What Is An Alternative Investment
Before we begin, let’s first define what an alternative investment is. Technically speaking, an alternative investment is any that doesn’t fall into the conventional equity, cash, or income investment categories.
An alternative asset can be a piece of tangible property, like a gold bullion bar, a collectible, like a bottle of fine wine, a security, like a hedge fund, or an intangible asset, like a Bitcoin token. Given the sheer breadth of the asset class, it’s often more useful to define alternative assets by what they aren’t, which includes stocks, bonds, or cash.
Liquidity And Asset Location
Some may argue that these proposed rule changes dont limit the ability of investors to invest in the types of alternatives that would be prohibited by changes as the rues would apply only to retirement accounts. But for some investors, holding alternative and private investments in their self-directed retirement account makes much more sense than holding them in a taxable investment account.
Often your clients retirement accounts are their largest source of investable cash for these types of assets. Many of these alternative investments are illiquid and require a number of years to pay out. Access to the funds is often limited during the holding period by lockups.
The liquidity aspect can make alternatives less desirable for middle-income investors to hold in a taxable account. Assets like stocks, ETFs or mutual funds can be sold if additional cash is needed quickly. This is not the case with alternative assets. Limiting the ability to house private and non-publicly traded investments in a retirement account would effectively put these types of investment out of the reach of many non-wealthy investors, but likely will not have this effect on the wealthy.
Potential Benefits Of Investing In Marine Finance
When you invest in a vessel, your principal can be protected by both the ship and its Residual Value Insurance . If shipping demand were to plummet, for example, and the vessels sale price were to dramatically decrease in value, RVI protects the vessel owner by making up the difference.
Investing in marine finance also offers a relatively short duration . You can use these short-term investments to help diversify your portfolio by both industry and duration.
Additionally, investors can leverage data from the Baltic Dry Index to forecast the security of potential investments. The BDI measures supply and demand within the marine shipping industry by monitoring the activity and rates of specific shipping routes. Its primarily influenced by the supply of ships and the demand of consumers.
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Why Investors Choose To Invest In Alternatives Using Their Self
There is an entire investing universe that extends beyond basic long positions in equity and fixed income investments. While stocks and bonds provide a solid long-term core for most retirement portfolios, incorporating alternatives provides a tool to achieve higher yields, greater diversification, protection against inflation and the ability to own hard assets.
Alternative assets are the fastest growing segment of the retirement market. An alternative asset is an investment that isnt among traditional asset classes, such as stocks and bonds. These investments are more common and well-known. For example, many investors know the ins and outs of real estate, but cant navigate the complex world of Wall Street. This is one reason alternative asset investments have become increasingly popular. The second reason arose from the 2008 financial crisis. Many alternatives have a low correlation to stocks, bonds or both. This low correlation can be a real asset to investors in times of market uncertainty as they strive to control the volatility and downside risk of their portfolios.
With alternative assets growing in popularity, we wanted to highlight one of the lesser known investment vehicles that can be an ideal for investing in alternatives: The Self-Directed IRA.
Real Estate: What You Can Invest In
Now that weve covered the nitty-gritty of what you cant do, we can get to the interesting topics: what you can invest in. The good news is you have options. You can invest your Self-Directed IRA in the following:
- Residential real estate: Single and multi-family homes, condos, and mobile homes
- Commercial real estate:Office buildings, salons, gas stations, shops, or other businesses
- Vacant land:Undeveloped lots
- Trust deeds:Agreements between borrowers and lenders that property will be held by a neutral third party serving as a trustee
- Mortgage notes:Documents signed at closing detailing the cost of the mortgage and its payment timeline
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The Why And How Of Choosing A Self
Tom Kurinsky | Aug 09, 2021
Thanks to a soaring stock market, many individual investors are finding their portfolios are flushand likely overweighted in stocks.
