstrated a low correlation with both equities and fixed income. Having alternatives in a well-diversified portfolio can lower the long-term volatility of your investments and improve your risk-adjusted returns Traditionally. Alternative investments have been restricted to accredited and high net worth investors but there are some asset categories such as Gold and Real Estate that are available to retail investors in publicly traded securities. Another disadvantage to the ownership of alternative products is their tax status. For many of the products, investors have to file form K1, which can be laborious and expensive process.

Having alternatives in a tax-deferred account such as Traditional IRA or tax-exempt account such as Roth IRA will avoid the hassle of tax filing and will minimize the tax impact. However, due to the nature of these products, purchasing alternatives in your IRA or Roth IRA will most likely require a significant amount of paperwork and disclosures of various levels of risk.

Many alternatives have a minimum holding period, which sometimes is as long as 2 to 5 years. Due to their liquidity restrictions, alternatives may not be appropriate to investors with low-risk tolerance and immediate cash needs.

I have generally tried to avoid investing in illiquid and non-publicly traded alternative products for clients of our firm. Even though some of the alternatives like hedge funds, private equity, and private real estate have compelling advantages, the benefits and the compliance burden outweigh any potential benefits. Additionally, with the markets being at all-time high many of our clients are nervous about a potential market downturn. In that scenario, I prefer to have more liquidity and flexibility to navigate through any market volatility.”

Stoyan Panayotov, CFA, Founder and CEO, Babylon Wealth Management 

Three Things About Alternative Investments In An IRA

 “It's important to understand three things about alternative investments in an IRA: High-risk, high-cost, and the tax issue. Many IRAs don't allow for alternative investments for these reasons. They often aren't worth the extra trouble of allowing alternative investments. Like all investments, alternative investments run the risk of leaving you with nothing. There can be a lack of diversification, leaving you with an all or nothing type of deal, but even if you diversify there's no guarantee.

By electing to use alternative investments, you have to look specifically for a self-directed IRA, meaning you make the final call on all investments. This is designed more to protect the IRA than you, so keep that in mind. Additionally, there will be higher fees. Everything from set up fees to custodial fees to annual fees. You're paying for a custodian to oversee your account and navigate the complications that come with uncertain investments.”

Chane Steiner, CEO, Crediful 

REITs, Which Are investments Into Real Estate Funds That Manage Investment Properties And Return The Profits To The Investors And Dividends

 “Alternative investments are as modern and traditional as you want to make it and so they have pros and cons to the, depending on what it is. Traditional investments into items such as gold, silver, or platinum is interesting in that it serves as more or less of an attempt to protect the investments in the event of a sudden a crash—in times of economic fear and instability, previous metal prices get driven up. There are also other investment opportunities that have hit the market, such as REITs, which are investments into real estate funds that manage investment properties and return the profits to the investors and dividends. Due to the way they are structured, in order to retain their status as REITs, the companies issuing these funds must give out 90% of their net income to their investors, which means their dividends often beat mutual funds. The other interesting thing about them are that not only do their asset values increase over time since real estate does grow, but even in the event of a crash, their income sources (due to how tenancies are maintained) usually hold steady, making it safer in times of economic turmoil.”

Jake Lizarraga, Finance Fox 

An Objective Case For Alternative Investments In An IRA Type Account

 “I've spent almost two decades specializing in the tax-advantaged account space. Recently, there has been increased interest in putting alternative (defined as non-publicly registered securities) investments into IRA accounts. Industry organizations such as DCALTA have been created for large asset managers, retirement plan record keeper administrators, and private equity firms to present a unified voice to regulators to make the objective case for alternatives to be in retirement accounts such as 401ks and IRAs.

My professional opinion is that the inherent positive characteristics of tax-advantaged accounts: long time horizon and tax deferral advantages that are very suitable for alternative investments. Many, but not all, alternative investments have the inherent characteristics of long lock-up periods and potential for substantial gains that could be subject to high tax exposure. Placing investments that have potential for high tax burden when successful and have a long time horizon inside of accounts that are structured for decades of tax deferral and have an IRS mandated long time horizon where monies can't be withdrawn without penalty in most cases until age 59.5 is a good, objective case for alternative investments in an IRA type account.”

Henry Yoshida, CFP®, CEO, Rocket Dollar

Depending upon the risk profile of an investor, alternative investments in an IRA could be a good option in a diversification strategy. However, individuals must be aware of certain things such as precious metals IRA rules and regulations. Additionally, there are also things to consider when adding Bitcoin or other cryptocurrencies in an IRA. For those inclined to include alternative assets in an IRA, take into consideration what these financial advisors have discussed here, do your due diligence, and consult a financial professional.