What Are Alternative Assets in a Self-Directed IRA?

Alternative assets are investments that are restricted in standard retirement plans, such as real estate, cryptocurrency, and precious metals. 

Self-directed IRAs give you access to a broader range of alternative assets, allowing you to diversify your portfolio and explore new investment opportunities. 

While brokerage accounts still allow you to access publicly traded assets, SDIRAs offer a wider range of choices, ranging from private placements to hard assets. 

Understanding the types of assets available in a self-directed IRA can help you build a portfolio that supports your needs, interests, and goals. 

Real Estate Investments 

Real estate in a self-directed IRA is one of the most popular alternative investments, enabling account holders to hold real property and profit from rental income or appreciation. 

An SDIRA provides the flexibility to invest in a diverse range of physical properties, including:

• Single-family residential properties (rentals or flips)
• Multi-unit homes and townhouses
• Large-scale apartment buildings
• Commercial real estate (office spaces, retail, or industrial)
• Raw land and undeveloped plots

It’s important to note that your IRA owns all of these investments, not you personally. Because of this, all income from the property, permissible contributions, and other assets belong to the IRA. 

Tip: If you don’t have enough funds in your account to purchase a property in full, you can use a non-recourse loan. These loans use the property to be held by the IRA, not your personal assets, as collateral. If you go that route, speak to your tax advisor about any UBIT requirements in an SDIRA.

Precious Metals

Precious metals in a self-directed IRA offer a tangible hedge against inflation and currency devaluation. Unlike traditional retirement accounts that limit you to paper assets, an SDIRA allows for the physical ownership of gold, silver, platinum, and palladium.

To qualify for an SDIRA, the IRS mandates strict purity requirements for all bullion and coins. If these standards are not met, the investment is considered a “collectible” and may trigger immediate taxes and penalties:

• Gold: Must be .995+ fine (24-karat).
• Silver: Must be .999+ fine.
• Platinum & Palladium: Must be .9995+ fine.

Additionally, all metals must be held in an IRS-approved depository; “home storage” is strictly prohibited and can result in the total disqualification of your IRA.

Private Placements & LLCs

Self-directed IRAs allow you to invest in private placements, including startups, private companies, and small businesses. These investments can take several forms, such as common or preferred stock, warrants, or promissory notes used for private lending.

While these opportunities can support business growth, they also carry higher risk and require careful due diligence.

In some cases, investors use an LLC to hold these assets. This structure can provide liability protection and enable “checkbook control,” allowing you to direct transactions more quickly. However, forming an LLC is optional and comes with additional compliance responsibilities that should be carefully considered before moving forward.

Crypto and Digital Assets

Self-directed IRAs allow investors to invest in cryptocurrencies such as Bitcoin and Ethereum, as well as other digital assets, providing a tax-advantaged way to participate in the blockchain economy. By holding these assets in an SDIRA, you can trade 24/7 and accumulate gains without the immediate tax burden associated with personal crypto wallets.

• Tax-Deferred Growth: All trading profits remain within the IRA, allowing for compounded growth.
• Asset Control: Investors can choose specific coins or blockchain-related funds based on their risk tolerance.
• Security Standards: SDIRA custodians utilize institutional-grade cold storage to protect digital keys from cyber threats.

Mineral Rights and Royalties

Self-directed IRAs can hold mineral rights, including interests in oil, gas, and natural resource production. These investments generate income through royalties based on production levels or lease agreements.

Typical structures include:

• Direct Ownership: Your IRA holds the underlying rights to the minerals beneath a property.
• Lease Bonuses: Earn upfront payments when energy companies sign contracts to explore your land.
• Monthly Royalties: Receive a percentage of the gross production revenue as long as the resource is being extracted.

These investments can produce passive income without the operational demands of real estate, but returns depend on commodity pricing, production levels, and regional demand.

Private Lending

Private lending allows your SDIRA to act as the lender rather than the borrower. Instead of purchasing assets directly, your IRA issues loans and earns returns through interest payments.