While those traditional assets have performed remarkably well over the last year, economic uncertainty is growing. Inflation fears and hints that the Federal Reserve is ready to raise interest rates are leaving financial advisors on the hunt for ways to protect and grow their clients retirement accounts in case the market turns.
One way to do that is to look beyond the standard stocks, bonds and mutual funds to non-correlated assets that can move independent of the traditional markets.
This is the approach used by some of the worlds largest investors, the people who invest in college and university endowments. The members of the National Association of College and University Business Officers reported that as of June 30, 2020, less than half of their endowment investments are in traditional assets, such as stocks and bonds, with the rest in non-traditional assets such as private equity.
While such alternative investments, like private equity, hedge funds and real estate, once were available only to institutional investors, increased awareness and enhanced technology platforms have helped make it easier for individuals to move retirement funds into tax-advantaged self-directed Individual Retirement Accounts and access these asset classes.
What assets can be held in an SDIRA?
Why Use a Custodian?
Best For Larger Portfolios: Rocket Dollar
Another relative newcomer, Rocket Dollar has introduced several SDIRA investing innovations, including a flat $15 monthly administration fee, which works out particularly well for larger portfolios.
Low fee structure favorable to larger portfolios
Quick, easy account setup
Automatically sets up checkbook control
Supports self-directed solo-401
Only been in operation since 2018
High setup fee
Founded in 2018, Rocket Dollar has already made its mark in the SDIRA space. As for investment availability and ease of use, it competes with the best. But for investors with larger portfoliosthink IRA rollover accounts or SEP-IRAs and Solo-401s with larger annual contributionsit can be the most cost-effective SDIRA.
With Rocket Dollar, clients are automatically set up with a checkbook LLC, which provides them with more investment opportunities. In addition to the standard alternative investment options of real estate, precious metals, cryptocurrencies, and private equity, Rocket Dollar has partnered with several crowdfunding platforms to offer crowdfunded real estate and peer-to-peer loans.
Clients can set up their SDIRA online in under 10 minutes with no minimum deposit. Clients can access customer support through their RocketDollar.com dashboard. Gold customers can call a special support line at any time. All clients have access to the account service team for help connecting with any of Rocket Dollar’s investment partners.
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Diversification: The Key To A Secure Retirement
A secure, robust retirement portfolio starts with asset class and risk factor diversification. But to achieve true diversification, you need a self-directed retirement account.
Only a self-directed IRA allows you to invest in the types of alternative investments that can protect your wealth during a market downturn or recession. To protect your financial future, open a self-directed account today. Don’t waitcheck out our list of self-directed retirement account providers and see which best suits your retirement goals.
Alternative Investing With Self
Alternative Investing with Self-Directed IRAs
Since the stock market bottom in March of 2009, weve seen the longest bull market for stocks in history. While this has been a boon for investors, no bull market goes on forever. We saw stark evidence of this during the month of December 2018 when the S& P 500 declined sharply. With the rise of stock market volatility, investors will look to their advisors for ways to minimize the impact on their portfolios, especially their retirement assets. Alternative investments present an opportunity for investors to diversify into investments with low correlations to traditional stock and bond investments.
There is a whole investing universe that extends beyond basic long positions in equity or fixed income investments. While stocks and bonds provide a solid long-term core for most retirement portfolios, incorporating alternatives into the mix provides a tool to fine-tune your portfolio.
Many alternatives have a low correlation to stocks, bonds or both. This low correlation can be a real asset to investors in times of market volatility as they strive to control the volatility and downside risk of their portfolios.
The alternative investment options we support here at STRATA Trust include:
- Real estate
- Structured settlements
Why use a self-directed IRA?
Using a self-directed IRA to invest in alternatives
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Its Important To Understand What Youre Investing In And Be Aware Of The Risks
With self-directed IRAs, youre in control. But with control comes responsibility. In short, know what you are investing in.
Its important to ask yourself whether the freedom of picking and choosing investments in your IRA is worth the potential risks involved.
