If retirement savings accounts were a buffet, most of them would receive nothing but one-star reviews on Yelp for poor quality and a lack of variety. Why?
Retirement accounts often only offer a narrow range of tasteless and warmed-over investment options, so you’re forced to pick, in many cases, from the best of the worst. Sometimes, you end up with a bad taste in your mouth and your hunger for income is far from satiated. Control and diversification are hallmarks of a “gourmet” income plan.
That’s why a Self-Directed IRA (SDIRA) might be the perfect ingredient to add to your retirement recipe.
There are some misconceptions about how you can invest your qualified money. In fact, the IRS doesn’t have a comprehensive menu of how you can invest qualified money. They only specify what you are not allowed to order. For example, you can’t use qualified money to obtain collectibles such as art, memorabilia or anything similar that has subjective and speculative value. This is the U.S. government’s way of protecting us from our own poor and capricious decisions. Thank you, government. Also, you’re not allowed to use your qualified position to improve your non-qualified position. For instance, you can’t buy a duplex as a real estate investment and rent only one unit while you live in the other. That would improve your non-qualified position. (You can read more about Prohibited Transactions on our blog.)
Using a SDIRA to Diversify Your Investments
Why am I talking about IRS regulations for qualified money? Well, that’s just the roux, now here’s the sauce. You can use your retirement savings to invest in a wide range of vehicles through a SDIRA. This gives you much greater control over your investment portfolio, giving you access to an entire supermarket of delectable and appetizing options. But it’s important to do your due diligence. If you aren’t a financial professional (and even if you are), you should review your options with your financial advisor. And if you don’t yet have a financial advisor, get one. If you’re smart, you can direct your investments to greatly improve both the performance and the stability of your IRA.
One key benefit to broadening your investment options through a SDIRA is to help diversify your portfolio. Many typical IRA plans only offer a limited selection of investment options. This can differ depending on which custodial entity you choose for your specific IRA. But with SDIRAs, you have almost limitless options for investment. This provides more control to diversify your portfolio within your IRA. Greater control to diversify means a greater ability to manage risk. Each person has a different appetite for risk depending on their unique palate. Some of these factors include:
- age
- current financial situation
- retirement goals
- lifestyle to which you are accustomed
A qualified financial advisor can help make the appropriate recommendations for your specific risk profile and income objectives.
High Yield Investment Opportunities With SDIRAs
If you’re not particularly risk-averse, you might want to use the flexibility of a SDIRA to try maximizing your returns by seeking higher-yield investment opportunities. Typically, people who are younger might pursue this strategy because, if they take a loss on a riskier high-yield investment, they have more time to recover their losses. In some cases, an individual might have accumulated enough savings and secured an appropriate amount of predictable income that they have some padding to aim for an auxiliary accumulation strategy for their retirement income or even as part of their legacy plan. Many of our clients are increasingly incorporating real estate into their investment portfolio for steady passive income.
Incorporate a SDIRA Into Your Investment Portolio
As the operator of a real estate private lending platform for a company that’s been in business for 18 years, I can tell you that many of our investors utilize their SDIRAs to invest with us. In fact, SDIRAs are how more than half of our current clients are invested in our private investment funds. Your average IRA custodian, and most financial advisors, for that matter, don’t offer real-estate backed investment vehicles even though they can be a steady and predictable source of income.
Though real estate is a widely-used investment option, SDIRAs can be used to invest in a number of other alternatives such as precious metals, commodities, limited partnerships, and crowdfunding investments among others. Regardless of their financial situation, risk profile or retirement goals, most people would likely benefit from incorporating a SDIRA into the mix of their investment portfolio. Whether the goal is to manage risk, maximize returns or just achieve peace of mind when it comes to security and financial freedom, any income plan can be spiced up by adding a SDIRA. So, explore your options and get cooking!
Chris Ragland – Chief Operating Officer Chris is a managing partner of Noble Capital, a private equity firm specializing in real estate investment including loan originations, loan servicing, fund management, loss mitigation, and capital markets. He has spent twenty years building firms that specialize in loan servicing, loss mitigation, full-service brokerage, insurance, management, maintenance, rehabilitation, and REO disposition. Chris serves as Chair of the Government Relations Committee for the American Association of Private Lenders and is a member of the Board of Trustees for St. Edward’s University.
*Mainstar's role as custodian of self-directed accounts is nondiscretionary and/or administrative in nature. This information is for educational purposes only, and should not be construed as investment, legal, tax or financial advice or as a guarantee, endorsement, or certification of any investments. Mainstar encourages individuals to consult a financial or legal professional when making investment decisions.