Are you aware that you can invest in a pig with your IRA?
You might say that I’m full of it, but you would be wrong. It is entirely possible to invest in a wide variety of alternative investments with your IRA if you understand how self-directed IRAs work.
In 1974, legislation was enacted to allow people to save for their retirement in a tax deferred manner. This was the creation of the individual retirement account (IRA). In this legislation, the rules stated that investors could invest in virtually any investment withstanding a few exceptions.
The vast majority of the investing public is not aware that they are allowed to invest in alternative investments outside the stock market. Even fewer are actually investing in these alternative investments. Examples of these alternative investments are: real estate, tax liens, private mortgages, horses, livestock, private companies or franchises, oil and gas LPs, intellectual property and more.
There are only a few limitations as to what investors cannot invest in with their IRA:
- S- Corporations
- Life Insurance
This opens your world up to a wide range of possible investments to choose from. This will allow you to “invest in what you know“, as Peter Lynch was famous for saying. While you can invest in a lot of different asset types, you should still focus on what you know best. Diversification is important, but so is investing to your strengths.
As of 2014 only 37.6% of American Households have an Individual Retirement Account. More than 80% of those people are not aware that they can self-direct their retirement through a self-directed IRA. The biggest hurdle to investors exploring their options is knowledge. While the rules are the same for self-directed IRAs and IRAs that invest in publicly traded securities, it can be more difficult to adhere to the rules.
4 Quick Steps to set up a self-directed IRA
- Find a self-directed IRA custodian that supports alternative investments. Not all custodians are prepared to handle these types of transactions. If you have an IRA held at a financial services firm which invests in stocks or mutual funds, it is highly likely that they won’t be a good fit to provide custody for your rental property. Here is a list of Self-Directed IRA custodians to speed up your search.
- Chose your investment – Choosing the appropriate investment is one of the most important parts of investing. Chose investments that you are an expert in and do your homework before you invest.
- Risk Management – Before you invest in any asset, whether it is a stock, bond or a horse, make sure you fully understand what you are investing in. If you do proper due diligence, you will mitigate a lot of mistakes.
- Maintenance of the investment – Once you invest your capital into the asset, you will need to monitor the investment to ensure its performance. There are a number of tasks that need to be tended to periodically, so make sure you are aware of all the rules pertaining to self-directed IRAs.
Next time you are looking for investments, and the stock market has an unappealing valuation, go hog wild and find an alternative investment that suits you. Invest in what you know.