Social Investing Through a Self-Directed IRA
Self-directed investors are avoiding the stock market roller coaster by investing in non-publicly traded, alternative assets, through their self-directed IRAs. These retirement plans offer the same tax advantages as regular IRAs, but allow for a broader array of nontraditional investments that traditional brokerage accounts do not. This also enables individuals to build retirement wealth through investments that reflect their personal interest or, in other cases, their ethics. One such class of nontraditional investments is social investing, also called sustainable investing or impact investing.
Examples of social investing are assets that fit into the broader category of environmental, social, and corporate governance (ESG); they foster positive social change, social justice, and protect the environment. Investors are discovering ways to invest in causes that are meaningful to them; these may be renewable energy options that reduce carbon footprint, shares in cooperative farms that lift people out of poverty, or funds that include corporations with excellent employee relations or human rights records.
As with any self-directed investment, social investing means taking the time to research and conduct one’s due diligence. Investors who want to make a difference through their retirement plan can look for ways to support sustainable or impact investing projects, or funds that are managed in a socially responsible way. Maybe you know of a startup that’s bringing clean energy projects to market or clean water to remote villages; or perhaps you want to invest in a minority-led company as a way to diversify your retirement portfolio—and support economic diversity.
Once you’ve done your research and selected sustainable investments to include in your retirement plan, Next Generation—as the self-directed IRA custodian and administrator—will first conduct an administrative review of the asset documents to ensure it meets internal guidelines for self-directed retirement plans. We will then process your transaction based on your instructions, hold the assets, and manage all the paperwork and mandatory filing associated with the investment (mandatory IRS filings of 5498s, or Fair Market Value and 1099s if required).
If you have questions about self-direction as a retirement strategy, or about the many other nontraditional investments these retirement plans allow, you may schedule a complimentary educational session with one of our knowledgeable representatives. You can read more about various types of alternative assets these plans allow here; or contact us directly via email at NewAccounts@NextGenerationTrust.com or call 888.857.8058.
Investing in Cryptocurrency in a Self-Directed IRA
One of the benefits of self-direction as a retirement strategy is the ability to include a broad array of nontraditional investments in an IRA or retirement plan. One such investment that has the attention of certain savvy investors is cryptocurrency.
Many people have heard of Bitcoin—a form of cryptocurrency—but what is this alternative asset all about?
What is cryptocurrency?
In short, it’s a digital or virtual currency—not paper money or metal coins—that is created on decentralized networks of computers using blockchain technology. Blockchain is a distributed/online ledger and an organizational method for ensuring the integrity and security of all transactional data—an essential component of many cryptocurrencies.
Cryptocurrencies are secured by encryption techniques called cryptography and allow for secure online payments as virtual tokens—these tokens are the ledger entries in the system. Cryptocurrencies are not held at a bank nor issued by any central authority such as a government agency or financial institution. No personal information is exchanged during a transaction and there is no third-party interaction with institutions such as a banks or credit card companies. The parties’ digital wallets are account addresses with a public key and the owner has a private key to sign transactions.
Bitcoin, launched in 2009, became famous as the first blockchain-based cryptocurrency; today, there are many others that compete with it. A more detailed explanation of blockchain technology and cryptocurrency can be found here.
Including cryptocurrency in a self-directed IRA
Diversifying one’s retirement plan through self-direction enables individuals to include many non-publicly traded alternative assets—such as cryptocurrency—in their retirement portfolios. Investors who know and understand this asset also know that market prices are based on token supply and trader/user demand, and the exchanges the currencies trade on.
(NOTE: There is a limited supply of this computer-generated currency by design; for example, Bitcoin was designed to cap at 21 million).
That said, like many nontraditional investments, cryptocurrencies can provide a hedge against stock market volatility and inflation, and unlike other alternative assets, are certainly easy to transport and use.
