Do you remember the lyrics of Peggy Lee’s song – Is That All There Is? Investors will often shake their heads in awe after meeting with a financial planner who talks about “diversification” and “not putting all your eggs in one basket.” Great concepts, but what about something beyond stocks, bonds, and mutual funds?
Well, as the announcer says at the end of those TV commercials: But wait, there’s more!
Did you know that nearly $4.2 trillion in IRA and retirement account assets can be invested in much more than the run-of-the-mill investment options offered by Big Box investment companies?
Since IRAs were first introduced in the 1970s, investors have been allowed to invest in a variety of stock market alternatives, including non-traded assets such as real estate, notes and loans, private equity and tax levies. But not many financial advisors and even fewer investors are fully aware of the options.
Legendary investor Warren Buffett uses a simple rule for success: Invest in what you know and understand. Diversification offers risk protection. And what better way to diversify than to own something you have experience in, like real estate or a business?
You may find greater portfolio diversification and an investment return that may be better targeted to meet your individual goals when you consider investing in what you know from experience.
Any IRA, including traditional IRAs, SEPs, Roth IRAs, Coverdell Education Savings Accounts, and 401(k)s only, can use a portion of IRA funds to purchase shares in these various stock market alternatives. Essentially, an investor determines the amount and source of funds, transfers them to an independent third-party custodian for holding, and then directs the custodian to release funds to purchase an investment in one or more alternatives. The custodian also owns all the income for the investor derived from the investment.
The “rules of the road” can be complex but not impossible to navigate with proper guidance. Basically, an investor, spouse, direct descendant, or fiduciary adviser is a “prohibited person” and may not “self-deal” or make personal use of the property. With few exceptions, a “prohibited person” cannot work or earn income from an IRA investment.
What can an investor do? Combine multiple IRA accounts from many people along with personal funds to purchase properties as co-tenants, for example.
It’s easier to list the things a self-directed IRA can’t use as possible investments. These include 1.) collectible items, 2.) life insurance contracts, and 3.) shares in a Subchapter “S” corporation. Almost everything else is fair game.
If structured correctly, the self-directed IRA can act as a lender to help facilitate a real estate transaction. Self-directed IRAs can be invested as a member of an LLC or as a shareholder in a C corporation or even as a limited partner. This is a way to add a level of asset protection to an investment.
Harnessing the power of a self-directed IRA can offer an investor an entirely new way to invest and get their retirement dreams back on track.