With the current stock market’s volatile state of being, diversifying your portfolio with alternative investments is more important than ever. But did you know that your individual retirement account can actually own alternative assets? Let’s talk about what you can do with your own IRA for smarter investment.
How It All Works
Investing in alternatives – hedge funds, real estate investment trusts, private equity funds, and others – offers the potential for huge returns for people who are willing to accept the risks involved. But now consider for a moment how this could work with your retirement fund.
A self-directed individual retirement account allows you to, essentially, borrow money from yourself to invest in alternative assets, like those listed previously or others. In this way, a self-directed individual retirement account allows you to hedge your risk because you have full control over how much money you are investing.
The art of the self-directed individual retirement account continues to be a niche business. Only a small percentage of total IRA assets remain allocated to self-directed IRAs. While some belong to people worth multiple millions of dollars, such as Mitt Romney’s self-directed IRA, which in turn owns multiple millions of dollars in offshore investments, others belong to more ordinary U.S. citizens.
For example, many people are investing a few tens of thousands of dollars in assets such as precious metals – people who are still only in their thirties, but remain enormously creative with their self-directed individual retirement accounts.
Advantages and Limitations
Of course, there are limitations. For example, “self-dealing” – the phenomenon of making an investment that directly or even indirectly benefits you or a family member – is not allowed. So if your IRA owns a piece of property, then you and your family are not allowed to make use of the space.
On the other hand, you probably already know that one of the greatest advantages of investing in alternative assets is the diversity that these kinds of investments bring to your own portfolio. But by doing so through a self-directed individual retirement account, you can, in this way, ensure that your IRA is protected far more readily from the ups and downs of the stock market, which significantly reduces the overall risk.
Another enormous advantage, however, is that because your IRA can legally own alternative assets, you no longer have to conform to the limits associated with traditional IRAs. These include publicly traded stocks and bonds, as well as mutual funds.