Hedge Against Inflation with a Self-Directed IRA

Published on April 21, 2022

America is having an inflation moment. It’s all over the news and our pockets are hurting. While inflation is not forever, those price increases are tough for many people to handle right now. This bodes the question – what can we do to hedge against inflation?

Investors holding alternative assets within a self-directed IRA, or those that wish to do so, may appreciate the “inflationary advantages” those asset classes come with.

Investing in alternative assets through a self-directed IRA can help individuals save on taxes while earning retirement wealth. These investments—such as real estate, natural resources like oil and gas, precious metals or other ‘real assets’ —provide cash flow through the retirement plan, and many do well during inflationary periods as they tend to be non-correlated with the public market.

Benefits of a self-directed IRA – during inflationary periods or any time

According to the Motley Fool, commodities—a class of alternative assets many investors include in self-directed IRAs—can be an effective hedge against unexpected inflation, given that the rise in cost of consumer goods is in part driven by increased cost of raw materials (think timber used for construction). In addition, Worth reports that real estate, private credit, and commodities have often performed well during periods of rising inflation.

Since self-directed investors can take a more agile approach to opportunistic investing, building a hedge against inflation is not their only advantage. Here are some other reasons to consider self-directed IRAs:

Not correlated with the stock market. Public markets and traditional investment vehicles (stocks, bonds, mutual funds) ebb and flow—often with wild fluctuations as we have seen over the past 20+ years. The performance of most nontraditional investments does not correlate with the stock market, so savvy investors can avoid that roller coaster ride.

Tax-deferred (or free) returns. The investment returns a self-directed IRA earns are tax-deferred (and tax-free for Roth accounts), so there are no taxes on capital gains. It’s important to note that “self-directed IRA” is not an account type, and the tax status depends on the type of account an individual opens; Traditional/Roth IRAs, SEP IRAs and Solo 401k’s are all account types that can be self-directed.

Positive cash flow. Self-directed investors are usually knowledgeable of the alterative asset classes they invest in and are comfortable making all their own investment decisions and conducting their due diligence. They know and understand what it takes to earn positive cash flow from their IRA’s investments, and they may already be investing in these asset classes outside of their IRAs. They also understand that, unlike many stock holdings, these are generally long-term investments that are less likely to be affected by temporary inflation.

Generational wealth transfer. In this scenario, the account owner can reinvest their returns and put the funds back into a new or existing investment to grow the account. This wealth can be left to any designated beneficiaries upon the account owner’s death.

The bottom line is that including alternative assets within a self-directed IRA builds a more diverse retirement portfolio—and diversity is a great safeguard against market volatility.

Benefits of a self-directed IRA at Next Generation

Next Generation offers both custodial services and full account administration to individuals who open a self-directed IRA or other self-directed account with us. We offer a plethora of educational materials on our website that not only provide information about the types of investments you can hold within these accounts, but what to expect from the setup and funding processes as well.

You can also schedule a 1-on-1 complimentary educational session with a member of our team so that self-directed investors—new and seasoned—can get answers to their questions about the many benefits and options available through this retirement wealth-building strategy. Alternatively, you can contact us directly via email at NewAccounts@NextGenerationTrust.com, or via phone at (888) 857-8058. You can also text us at (848) 233-4076; we’re here to help!

Back to Blog