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What are Alternative Assets?

alternative assets

Alternative assets are investments outside of traditional investments. Common examples of alternative investments include real estate, private equity, cryptocurrencies, precious metals, such as gold, structured settlements, and venture capital investments. Whereas traditional investments include stocks, bonds, and bank CDs. 

What are the Benefits of Alternative Assets?

Alternative assets simply refer to investments not traditionally held in an IRA, such as real estate. The benefits of alternative assets include:


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Inflation Protection

There are other benefits to investing in alternative assets that are directly related to the investment being made. For example, did you know that if you invest in real estate in a Roth IRA you can move into the home tax-free at 59 1/2 if the account has been open for at least five years? Hence, alternative asset investing has some benefits that are unique to the individual investment.

Related: Self-Directed IRA for Real Estate

Why should you invest in Alternative Assets?

The importance of investing in alternative assets comes down to investment diversification. Diversifying your retirement portfolio with US equities, as well as alternative assets is a risk mitigation strategy. For example, if the U.S. stock market takes a hit, you can fall back on your real estate, cryptocurrency or precious metal investments.

“Alternative investments are becoming very popular,” Hendrik says. “They offer the potential for higher returns and they have lower correlations to traditional investments.”

When your investments do not correlate, they can protect your portfolio from market volatility. Every investor should look into purchasing both traditional and alternative investments.

“Growing wealth is the goal,” says Hendrik, “but protecting it is just as important.”

Read More: What is a Self-Directed IRA LLC with Checkbook Control?

How can you invest in Alternative Assets?

Investors who are interested in using their retirement funds to invest outside of “conventional” investments can do so with a self-directed retirement plan. Before establishing a self-directed account, such as the Self-Directed IRA, make sure you go through a custodian who allows for the purchase of alternative investments. For example, most banks and financial institutions will establish a “Self-Directed” plan and make investments on your behalf. However, the types of investments such institutions will make are restricted to the financial products they sell conventional/traditional investments.

If you wish to you use your retirement funds to purchase real estate, cryptocurrency, tax liens, or any other alternative asset, you would not be able to do so through a bank or financial institution. The reason for this is because banks and financial institutions do not make money when you purchase assets they do not sell. Unfortunately, they are completely within their right not to allow you to invest in such assets.

Passive Custodian

Even though the majority of banks and financial institutions do not allow investors to invest in alternative assets, you can still make alternative investments with a passive custodian.

By establishing a Self-Directed retirement plan through a passive custodian, also known as a Self-Directed IRA custodian, you will gain the freedom to make any type of investment. Passive custodians administer retirement accounts and offer custodial and administration services. They do not make money on the type of investments you purchase with your retirement funds because passive custodians do not sell financial products.

We will soon look at the retirement vehicles that allow you to make alternative asset investments.

Self-Directed IRA or Solo 401(k) Retirement Plans

At IRA Financial, we are the fastest-growing provider of self-directed retirement plans. Our plans include the Self-Directed IRA and the Solo 401(k) plan that allows plan participants to invest in traditional and alternative assets tax-deferred or tax-free in the case of a Roth IRA or Roth 401(k). By establishing checkbook control, you can make investments without custodian consent, which eliminates custodial fees and delays.

Self-Directed IRA

A Self-Directed IRA is an individual retirement account that has the same characteristics as a Traditional IRA, but allows investors to make alternative investments with their retirement savings. In the last several years, the number of Self-Directed IRA accounts have grown significantly.

Solo 401(k)

A Solo 401(k) is a traditional 401(k) plan that covers only one employee. To be eligible for the plan, you must be self-employed or have a small business with no full-time employees other than yourself, business partner(s) or spouse. The business can be a sole proprietorship, corporation, LLC, etc., but the income it generates must be from a trade or business.

Note: A full-time employee is an employee who works less than 1,000 hours in a year.

What are the prohibited transaction rules?

You can engage in virtually any investment with a self-directed retirement plan, but IRS rules do exist. For example, you cannot use retirement funds to purchase life insurance or collectibles (works of art, stamps, some coins, etc.). Furthermore, you cannot engage in a transaction that involves a disqualified person, which includes yourself as the Self-Directed IRA owner/ Solo 401(k) trustee.

“You can possibly get tax advantages or sheltered cash flows with alternative investments if done properly,” says Hendrik. “However, if you invest in alternatives in the wrong account or incorrectly, it can have negative consequences.”

Hendrik advises that investors consult with a professional before investing. At IRA Financial, our team of tax and ERISA specialists are on board to help you navigate the IRS-prohibited transaction rules. By working with IRA Financial, we will ensure that your self-directed retirement plan remains IRS-compliant. Unlike other custodians, IRA Financial has never had a client audited by the IRS for triggering a prohibited transaction.

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Wrapping it up

Alternative investments are becoming more popular, and while they may have higher risks than traditional investments, that translates to higher rewards. More importantly, by diversifying your retirement portfolio with traditional and alternative investments that have a low correlation, you will protect your hard-earned funds if one market crashes or in the event of a recession.


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