Investing in Cryptocurrency through an IRA at Next Generation
Note that any time you buy or trade a digital asset, this transaction is done through a digital wallet that is linked to a checking account. If you plan to invest in Bitcoin or other cryptocurrencies, most self-directed IRA custodians, like Next Generation, require that this be done through an LLC; the LLC is funded by the self-directed IRA and opens a business checking account to use for the digital wallet. This checkbook control should ensure that the funds are held and used specifically for the purpose of buying or trading this digital asset (or other alternative assets within the IRA)
If you’ve done your research on cryptocurrencies—or if you’re already trading these digital assets outside of your existing IRA—you can form an IRA LLC with Next Generation and start building a more diverse retirement portfolio that includes Bitcoin or other cryptocurrencies. You can also schedule a complimentary educational session with one of Next Generation’s team members to discuss how this all works. For questions about self-direction as a retirement strategy, contact Next Generation by phone at 1.888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.
Investing in Private REITs with a Self-Directed IRA
A real estate investment trust (REIT) is a company that invests in/owns and usually operates all types of income-producing commercial real estate: multi-family housing/apartment buildings, student housing, retirement and senior communities; warehouse and industrial properties; retail centers, hospitality, and office buildings.
In order to qualify as a (REIT), the company must file with the SEC and meet certain SEC requirements. Although most REITs are publicly traded on stock exchanges (known as public, traded or listed REITs), there are also private REITs; like their stock exchange-traded counterparts, private REITS must register with the SEC and are subject to the same IRS regulations. That includes the requirement to return 90 percent of their taxable income to shareholders annually.
One big difference in public vs. private REITs is that the latter are not as susceptible to demand-driven price volatility as public REITs, whose value fluctuates daily; private REITs are valuated annually.
Why invest in a REIT
- REITs provide access to dividend-based income in the short term, and long-term return on investment as the property grows in value over time.
- Real estate is a popular hedge against inflation/stock market volatility and enables investors to diversify their portfolios.
- REITs require a relatively low minimum investment to get started.
Renters are on the rise—and so is rental property popularity
Multi-family housing represents a large portion of real estate investments, thanks to an increase in the renter population, which has been in growth mode for a few years and continues to rise. There are several reasons for this:
- Baby Boomers are downsizing into amenity-rich luxury rental apartments; the 2015 Census Bureau projected that by 2020, five million Baby Boomers will make an apartment their next residence.
- Millennials are delaying home ownership and looking for smaller domiciles in more urban, denser areas; they value the flexibility of apartment living and are paying off student debt.
- Right behind Millennials is Gen Z, whose members have started entering the rental market.
Investing in private REITs with a self-directed IRA
As you know, a self-directed IRA can include many different types of nontraditional investments, with real estate being the most popular class of alternative assets within these plans.
When your self-directed IRA invests in a private REIT, all income and expenses related to the asset flow in and out of the retirement plan. However, private REITS are not the only type of real estate investment you can include in a self-directed IRA. Other types of real estate investments might allow you to partner your self-directed IRA with another buyer, transact a “fix & flip” and take the profit on the sale of the property, or buy and hold the asset, so the IRA earns tax-advantaged rental income over time.
After you’ve researched a REIT or any other real estate investment you’d like to include in a self-directed retirement plan, it’s time to open and fund your account. At Next Generation we not only provide comprehensive transaction support, we also provide client education about investing in real estate and other alternative assets through a self-directed retirement plan. Of particular importance is understanding prohibited transactions and disqualified persons as defined by the IRS.
If you have questions regarding this strategy, don’t hesitate to contact Next Generation at NewAccounts@NextGenerationTrust.com or call 888.857.8058. Alternatively, you can schedule a complimentary educational session with one of our knowledgeable representatives.
Want Out of the Stock Market? Consider Precious Metals in a Self-Directed IRA
Buckle up, investors—the stock market is taking millions of people for a very uncomfortable ride during the Covid-19 pandemic. Individuals who maintain retirement portfolios with traditional assets like stocks, bonds, and mutual funds have seen precipitous declines in their retirement accounts this month as the markets, businesses, and the world deal with the virus.
