Tax-advantaged retirement accounts such as IRAs are a great way to save for retirement. However, when you establish a traditional IRA with a bank, a brokerage, or a trust company, you are ordinarily limited to a narrow range of investment options, such as CDs, publicly traded stocks, bonds, mutual funds, and ETFs. The IRA custodian will not permit you to invest in alternative investments such as real estate, precious metals, or cryptocurrency.
A self-directed IRA could be for you if you want to walk on the wild side and invest your retirement money in assets such as real estate or cryptocurrency.
You can invest in almost anything other than collectibles such as art or rare coins, life insurance, or S corporation stock with a self-directed IRA. Investment options include, but are not limited to the following:
- Real estate
- Private businesses
- Trust deeds and mortgages
- Tax liens
- Precious metals such as gold, silver, or platinum
- Private offerings
- LLCs and limited partnerships
- Real Estate Investment Trusts (REITs)
- Oil and gas interests
- Hedge funds
- Promissory notes
Aside from the vast array of investment options, a self-directed IRA is like a traditional IRA and subject to the same rules. The income that the investments in your IRA earn is not taxed until you take distributions. Distributions taken before the age of 59 1/2 are subject to a 10 percent penalty unless an exception applies.
You can also have a self-directed Roth IRA for which distributions are tax-free after five years. You must avoid self-dealing and other prohibited transactions; otherwise, your self-directed IRA could lose its tax-advantaged status.
It is not difficult to establish a self-directed IRA. You open an account with a custodian that offers self-directed investments. You can also acquire checkbook control over your self-directed IRA by forming a limited liability company to own all the IRA investments.
Investing in alternative assets such as cryptocurrency is riskier than stocks, bonds, and mutual funds. The damage to your investment portfolio can be substantial, as we have seen over the years. However, the rewards could also be great, as we have seen with recent returns for cryptocurrency investors.
When it comes to alternative investments, you need to know what you are doing or have an investment professional you trust to assist you.
Further reading: IRC section 408.
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