What Assets Can Be Held in a Self Directed IRA?
Self-directed IRAs differ from mutual funds or stocks in that they allow the owner greater freedom in selecting alternative assets like real estate, private equity, precious metals and tax liens. However, the IRS has strict rules regarding how these assets may be utilized; any violations could lead to fees and penalties from them being used improperly.
Self-directed IRAs provide an individual retirement account that allows investors to invest in anything the IRS approves of – including alternative assets. While most custodians limit investment options to stocks, bonds, mutual funds and CDs only, a self-directed IRA offers more choices – from real estate and precious metals to private equity, promissory notes, tax liens and foreign currency!
Investors should be mindful that alternative investments may offer limited disclosures – both financial and nonfinancial – and may lack liquidity due to extended holding periods, redemption restrictions or illiquid markets. Furthermore, the Securities and Exchange Commission warns investors about fraudulent self-directed IRA promoters that provide inaccurate valuations of investments.
As mentioned, it is crucial that self-directed IRA holders select a custodian who specializes in self-directed IRAs in order to avoid unintended prohibited transactions. A reliable self-directed IRA custodian should boast an excellent track record and uphold industry trustworthiness standards. To verify its legitimacy, referring to the IRS list of approved custodians is highly recommended.
Self-directed IRAs offer investors who seek to diversify their retirement portfolio beyond stock market-based investments the freedom and flexibility of investing in alternative assets, which may yield higher returns while being less risky than what can be found in traditional brokerage accounts.
But it is vital that you abide by IRS rules when opening a self-directed IRA account, including not engaging in “self-dealing” or transacting business with disqualified parties, and carefully verifying all information provided to you in your self-directed IRA account statements.
The IRS does not provide a comprehensive list of permitted and prohibited investments, but there are a few types such as life insurance contracts and collectibles that fall under its purview. Violating one of their rules could incur a steep tax bill; to prevent this happening you’ll want to consult a tax professional or IRA administrator to assist in this process and ask plenty of questions before investing.
Precious metals (gold, silver, platinum and palladium) are extremely valuable commodities that are rare and costly to mine, yet have an array of industrial uses. Their scarcity makes them attractive investments that serve as a hedge against inflation; investors can hold physical bullion coins or bars directly; invest in precious metal mutual or exchange-traded funds; or purchase shares in companies that produce and mine these assets.
Investors should exercise extreme caution when investing in precious metals. Many of these investments rely on leverage, paying part of the price in cash while covering part with “margin,” increasing risk and necessitating more oversight from supervisors.
IRS restrictions limit what investments you can invest in, but with a Self-Directed IRA it’s easier than ever to diversify into alternative assets that provide tax-advantaged income during retirement. Consult an IRA Counselor for more details regarding potential options like real estate-related assets, private companies lending money with promissory notes or precious metals as they could generate passive tax-sheltered returns during your golden years.
Promissory note investments provide investors with an opportunity to use their Self Directed IRA funds to lend funds out at interest-bearing promissory notes from individuals or companies in exchange for regular loan repayment and interest payments; such investments provide increased profits over traditional assets.
Self-Directed IRA investors have the freedom to research alternative assets that may not be approved by traditional custodians for investment in an IRA, so long as it meets certain criteria. When researching such opportunities, however, investors should exercise extreme caution as any promissory note offering that seems too good to be true should always be investigated thoroughly by asking about its background and track record before investing.
Like with any investment, an IRA owner must ensure they do not engage in prohibited transactions prohibited by the IRS, such as dealing with disqualified people such as employers or family members. Also be wary not to overpay for assets as this can harm long-term performance.