Advisors will say that diversification is always the key to a healthy portfolio—something self-directed investors know and practice. One way to hedge against the volatility of the stock market and reduce risk is to include alternative assets within a self-directed IRA. Along with real estate, precious metals are among some of the most popular nontraditional investment options that can be held in a self-directed IRA. In fact, there has been a recent spike in demand from investors who wish to diversify their retirement accounts with metals like gold, silver, platinum, and palladium. You can read the particulars of including precious metals in a self-directed IRA in this blog post.
Why include precious metals in a self-directed IRA?
Long before there was paper currency, there were gold and silver, traded around the world. Key benefits to including precious metals in a self-directed IRA is that these assets have no credit risk, serve as a hedge against market volatility, and also do so vis-à-vis political instability, currency weakness, and economic collapse. As Goldman Sachs was quoted this week, “gold is the currency of last resort.” Given the news swirling around us right now, it’s no wonder precious metals are in higher demand as a long-term investment.
In a move to stabilize the U.S. economy and ward off a credit crunch, the U.S. Federal Reserve has committed to purchasing an unlimited number of Treasuries and securities tied to residential and commercial mortgages. This process, called “quantitative easing,” is meant to enhance liquidity of financial markets. Pushing more money into the market affects gold prices inversely; as more money is available, interest rates go down and the value of gold goes up. This article on MarketWatch explains further and predicts gold will increase sharply in value in the coming weeks.
If you’re already knowledgeable about investing in precious metals or want to include this alternative asset in your retirement plan, check out our helpful Precious Metals Guide to learn more. If you have questions about self-direction and the other kinds of nontraditional investments these plans allow, register for a complimentary educational session with one of our knowledgeable representatives. Alternatively, you can call us directly at 888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com.
Including Joint Ventures in a Self-Directed IRA
Did you know that you can use funds in a self-directed IRA to invest in a joint venture? These investments allow you, as a self-directed investor, to enter into a business arrangement with one or more individuals, and create a way for different investors to pool resources for a particular project.
Unlike partnerships, which are between individuals and are long-term arrangements between parties to operate a business, joint ventures are typically for a limited time or for a specific investment. Joint ventures (JVs) are often done in real estate but can be for other investments that the parties intend to sell at a profit within a specified time frame.
According to Investopedia, “Joint ventures, although they are a partnership in the colloquial sense of the word, can take on any legal structure. Corporations, partnerships, limited liability companies, and other business entities can all be used to form a joint venture.”
JVs can be formed for many different types of business activities. Liability is mitigated since the venture is its own entity, separate from the participants’ other business interests. When the JV is a self-directed investment, the IRA, as one of the partners, shares responsibility for the profits, losses and expenses associated with the JV. It is possible for two or more self-directed IRAs to team up on a joint venture.
How joint ventures work with self-directed IRAs
Let’s say you have a self-directed retirement plan and wish to partner with another investor to purchase a piece of real estate. The self-directed IRA makes the investment along with another party or parties as a private placement. Terms of the arrangement are worked out between all involved, including:
- How much each party is investing
- Type of project (technology, real estate, foreign venture, etc.)
- Time period of the investment/JV
- Structure of the JV
- Control, management and, if relevant, staffing
- Ownership splits
Gains on the investment flow back to the self-directed IRA, tax deferred or tax exempt, depending on the type of retirement plan.
Joint ventures carry with them tax and legal considerations. At Next Generation, we recommend that as part of their due diligence, investors consult with their trusted advisors before entering into a joint venture of any kind. It’s also important to educate yourself to avoid a prohibited transaction. As a self-directed retirement plan custodian and administrator, we review all documentation for compliance with IRS guidelines to identify disqualified persons or prohibited transactions.
If you’re considering using your self-directed retirement plan to invest in a joint venture, and have questions about how to get started, contact us via email at NewAccounts@NextGenerationTrust.com or call 888-857-8058. Alternatively, you can schedule a complimentary educational session with one of our representatives to discuss self-direction as a retirement wealth-building strategy.