Because of the tax implications of a self-directed IRA, you may want to consider consulting with a tax specialist.
Certain Transactions Are Prohibitedand Breaking The Rules Could Cost You
You might have more control over what you invest in with a self-directed IRA, but you have to be careful about what you do with those investments. The IRS prohibits transactions between an IRA account and the accounts owner, its beneficiary, or other disqualified persons, such as certain family members.
The reasoning behind this: IRAs were created with the idea of ensuring future retirement stability. Any transactions conducted by an IRA must be for the exclusive benefit of the retirement plan.
For instance, if your self-directed IRA account owns a condo, you cant live in it. Nor can your child live there, even if that child is paying rent.
What happens if you dont follow the rules? Even if you make an unintentional mistake, it will cost you. Typically, if an IRA owner or another disqualified party engages in a prohibited transaction, the IRA account loses its IRA status as of the first day of the year that the transaction took place.
And you might have to pay a 10 percent penalty as well.
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Funding Real Estate Investments
When it comes time to fund your real estate investment, there are a few ways to go about it. You can make a direct purchase, combine personal funds with existing IRA funds or make a leveraged purchase. You could also invest in a real estate investment trust . Generally, these are entities that own and/or operate income-producing real estate in sectors such as retail and healthcare.
Keep in mind that deploying leverage with your IRA could make some of the gains and income taxable. The method you choose to fund your investment with is up to you, so be sure to do your due diligence and definitely consider speaking with a financial advisor before committing to one strategy or another.
Who Should Get A Self
An SDIRA is best suited for experienced and savvy investors who aren’t satisfied with the returns or diversification available through traditional investments. Investing in alternative investments offers the opportunity to earn higher returns, but they come with commensurate risk. Many alternative investment options are restricted to investors with a higher income or net worth. But there are plenty of investment options available to smaller investors, but it is their responsibility to understand the risks.
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Real Estate & Tangible Assets
These days, one of the most popular types of alternative assets includes real estate and other real assets that can be physically held by the investor. Most often, this includes real estate such as residential rental properties or commercial leasing properties, or it could include other tangible items, such as:
Investors should note that any tangible item deemed collectible by IRS regulations is prohibited from all IRAs, including self-directed ones. Whether self-directed or not, these assets cannot be included in a tax-advantaged retirement account. Per Internal Revenue Code 401, these assets include, but aren’t limited to:
- Fine art
- Comic books
These Specialized Retirement Accounts Let Investors Do Things They Can’t In An Ordinary Ira Like Invest Directly In Alternative Assets But This Opportunity Also Comes With These Risks
Self-directed IRAs are not for the average retiree or the faint of heart. These specialized retirement accounts let investors do things they can’t in an ordinary IRA, like invest directly in alternative assets, including cryptocurrencies, real estate or a private business. A second property, which many retirees invest in for income, could be purchased as an IRA asset using a self-directed account.
Like ordinary IRAs, assets grow tax-free inside a self-directed account, giving a real estate investor, for example, a way to rent properties or buy and sell them using IRA savings while postponing the taxes on any income or capital gains. “A self-directed IRA would delay those taxes until you withdraw from your plan so you can re-invest all the profits from the sale without having to reduce the net gains by paying taxes now,” says Grey Merryman, head of wealth planning at Atlantic Union Bank‘s Wealth Management Division.
This freedom, however, means more ways for retirees to land in trouble with their hard-earned savings by investing in something that isn’t remotely suitable. In fact, partly because of the problems with alternative assets, these accounts have a lot more going against them than for them, and even investing in a second home this way has disadvantages. Consider these risks.
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Best For Audit Protection: Ira Financial
Investing in SDIRAs can invite IRS scrutiny, but IRA Financial has your back if you are ever subjected to an audit, making it our choice as the best SDIRA firm for audit protection.
Cumbersome account setup process
Founded in 2010, IRA Financial is gaining traction in the SDIRA space by differentiating itself as the only firm to stand by its clients should they come under an IRS audit, making it our choice as the best SDIRA for audit protection.
