A self-directed IRA is a form of individual retirement account that is designed to allow investors to diversify their retirement assets beyond what is typically offered by brokerage firms. Here's a brief overview of what a self-directed IRA is and a few examples of what you might be able to invest in using this type of account.
What is a self-directed IRA?
A self-directed IRA is a type of retirement account that is legally structured like a traditional or Roth IRA. The same annual contribution limits and potential tax advantages apply.
However, in a self-directed IRA, account owners can invest in things other than what most IRA custodians offer. While traditional and Roth IRA investors are generally restricted to stocks, bonds, mutual funds, CDs, and similar investments, a self-directed IRA has many possible investment choices. Here are just a few of the most common things you can buy in a self-directed IRA.
1. Gold and other precious metals
Gold and precious metals are popular investments, as they are considered "real" money that offers inflation protection, and they are often used by investors to diversify their holdings and preserve wealth, no matter what the economy is doing.
According to Trevor Gerszt, CEO of Goldco, which specializes in precious metal IRAs, "Gold isn't a get rich quick investment, its benefits are most visible over the long term."
2. Real estate
Self-directed IRA account holders have the ability to buy investment properties through their IRA. However, there are a few things to know. For one thing, you can't buy a property you intend to live in, either full- or part-time. And the process can be complicated on an ongoing basis, as care must be taken not to mix personal and IRA funds with a real estate investment. In other words, all the investment property's expenses, taxes, and insurance must be paid from the IRA.
Through a self-directed IRA, it is possible to purchase a variety of debt instruments. Tax liens are one popular example. You can also purchase loans (or an interest in a loan), and there have been several reputable debt-investing platforms that have started within the past few years.
Just to name one example, PeerStreet is a real estate debt website that allows investors to buy short-term real estate loans through its platform. Investors can put as little as $1,000 into deals, and because these deals generate significant interest income, it can be very advantageous to shelter them through a self-directed IRA.
You can invest in businesses within a self-directed IRA, either in their entirety or in part. For example, if you want to use your self-directed IRA to buy a convenience store, you can do that. However, there are several rules governing the ownership of businesses in self-directed IRAs, so it's definitely a good idea to reach out to a professional financial planner before you get started. Specifically, you cannot use your IRA to invest in anything that is going to benefit you now, as opposed to when you retire, so you need to be very careful to make sure an IRA-owned business doesn't do that.
5. Bitcoin and other digital currencies
Digital currencies, such as bitcoin, are still a relatively new investment, and many people see them as the future of money. And since they're considered capital assets, bitcoin and digital currencies are subject to capital gains taxes when sold at a profit, so holding them in a tax-advantaged account can make a lot of sense.
According to First Digital IRA, which specializes in helping investors purchase digital currencies in self-directed IRAs, most of their clients invest just a small portion of their assets in bitcoin and other digital currencies. In other words, bitcoin, like the other items listed here, can be used to further diversify one's retirement assets.
In addition, reputable self-directed IRA custodians with digital currency capabilities like First Digital store clients' digital currencies in a much more secure manner than most individuals would do for themselves.
The usual IRA investments also apply
It's also worth mentioning for completeness' sake that standard IRA investments such as stocks, bonds, mutual funds, ETFs, and CDs can be owned through a self-directed IRA. For example, in a self-directed IRA, you could choose to maintain a portfolio that's 90% filled with standard IRA investments like these and use the other 10% of your assets to diversify into some of these alternative investments.
Is a self-directed IRA right for you?
To be clear, a self-directed IRA is not for everyone, and has its pros and cons, and rules you need to know. And none of these alternative investments should be undertaken by people who don't have a thorough understanding of the risks. For example, First Digital IRA's Andy Klein recently told me that "A digital IRA (self-directed IRA with digital currencies) is appropriate for someone who is educated about digital currencies and understands what they're getting into."
The same logic applies to the other investments on the list. Stock and bond investment, especially in the form of mutual funds and ETFs, are rather easy to understand, which is why most Americans are better off sticking to a standard IRA. However, if an investor is knowledgeable about any of the investment types on this list and wants to use them as part of a well-rounded retirement strategy, a self-directed IRA could be worth a look.