Forbes published a story recently about a famous pianist who died and left her daughter a significant amount of money in her IRA. The daughter wanted to purchase real estate with the money she inherited but was terrified of the tax implications. Imagine how happy she was to realize that an IRA could actually purchase real estate and own it. The daughter was able to purchase the properties she wanted through the IRA and avoid expensive taxes.
Here are four alternative ways you could choose to invest your money in a self-directed IRA.
Funding Your Business
Yes, that is right. You can use funds from your IRA to get quick capital to start your own business. The business will be owned by the IRA technically, but it is your IRA.
This plan has potential pitfalls, for example, you are investing your retirement income, and should it fail, retirement could come later, or not at all. Additionally, you will not be able to take any income from your business. Employees in your business cannot be immediately related to you (parents, siblings, children, etc.) and your business must be run by someone other than yourself.
If you truly believe in your business, however, this is a viable option. You need to be careful when dealing with the IRS, but if done correctly this is a viable way that many people do not realize to not only obtain funds for a startup but decrease your tax burden when it succeeds.
Invest in Precious Metals
Another option for many investors who are worried about the current conditions of the financial markets is investing in what is called a gold-backed IRA. These also require self-directed IRAs but have a lot of potential for return if the economy goes down. They are backed by physical gold, making them a very safe investment. Not only that, but gold has increased by nearly 500% in the last 15 years, making it a relatively safe and so far, a lucrative investment.
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Invest in Real Estate
Do you ever look at your mortgage statement and feel frustrated at how much interest you pay? You can actually use your IRA to essentially become the bank on other’s mortgages. This has the potential to be a lucrative option, especially compared to some other forms of investment nowadays. You cannot put your current mortgage into a self-directed IRA, but you can invest in real estate. Your self-directed IRA can earn rental income, or be a mortgage holder through a contract for deed, and also benefit from the appreciation of the real estate.
It is important to be careful with this type of investment as well, however. Many times the people that do not go to a traditional bank for mortgages do so because of a bad credit rating. That means you may run the risk of foreclosure, an expensive and painful option for an IRA.
Private Equity
Have you ever felt jealous of the people that were able to get in on the true ground floor of companies like Facebook or Apple? It is virtually impossible for a small investor like most of us to do so, but through IRAs, there is a chance.
You can invest in what is called private equity with your IRA. Private equity is essentially the money that is invested through private equity funds into startups while they are still small.
This can be a scary investment because companies that are young have a huge chance of failing. This would mean you wouldn’t get any of your money back, putting a significant damper on your IRA.
There are a lot of things to consider before getting into any of these alternative IRA investments. If you do it incorrectly, you could be hit with the IRS for early withdrawal and pay significant fees and fines for doing so. If you are close to retirement, it is probably a good idea to talk to a professional to make sure that everything is done correctly so as not to screw up that big day when you can finally quit working.
Any idea how one can buy gold coins (and sell them). I am seriously considering a small fraction of physical gold as opposed to paper gold.
So if you can fund other peoples mortgages can you fund i.e. refinance your child’s student loans from your IRA?
Hey Chris, I am fairly certain you can use them to pay for tuition and books, as far as a refinance, you will have to look into that. It would make sense though!
Good article on this topic. Alternative investments in an IRA can be a good idea for some, but for most people keeping it simple is usually the better option. There are risks and often expenses that are quite high. While there are many reputable folks offering the alternative IRAs, there are also many scammers out, there. As always do your homework and make sure you understand the risks inherent with these strategies. This is your retirement money and should be treated accordingly.