Investing in an Individual Retirement Account (IRA) is a great way to save money for retirement. Traditional IRAs allow for multiple types of alternative investments and come with tax advantages.
Here are a few good reasons to invest alternatives through your IRA:
- Portfolio diversification: As seen in this year’s selloff in both equities and bonds, markets are very cyclical in nature. You may experience poor returns some years no matter what you’re investing in. But diversifying your portfolio can reduce volatility and smooth out returns over the years.
- Tax advantages: IRAs allow you to defer paying taxes until you withdraw the money – which you won’t have to do until retirement. This gives your investments a longer time to compound.
- “Future proof” your investments: You never know what kinds of investment opportunities will come your way in the future. But it’s safe to predict that they’ll benefit from tax advantages.
Alternative Investments for Your IRA
Here are six non-traditional investments that are well-suited for your Traditional IRA:
- Real Estate: One great way to grow your money is by investing in rental properties. They have high barriers to entry, but produce often substantial long-term returns with consistent rental income. Investing in real estate also provides tax benefits. However, IRA funds cannot be used to purchase a personal residence or a secondary home.
- Venture Capital: Venture capital can be a lucrative investment opportunity. But you need to find promising startups to fund early on before they become full-blown corporations. It can be highly time-consuming and risky, but if done correctly, can pay off big-time in the long-run.
- Private Equity: With this type of investment, you (or your firm) buy out private companies. You can make direct investments or do what’s called a leveraged buyout (LBO). A leveraged buyout uses debt to finance the purchase price. LBOs are particularly attractive because they’re non-recourse to your firm. That means if things don’t work out as planned, you’re only on the hook for the loan payment.
- Oil/Gas Drilling: This is one of the highest-risk investments because it requires significant upfront capital and can take years to come to fruition. But, when successful, this type of investment can generate sizable returns.
- Precious metals: Unlike stocks, precious metals like gold don’t pay dividends or interest. That means all your gains are derived solely from price appreciation. So if gold’s value declines, so will your returns.
- Cryptocurrencies: Despite what many financial pundits claim, cryptocurrencies such as Bitcoin and Ethereum brought massive returns over the last few years. Additionally, cryptocurrencies can be a way to hedge against inflation, so long as its price rises at the decline of the traditional dollar.
While there are many more investments well-suited for a Traditional IRA, it’s important to do your research before making any investment. Different investments have different risk levels and return rates.
Also, keep in mind that certain alternative investments won’t be a fit for your Traditional IRA. For example, life insurance contracts are not allowed in an IRA. So do your research to make sure the types of investments you’re interested in are allowed in an IRA.
The bottom line
Overall, Traditional IRAs are a great account to host your alternative investments. IRAs give investors the opportunity to explore different asset classes, experience serious tax advantages, and create a diversified portfolio to withstand the long-haul.