Between the structuring of an SDIRA and the transactions that occur inside them, their complexity can invite IRS scrutiny, which is why it’s essential to know you’re working with a firm that is willing to stand by you. The firm was established by a team of tax specialists with a deep understanding of the myriad rules and restrictions governing SDIRAs.
IRA Financial offers a checkbook IRA providing access to a full array of alternative investment options, including real estate, precious metals, private equity, private loans, foreign currencies, and cryptocurrencies. IRA Financial offers SDIRAs without checkbook control, but their checkbook IRA offers far more investment options and is more cost-effective.
There is a one-time establishment fee of $999 for opening a checkbook IRA LLC, and clients pay an annual custodian fee of $300 in quarterly installments of $75, which is less than most of its competitors. You’ll pay no transaction fee when you buy, sell, or exchange an investment.
Equity Trust Company Account Features:
- Minimum Investment: $500
- IRAs Supported: Traditional, Roth, SIMPLE and SEP IRAs
- Other Account Types Supported: Coverdell education savings accounts and health savings accounts , solo 401s
- Asset Classes Supported: Real estate, mortgage notes, promissory notes, peer-to-peer lending, private equity and entities, precious metals, real estate investment trusts , cryptocurrency, foreign currency, mutual funds, stocks, exchange-traded funds , and 100 other possibilities.
- Fees: Application set up fee: $50 annual fee:see screenshot below
- Checkbook Control: Yes
- Customer Service: Monday through Friday, 9:00 AM to 6:00 PM, Eastern time
- Better Business Bureau Rating:A+
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What Is A Self
A self-directed IRA is a specialized account set up through a custodian or administrator that allows you to invest in many different types of alternative investments. Popular investment choices include real estate property, precious metals, closely held companies, cryptocurrencies, tax liens, and private loans. Aside from that investment flexibility, SDIRAs are similar to traditional IRAs, with the same tax advantages and contribution limitations.
Because custodians don’t provide investment advice, investors are on their own to perform the necessary due diligence on investment options. That’s why investing in SDIRAs can be especially risky. In addition, the rules and restrictions for setting up and investing in SDIRAs can be complicated, which poses an audit risk with the IRS. SDIRA investors should always consult with a tax advisor when setting up or investing in an SDIRA.
Risks Of Investing In Litigation Finance
Though the payoff may be worth it, like all forms of investing, using your Self-Directed IRA to invest in this option isnt entirely risk-free. Pre-settlement funding, for example, can be especially risky as plaintiffs can quickly run low on funds, leaving them unable to repay their legal fees with interest. To protect yourself and your investments, it is important to do your due diligence and consider working with a third party before investing in any aspect of litigation.
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How To Get Started
Get Support with a Self-Directed IRA Custodian
Alternative investments can add complexity to your IRA, with the potential for additional administrative, tax, or legal requirements. Often IRA owners engage a financial advisor to help them evaluate investment opportunities, risks, and costs.
Many self-directed IRA owners find it beneficial to consult with tax or legal advisors to navigate the tax rules and avoid prohibited transactions. It is also important to work with a custodian that has proven expertise in administering self-directed IRAs.
At Mainstar Trust, youll get the support you need while keeping control over your investments.
Open a Self-Directed IRA with Mainstar Trust
Mainstar Trust is a custodian for many alternative investment options for individuals seeking self-directed IRAs. Ready to open a self-directed IRA? Find out how to open a self-directed IRA here, or contact a Mainstar Trust representative to discuss your options.
Choosing the Right IRA Custodian
Your journey, your goals, your future.
When it comes to choosing the right IRA custodian, its important to weigh your options, identify your goals, and find the one that is committed to you and where you want to go in the future.
You want an IRA custodian that:
At Mainstar Trust, we believe that when you take control of your long term savings objectives, you take control of the future you long to have. And, we help IRA owners do just that.