You know how essential it is to invest and save for retirement, but maybe your 401(k) or traditional IRA just isn’t cutting it. You’re limited to common assets, like stocks and bonds, and often find yourself at the mercy of the stock market or the financial institution that holds your account.

Savvy investors who have confronted the same investment roadblocks often turn to self-directed IRAs. This type of retirement account unlocks a wealth of opportunities that make reaching your goals easier.

Here’s what you need to know about a self-directed IRA and the assets you’ll gain access to once you open one.

You know how essential it is to invest and save for retirement, but maybe your 401(k) or traditional IRA just isn’t cutting it. You’re limited to common assets, like stocks and bonds, and often find yourself at the mercy of the stock market or the financial institution that holds your account.

Savvy investors who have confronted the same investment roadblocks often turn to self-directed IRAs. This type of retirement account unlocks a wealth of opportunities that make reaching your goals easier.

Here’s what you need to know about a self-directed IRA and the assets you’ll gain access to once you open one.

What Is a Self-Directed IRA?

A self-directed IRA functions similarly to a standard IRA, but it has two defining features that set it apart from the rest:

• Unparalleled flexibility and diversification. When you invest in a Traditional IRA, your choice of assets is limited to common options, like stocks, mutual funds, and annuities. When you open an SDIRA, you can access a range of alternative assets, including real estate, precious metals, and private equity.
• Tax benefits. SDIRAs come with the same tax advantages as a Roth or Traditional IRA. In turn, this can be a powerful vehicle to purchase assets like real estate or private equity which are subject to massive tax burdens.

Being able to invest in alternative assets with IRA tax advantages presents an opportunity not found anywhere else in traditional investing. This means that every cent you earn from a house flip in your retirement account will never be taxed.

Of course, you will have to wait to withdraw those funds in the future, but all contributions can be withdrawn tax-free. In turn, if you contribute $10,000 to an IRA and make $20,000 in earnings, you can still withdraw that initial 10k tax-free and use it to finance another house flip outside of your retirement account.

Combining retirement planning with high-growth investment opportunities not found in traditional retirement accounts makes SDIRAs a complete game changer.

15 Investments You Can Purchase with an SDIRA

An alternative investment is anything you cannot normally invest in with a Traditional IRA, deemed legally acceptable for SDIRA investment. Standard IRAs can hold traditional assets, like stocks, bonds, CDs, annuities, mutual funds, exchange-traded funds (ETFs), and unit investment trusts (UITs).

But with an SDIRA, you can invest in any traditional asset, as well as alternative assets listed below.

1. Real Estate

The ability to invest in real estate is one of the primary reasons people consider opening SDIRAs. Though you can invest in real estate investment trusts (REITs) with a traditional  IRA, if you want to invest in actual property, you’ll need an SDIRA.

With a self-directed IRA for real estate, you can invest in commercial and residential properties, buying and selling them to turn a profit or leasing/renting them out for passive income. There is a catch, though. If you invest in real estate with your SDIRA, all income must go directly back into the SDIRA, and you cannot benefit directly from the property. That means you can’t live in or do business from a property you purchased with your SDIRA. The same is true for what’s known as disqualified persons, which include your spouse, children, or grandchildren.

2. Bonds

Bonds are essentially loans given to the government or a company. When you purchase a bond, you give money to the issuing entity under the agreement that they’ll repay you for the face value of the bond plus any interest earned while it matured. Unlike stocks, bonds do give you ownership shares in the issuing entity. Bonds are relatively low risk and can help round out your portfolio, particularly if you invest in more volatile assets, such as stocks.

3. Stocks

Stocks, commonly called shares, give you fractional ownership in the issuing company. Companies issue stocks in an attempt to build capital. When the company does well, your investment will grow based on the company’s earnings.

Stocks often outperform other types of investment over time, but they are also inherently riskier than bonds. If the market performs poorly or the company makes decisions that decrease the value of your shares, your investment will decrease. Still, a well-balanced portfolio typically includes at least some stocks.

4. Non-Recourse Loans

A non-recourse loan is a type of debt secured only by a specific piece of collateral. When you invest in a non-recourse loan, your earnings stem from interest paid on the loan.

If the borrower fails to repay the lender–in this case, the SDIRA account holder–one can assume ownership of the collateral, such as a house. And the lender can’t take legal action against the borrower’s personal property or assets.

5. Private Equity

When you invest in private equity, you provide capital to a private company in exchange for a share of the company. This differs from traditional stocks as the investment is more substantial, and the shares are not publicly offered on the exchange. You can invest in private equities in several ways, including in LLCs, private stocks, and private hedge funds.