Common lending scenarios include:

• Real estate loans secured by property
• Business loans to private entities
• Promissory notes with fixed repayment terms

When loans are properly structured, this approach can create steady income. At the same time, the risk of default exists, though collateral can help mitigate some of the financial risk. 

What Alternative Assets Are Prohibited in a Self-Directed IRA?

The IRS prohibits specific alternative assets in a self-directed IRA to prevent personal benefit and ensure the account is used strictly for retirement savings. While SDIRAs offer vast flexibility, certain collectibles and personal transactions are ineligible for tax-advantaged status.

Investing in the following assets will trigger immediate taxes and potential penalties:

• Life insurance policies
• Collectibles, such as art, antiques, rugs, and most coins
• Alcoholic beverages
• Certain types of precious metals that do not meet IRS standards

You must also avoid prohibited transactions, which involve personal benefit or dealings with disqualified persons.

• Buying a property and living in it, even temporarily
• Lending money to or borrowing from your IRA
• Hiring yourself or a close family member to manage IRA-owned assets 

Prohibited transactions can lead to penalties, taxes, and even the disqualification of your IRA. If a transaction involves you personally or benefits you outside the IRA, it likely violates IRS rules. 

Investing in alternative assets through a self-directed IRA is the most effective way to diversify beyond the stock market’s volatility.

Don’t let traditional investment limits hold back your retirement potential. Whether you’re looking to purchase your first investment property or secure your wealth with physical gold, our IRA associates are here to guide you through every step of the SDIRA process.

FAQs

Who is considered a “disqualified person” in relation to my SDIRA?

A disqualified person is anyone the IRS defines as having a direct financial or familial relationship to you that limits IRA transactions.

This includes:

• You (the account owner)
• Your spouse
• Your parents and grandparents
• Your children and grandchildren (and their spouses)
• Any business you or these individuals control

It also includes fiduciaries, such as your custodian or anyone providing investment advice tied to the account.

Can I use my SDIRA to buy a vacation home that I also use personally?

No, you cannot vacation or otherwise use a property held in your SDIRA. This is considered self-dealing and prohibited by IRS law. 

How do I transfer funds from my existing 401(k) to a Self-Directed IRA?

You can transfer funds from a 401(k) or other qualified retirement account to an SDIRA by using a rollover. You can choose one of the following 

• Direct rollover. Funds move directly from one custodian to another. You do not take possession of the money. 
• Indirect rollover. You take possession of the funds by withdrawing them from the 401(k) and then depositing them into the SDIRA. You have 60 days to complete this process. If funds are not deposited within that period, they will be considered a distribution and taxed appropriately. Depending on your age, withdrawal and account type, you might also face penalties.  

What is “Checkbook Control,” and how do I set it up using an LLC?

Checkbook control is a structure that allows you to execute investments without submitting each transaction through your custodian. It works by having your self-directed IRA invest in an LLC. The LLC is owned by your IRA (through the custodian, FBO your account), and you serve as the manager.

Once funded, the LLC can make investments directly from its own bank account, giving you more control over timing and execution.

What is Unrelated Business Taxable Income (UBTI), and when does it apply?

Unrelated Business Taxable Income (UBTI) is income generated from business activities within your IRA that are not considered passive investments.

It can apply when:

• Your IRA uses debt financing (such as a non-recourse loan for real estate)
• Your IRA invests in an active business or operating company
• Income is generated from certain partnerships or LLCs

How is the “Fair Market Value” of my alternative assets reported each year?

Your SDIRA custodian reports annual fair market value to the IRS on Form 5498. For alternative assets, you typically provide the valuation using supporting documentation, and the custodian reports it without verifying the value.

Can I partner my personal funds with my SDIRA funds to buy a larger property?

No, you cannot mix personal funds with your SDIRA to purchase property. If you need more capital, you’ll typically need a non-recourse loan or a partner, with ownership based on each party’s contribution.