Self-Directed IRAs: You Can Buy a House, But Should You?

Self-Directed IRAs: You Can Buy a House, But Should You?

The biggest question that most people have when saving for retirement is what assets they should invest in to maximize their investment growth. For most people that ends up being stocks. Many will try to diversify their assets by holding a mix of stocks, bonds, mutual funds, CDs, and other financial investments. But in almost all cases investors will stick to a plain vanilla mix of assets that doesn’t differ much from most other people’s investments.

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The reality is that there is a whole world of investments out there waiting to be tapped. Those with large amounts of money and who want to maximally diversify their holdings are probably familiar with many of those options. They invest in real estate, commodities, currencies, and many other assets that we most often associate with professional traders on Wall Street.

That ability to invest in a greater variety of assets allows those investors to diversify their portfolios, make gains during tough economic times, and keep their assets secure against massive losses. But you don’t have to be super-rich to take advantage of many of the assets that those investors can. Through a self-directed IRA, you too can invest in real estate, private equities, precious metals, and more.

But even though you can invest in many of those assets, is it always a good idea to do so? Let’s look at a few of the options you have to invest in with a self-directed IRA and some of their advantages and disadvantages.

1. Real Estate

When you look at the wealth of many rich people, they very often are heavily invested in real estate. As some like to say, land isn’t being made any more. With a growing population and a fixed supply of land, it’s only natural that land values will continue to rise, and that can mean great gains for investors who are positioned to take advantage of that.

Self-directed IRAs can be used to invest in real estate, and investors can even buy a house with their retirement savings. But if you’re thinking about using your retirement account to buy a house to live in with your family, you’ll need to think again.

Real estate investments purchased for a self-directed IRA can’t be used for personal gain. You can’t live in the house, nor can you manage the property yourself. Even cutting the lawn yourself is forbidden, as that would be mixing your personal labor with your IRA’s assets.

Because you have to hire a property manager to deal with tenants and collect rent and landscaping services to keep the property neat and clean, and because payments for those services must also come from your IRA and not from personal funds, investing in real estate with a self-directed IRA can be complicated and time-consuming, and you’ll need to maintain lots of cash within your IRA to deal with expenses, mortgage payments, property taxes, etc.

Too many investors start reading about investing in real estate through a self-directed IRA and start getting stars in their eyes. The reality is often far different from the dream. But if you have the time, money, and inclination to invest in real estate, doing so through a self-directed IRA and the tax protection it affords might be worth a look.

2. Private Debt and Equity

Hedge funds and private equity funds can make great returns on their investments, often even during a weak economy. But they’re only open to accredited investors, generally those with a pretty significant net worth. Here again, investing through a self-directed IRA can help investors take advantage of those opportunities, but that too has its drawbacks.

One of the reasons most people don’t even think about investing in private stocks and bonds is the risk of getting fraudulent information. With a public company that is required to file its earning reports with the SEC, you at least have some expectation that fraudulent filings will result in prosecution by the authorities, clawbacks to retrieve lost funds, and some sort of resolution process to make investors whole. With private stock or bond offerings you don’t have that assurance, and your losses could potentially include every penny you invested.

As with any other investment, investors looking at private stock and bond offerings need to go in with their eyes wide open and do their due diligence. With such high potential losses, they really can’t afford to do otherwise.

3. Precious Metals

Precious metals such as gold and silver are perhaps the most popular investments among those investors who set up a self-directed IRA. With a gold or silver IRA, investors have the ability to invest in gold and silver using pre-tax dollars while deferring taxation until they decide to take a distribution. They can even roll over existing retirement savings from 401(k), 403(b), and TSP accounts into a new gold or silver IRA tax-free.

Of course, investing in a gold or silver IRA isn’t quite as simple as opening up an IRA with a regular brokerage. You’ll have to pick a custodian to store your gold, pick which gold and silver coins or bars you want to buy, and decide where you want to buy them. But if that isn’t too much for you then a gold or silver IRA may be just what you want to do.

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Gold and silver are countercyclical assets that often perform better when financial assets such as stocks and bonds are doing poorly. And with stock markets reaching plateaus and set to drop in the near future, more and more investors are turning to gold and silver to protect their retirement assets.