Maybe I’m too pessimistic or risk averse, but I’m not keen on the investment climate for stocks, bonds, commodities, or other conventional assets. (I am coming around to the point of view that the time may be right for U.S. real estate investing. Warning: Based on my track record, one friend uses my bullish calls as a sell signal.) I admit to being still spooked by the 2008 meltdown (and an array of other Wall Street shenanigans); consequently, a big chunk of our IRAs is invested in safe, and so very low return, instruments. I know that’s a losing proposition, both with respect to keeping pace with inflation and building a proper nest egg, but for the past few years I haven’t been able to talk myself into taking more risk.
Another Option: The Self-Directed IRA
Almost everyone keeps their IRA money with a management firm like Vanguard, Fidelity, or E*Trade and makes investments in mutual funds, stocks, bonds, ETFs, etc. Many prefer the “set it and forget it” approach of spreading IRA money among a few broad-based investments in different asset categories and then letting it run. There’s nothing at all wrong with this approach (assuming you’re mostly choosing very low cost index funds), but if you’d like to get your hands dirty and directly make investments and get under the hood managing your IRA money, a self-directed IRA is worth considering.
The main benefit, to my way of thinking, of a self-directed IRA is the broadening of the sorts of investments I can make, on my own volition, with my IRA funds. For example, with a self-directed IRA I could invest my IRA money in:
- A rental property
- Gold or other precious metals
- A herd of cattle
- A small business
- A tropical island
In short, you may invest your self-directed IRA funds into anything except IRS-specified prohibited transactions, which are:
- Life insurance
Set Up a LLC for a Self-Directed IRA
Self-directed IRAs are set up through a custodian, which must process individual IRA transactions, among other duties. To speed processing and cut fees, you can set up a Limited Liability Corporation (LLC) for your self-directed IRA and tell the custodian to invest your self-directed IRA funds into the LLC. Then, as manager of the LLC, you may make transactions at the LLC level, without the involvement of the custodian. It’s sort of like setting up your own miniature Berkshire Hathaway, and you’re Warren Buffet!
Due Diligence Very Important!
Just 2% of all IRA money is invested in self-directed IRAs, and probably for a very good reason: Time and skill. Before embarking on the self-directed IRA course, ask yourself: Are you ready—with respect to time, knowledge, and experience—to manage your own company? With a self-directed IRA, you become CEO of your IRA, and investing its capital wisely and managing the investments becomes your responsibility.
Self-Directed IRA Resources
If your interest is piqued, you’ve got a research project ahead of you. These resources will get you started:
- “How to Invest Your IRA in Real Estate, Gold and Alternative Investments”
- List of self-directed IRA custodians
- “Self-Directed IRAs and the Risk of Fraud“
Would You Self-Direct Your IRA?
I know there’s a lot more you’d need to learn about self-directed IRAs beyond the introductory information in this article, but do you think you might be interested in self-directing your IRA? Are you unhappy with the investment options you can make with your conventional (Traditional or Roth) IRA?