SDIRAs are one of the only accounts that let you purchase private equity for retirement.

Private equity investments can yield high returns, but they are not liquid. If you invest in private equity, be prepared to hold that asset for several years.

6. Startups/LLCs

Like private equity, investments in startups and LLCs are used to raise capital for a specific business entity in exchange for shares. Oftentimes startups use IRA funds as seed capital to grow or transition their business into the next strategic phase. If the company performs well, then you’ll reap the benefits.

Like private equity investments, start-up or LLC investments are typically less liquid than other opportunities and are generally long-term.

7. Promissory Notes

A promissory note is an agreement between the lender and the borrower. With an SDIRA, you can lend an individual or entity money, setting your own loan terms and rates. Promissory notes can be issued for various financial needs, including real estate purchases.

8. Cryptocurrency

Cryptocurrency is a decentralized digital currency that can take various forms. Common options include Bitcoin, Litecoin, and Ethereum. Depending on your preferences and comfort level, you can invest directly in cryptocurrency through exchange or digital currency funds.

9. Precious Metals

You can use SDIRA funds to invest in certain precious metals, namely gold, silver, and palladium. When you invest in precious metals, you can purchase physical qualities held by the custodian or through the stock market, where you can invest assets like futures or ETFs.

10. Tax Liens

Tax liens are implemented when a property owner fails to pay their taxes. When this occurs, the city or county government issues a tax lien certificate, which can then be auctioned off to investors. When you purchase a tax lien, you take control of the lien, and the debtor pays you instead of the government entity. Earnings are based on the interest rate set at the time of purchase.

11. Futures

Future contracts, commonly referred to as “futures,” are buy/sell agreements that are usually financial or commodities-based. For instance, you can invest in futures based on a specific type of currency, like the U.S. Dollar; energy, such as oil; or metals, such as gold.

The buyer and seller agree that a future will be bought/sold at a certain price at a certain date. Futures are speculative investments that allow investors to hedge their investment on where they think a particular market will be at a certain time.

12. Private Placements

Private placements offer a way for companies, especially start-ups, to raise capital by selling securities like stocks and bonds. However, unlike initial public offerings (IPOs), which are available to the public, private placements are only available to select investors or entities. In addition, you or you and your spouse generally must have a net worth of over $1 million and an annual earned income of more than $200,000 ($300,000 with a spouse).

SDIRA owners eligible to invest in private placements can use their retirement funds.

13. Mutual Funds

When you invest in a mutual fund, your money is pooled together with other investors to purchase a set of securities, such as stocks and bonds. Mutual funds offer a way to diversify your portfolio with a mix of assets while a professional investor manages the investment. Mutual funds can be held with a Traditional IRA or an SDIRA.

14. ETFs

Exchange-Traded Funds (ETFs) are similar to mutual funds in that they often represent a collection of assets and a reliable way to diversify your portfolio, whether you have a Traditional  IRA or SDIRA. The primary difference between the two is that ETFs can be bought and sold on the exchange throughout the day at fluctuating prices, whereas mutual funds are held to a single, daily exchange.

15. Foreign Currency

Foreign currency investments, also known as FOREX trading, allow you to take advantage of fluctuations in the macroeconomy. FOREX trading generally has low trading costs and can be profitable for active traders that are skilled in global finances.

With so many diverse assets available to self-directed IRA holders, there is no better account to invest for retirement than an SDIRA. Learn more about How to Open a Self-Directed IRA.

FAQs

Are self-directed IRAs subject to contribution limits?

The tax benefits and IRS regulations that govern all IRAs also extend to SDIRAs. For instance, you must adhere to annual contribution limits, which are $6,500 ($7,500 if you’re 50 or older) for the 2023 tax year.

What can’t you invest in with an SDIRA?

Though SDIRAs can hold a range of alternative assets, you can not invest in life insurance, alcohol, or collectibles, which include artwork, stamps, coins, gems, or rugs.

Can you trade options in an SDIRA?

Yes, you can trade select options in an SDIRA, but your options are limited. An experienced custodian like Horizon Trust can help you navigate this type of investment and the options available.

What is the best SDIRA investment for beginners?

There is no single SDIRA investment that is overwhelmingly best for beginners, though real estate is what often attracts investors to this type of investment account. Because SDIRAs place the onus of research on the investor, the best asset or security for you is the one on which you can confidently complete due diligence.