Investing in alternative assets can be daunting when it comes to what you can invest in with your SDIRA. Below are some of the more popular options for diversifying your retirement portfolio.
What is an alternative asset?
An alternative asset refers to any investment outside the traditional categories of stocks, bonds, and mutual funds. These alternative investments include a wide range of asset classes, such as real estate, precious metals, cryptocurrency, crowdfunding, and private debt, which offer diversification opportunities for investors seeking to move beyond conventional markets.
Why Consider Alternative Asset Investments?
Unlike mutual funds and traditional investments, alternative assets provide portfolio diversification and grants access to exclusive opportunities beyond traditional markets. However, these investments involve risks and are often less liquid than public securities.
- Real Estate – This is a popular choice for those who want to diversify their portfolio and want an investment that is a bit more stable as it is illiquid. This means your funds are locked in for the duration of the terms of the investment. Real estate investments that you can choose from can vary from trust deed investing, rental properties, commercial buildings, land, or real estate syndications. Real property investments, such as fix and flips or properties used for rental income, cannot be used for personal reasons or for the use of certain family members (disqualified persons). The IRS considers this as self-dealing and can lead to the disqualification of your IRA. Check the IRS rules for a list of disqualified people to be sure. But basically, it means: your spouse, your parents, grandparents, and great-grandparents, your children and their spouses, grandchildren, and great-grandchildren, service providers of your IRA and any entity that owns more than 50% of the property. Another important note is that you cannot purchase real estate with funds from your SDIRA from one of these disqualified people. You also cannot sell a property that you already own and purchase it with your IRA funds. When you have a rental property in your IRA all income received from tenants will go back into the IRA to keep it in a tax-sheltered environment. This also means that any repairs needed for that property will also need to be paid for with funds from your IRA. When considering having real property in your IRA, it is wise to make sure that you have a cash balance to cover any incidentals that may happen (Preferred Trust requires that you always keep 5% of the value of the property in your IRA)
- Precious Metals – The types of precious metal you can purchase with SDIRA funds is limited to gold, silver, platinum and palladium and they must meet certain purity standards according to the IRS. Gold must be 99.5% purity; silver 99.9% purity, platinum 99.95% and palladium is 99.95% purity. Like real estate, the SDIRA custodian must be the one to purchase the precious metals using the SDIRA funds. It is important to work with a reputable dealer who can meet the IRS requirements and not overcharge you (make sure that you check the spot price of the metals and ask what they are charging over that price). When you purchase metals in your IRA, they must be held at a third-party depository. No, you can’t bury them in your backyard or hind them under your bed. Just like real estate, all profits from selling precious metals go back to the SDIRA. A few important things to note, check the market as the price for metals fluctuates, impacting the investment. Owning a tangible, physical asset is also a bonus for precious metals investing. Another plus!
- Crypto - A bit more volatile but can garner high returns and diversify your investment portfolio. You can invest in crypto currencies such as Bitcoin and Ethereum with a little bit more peace of mind since the President has enforced his pro-crypto stance backing crypto and enacting more crypto friendly policies. Not all SDIRA custodians will custody digital currency, so make sure that you are working with one that will allow this type of investment. If you want to do day trading, a common way is by opening an IRA LLC with checkbook control. Checkbook LLC, this is when you create an IRA that is owned by the LLC to hold and buy assets. Any profits you make must remain in the SDIRA account and any type of withdrawing of the funds may trigger penalties, taxes or fees so be sure to check the rules with your SDIRA custodian. Questions you may want to pose are: What type of storage does your custodian offer (research the difference between cold storage wallets and hot wallets)? Also note that you cannot use the same wallet address for personal cash investments and SDIRA investments.
- Crowdfunding – Seen as a higher-risk investment. Crowdfunding has become a viable alternative investment option within IRAs, allowing investors to support businesses seeking capital. Recent regulatory changes have made it easier for companies to raise funds through crowdfunding, providing IRA holders with more opportunities to diversify their portfolios. Before investing your SDIRA funds, it's essential to conduct thorough due diligence on the investment opportunity, the company, and its management team. Additionally, ensure that the investment complies with IRA regulations and that the crowdfunding platform accepts SDIRA funds.
The great thing about investing in these is being part of the company and its decision-making process, and if it is mission driven, then you can make a powerful impact not only on the community but also the world. Depending on the stage of the fund or the company that you are investing in, you can get in on the ground floor of potentially disruptive innovations. The drawbacks may be longer holding periods for investing, as typically it might take years for an exit strategy. This means, like real estate, it can be an illiquid investment. Holding the investment for a long time should be part of your investment strategy then when considering crowdfunding investments.
- Private Debt – essentially acting as a lender and lending your SDIRA account for private real estate projects, or lending to private businesses. You will earn interest when you loan out your SDIRA funds to these projects. There are a few types of private debt that come into mind when thinking about this option:
- Promissory Notes – Loan money to individuals or businesses in exchange for fixed interest payments.
- Real Estate Notes – Provide private mortgages secured by real estate.
- Business Loans – Lend capital to startups or small businesses in need of funding.
- Convertible Debt – Loan funds with the option to convert into equity in a startup.
- Peer-to-Peer Lending (P2P) – Invest in alternative lending platforms that connect borrowers with investors.
With these types of investments, you direct the investment, and the IRA custodian sends the funds to the borrower. It is repaid with the principal and the interest and goes back to the SDIRA account. Make sure to structure the loan agreement accordingly to where you will be happy with loan terms such as the schedule to repay back the loan, the interest rate and if there is any collateral at hand.
Investing in alternative assets through a Self-Directed IRA (SDIRA) offers powerful diversification and tax advantages, allowing you to build wealth beyond traditional stocks, bonds, and mutual funds. Whether you choose real estate, precious metals, cryptocurrency, crowdfunding, or private debt, each investment comes with unique risks and rewards. Careful due diligence, compliance with IRS regulations, and working with an experienced SDIRA custodian are essential to maximizing returns while avoiding costly mistakes. By strategically allocating funds into alternative investments, you can create a resilient, long-term retirement portfolio tailored to your financial goals.
