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Alternative investments are increasing in popularity with savvy investors who want to diversify a retirement account. Not only does one gain tax advantages, but they provide a diversified strategy cushioning a portfolio when traditional markets are volatile.
In this article, industry insiders discuss alternative investiments to consider for your IRA.
1) Precious Metals
“It's a boon for investors that physical precious metals can be included in a self-directed individual retirement account (IRA). Precious metals tend to preserve their purchasing power over time, providing a useful hedge against the effects of inflation on your savings. Gold and silver are also great portfolio insurance: They can help offset losses in riskier assets (like equities) in the event of a prolonged market downturn.”
Everett Millman, Editor and Precious Metals Specialist, Gainesville Coins
2) Commercial Real Estate Via Syndications
“I believe one of the best alternative investments via SDIRA is passively
investing in the commercial real estate via syndications. It allows investors to be passive, preserve capital, save on taxes, and have passive income. It is a safer investment and has a more predictable outcome than Wall Street investments.”
Alina Trigub, Managing Partner, SAMO Financial
3) Private Equity Real Estate
“I love the prospect of using private equity real estate in a retirement account. Real estate is viewed as a hedge against inflation. Real estate as an asset class is highly attractive due to the ability to receive income and capital appreciation. You can actually use your Roth IRA or IRA to invest in private funds that will invest in real estate directly.
Given the tax advantages of retirement accounts, you can invest in a real
estate strategy such as a ‘core plus' or ‘opportunistic' strategy that
provides both income and capital appreciation over the long-term.”
Kyle Kroeger, Founder, Millionaire Mob
“Using the Rollover for Business Startups (ROBS), you are able to invest in
a franchise or other type of business tax-free and penalty-free. As part of an IRA, investors look for semi-absentee franchises that are manager run to add an additional income stream. To diversify from market risk, I typically advise investors to look at more recession-resistant industries such as hair-care, automotive, and fitness. Semi-absentee franchises are great to
have in a retirement vehicle because you can invest in a business with a
structured framework and history or success while using pre-tax funds and are able to also leverage SBA backed loans to increase your buying power.”
Kenny Rose, Founder and CEO, Semfia
5) Peer-to-Peer Lending
“Many investors are now including peer to peer lending in their IRA accounts. Platforms such as Lending Club handle all of the administrative and underwriting tasks associated with borrower applications and payments. Lenders simply select the loans they want to invest in, which can be done based on their own analysis or with the platforms automated investing feature. This type of investment is a great alternative to traditional fixed-income investments because the returns can be substantially higher. Risk associated with a properly diversified peer-to-peer loan portfolio is reasonably low and the investor can choose loans based on their risk tolerance.”
Cody Smith, Founder, PeerLoanAdvisor.com
6) Secured Notes
“Secured notes are an incredible investment for your IRA. Why? Because
they can provide outsized returns with a steady stream of cash flow, and
their risk is mitigated by the fact that they are secured by a piece of
real estate. The major downside to investing in notes is that that they
are tax naked, meaning that — unlike, say, rental real estate — there
aren't a whole lot of tax deductions you can take against the interest
income generated by your notes. However, by investing in notes through
your IRA, you can enjoy tax-deferred growth and gains in your note
investments if you are investing with a Traditional IRA and tax-free income if you are investing with a Roth IRA, making them an almost-perfect alternative investment to have in your IRA.”
Logan Allec (CPA), Owner, Money Done Right
7) Income-Producing Agriculture
“Self-directed IRAs allow for a larger range of investments, than regular
IRAs do, to include real estate, notes, and private placements. One of the tangible assets that people can now include in their IRAs is income-producing agriculture. Farmland and timberland are non-correlated
with stocks and bonds, making them a great tool for diversification. An ever-expanding global population brings increased demand for food,
especially protein, which makes farming a good addition to a retirement portfolio. Returns on farms can be competitive with similar commercial real estate projects.”
Chris Rawley, CEO, Harvest Returns
Keep these alternative investments in mind as part of a retirement account. They provide diversification strategies for reducing risk, and give you piece of mind when it comes to your retirement assets.
Tips and Advice From Industry Insiders
“Self-Directed IRAs are a great tool to shelter income and gains with
alternative investments. Some of the most interesting investments are set up creatively to maximize the tax benefits. We have seen a wide variety of
investments over the years, real estate, private company stock, equipment
leasing, lottery winnings, dressage horses, payday and title loans, tax
liens, cryptocurrencies, air space or mineral rights, minor league
basketball teams, and more. Let's take tax liens for example. Some states
have allowed tax liens to have interest rates as high as 18% annually. Why
pay taxes on that income when you can purchase them in your IRA and defer your taxes or in the case of a Roth IRA, your income and gains would be tax-free? Alternative investments held in a self-directed IRA can be beneficial for both capital gains and income, but the most important thing to know is that you should invest in what you know.”
Kirk Chisholm, Wealth Manager and Principal, Innovative Advisory Group
“I have used alternative investments for a number of years for the IRA accounts that I manage. Depending on the size and risk tolerance of the client, the allocations range from 10-20% of the portfolio.
The alternative investments that I use can be segregated into four separate categories: long/short equity funds, managed futures, global return funds and gold. I do not consider real estate or commodities allocations as alternative investments as many advisors do. The first three categories should provide stability and be characterized by low volatility. While they may produce very positive returns, their main function is to provide a cushion for the portfolio if bond and stock markets become very bearish.
In particular, managed futures that I have used for almost 15 years represent an ideal alternative if stock, bond and commodities markets dropped precipitously for a relatively long period of time. They proved their value during the financial crisis in 2008.
Long/short equity funds include allocations to mergers and acquisitions funds that attempt to derive returns from the arbitrage opportunities resulting from the purchase of one company from another. In essence, most long/short equity funds invest long in stocks that they believe have growth potential and short stocks they believe are over-valued.
Global return funds often derive their gains from opportunities that present themselves by pairing off asset classes that historically work for or against each other in various economic climates as well as other perceived opportunities in the global economy.
The most volatile alternative that I use is gold. I invest in either ETFs where there is a lien on actually bullion or, in some cases, invest in gold mining stocks. Gold and gold mining stocks often do not perform in concert. Clients need to be acutely aware and comfortable of their volatility. They are best suited for clients who are concerned about meltdowns where gold acts as a haven. I do NOT view gold as an inflation hedge but more of a crisis manager.”
Cliff Caplan, CFP(r), AIF(r), Neponset Valley Financial Partners
“When it comes to making investments with a retirement account the IRS does not say what is allowed only what is not allowed. The IRS generally prohibits one from using retirement funds to invest in the following categories:
1. Life insurance (An exception is available for a 401(k) plan.
2. Collectibles, such as art. However, an exception applies for IRS approved precious metals and coins, such as bullion.
3. Any transaction outlined in Internal Revenue Code Section 4975.
In general, IRC 4975 does not allow an IRA owner to engage in any transaction that directly benefits the IRA holder or any “disqualified person.” The definition of a disqualified person (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.
Therefore, the IRS allows on to use retirement funds to make a large number of alternative asset investments, including real estate, notes, private businesses, investment funds, IRS approved metals & coins, cryptocurrencies, ICOs, tax liens, and much more. The advantage of using an IRA to purchase alternative asset investments is that it allows the retirement account holder to better diversify their retirement portfolio, as well as invest in what knows and trusts, while gaining the ability to invest in hard assets, as a hedge against inflation. Best of all, all income and gain will flow back to the IRA or 401(k) plan without tax.”
Adam Bergman, Tax Attorney and President, IRA Financial Group