Many investors tend to think of private market investing through the lens of high-profile venture capital rounds or headline-grabbing private equity deals. But while those stories get the most buzz, they represent just a small corner of the opportunities available outside public markets.
Beyond the hype lies a broad spectrum of alternative assets that each offer distinct ways to diversify and strengthen a portfolio. In fact, our research shows that nearly 30% of investors plan to or are interested in investing in cryptocurrencies in the next few months, and 28% indicated the same for real estate.
For investors looking to tap into these opportunities, self-directed IRAs have become an increasingly effective way to participate. By allowing investors to hold a wider array of assets, they enable greater flexibility, control and potential for enhanced portfolio diversification.
What is a self-directed IRA?
A self-directed IRA (SDIRA) is a type of IRA that offers the same tax advantages as other IRAs, but allows for investment in a much wider range of assets beyond conventional stocks and bonds. With a self-directed IRA, investors can choose a Roth, traditional or SEP IRA structure while accessing private market investments including private equity, real estate and private credit.
Potential benefits of a self-directed IRA
- Broader investment flexibility: A self-directed IRA empowers investors to allocate retirement funds into assets they understand or believe in. For those with specialized interests or skills such as real estate investing, angel investing or small business ownership, this flexibility can be valuable.
- Tax-advantaged growth: Just like conventional IRAs, self-directed IRAs offer tax-deferred (traditional) or tax-free (Roth) growth. This can be especially powerful for assets that compound over long time horizons or that generate meaningful passive income.
- Diversification beyond public markets: Because self-directed IRAs accommodate a wider range of alternative assets, they allow investors to construct retirement portfolios that may be less correlated with public equities and potentially reduce volatility and increase stability.
- Alignment with investor interests and expertise: Investors can integrate personal passions or areas of familiarity such as real estate, startups or commodities directly into their retirement strategy.
Considerations and risks of a self-directed IRA
While self-directed IRAs offer significant flexibility, they also require informed decision making by sophisticated investors, and may require investors to meet the SEC’s definition of an accredited investor. Key considerations include:
- Due diligence is the investor’s responsibility. Custodians of SDIRAs generally do not endorse investments.
- Liquidity can be limited. Many alternative assets take years to mature and may be difficult to sell quickly. But this time horizon can align well with retirement.
- IRS rules apply. There are regulations for self-directed IRAs regarding prohibited transactions, disqualified persons and improper use of assets that are important to learn and adhere to.
With thoughtful planning and an understanding of compliance, self-directed IRAs can provide a powerful vehicle for accessing private markets.
Types of private market assets eligible for a self-directed IRA
The IRS does not provide a list of permitted assets. Instead, it identifies a small number of prohibited categories. As a result, SDIRAs allow for a wide array of private market assets including many that investors never realize are eligible. Below are the most common categories.
Real estate
Real estate is one of the most popular SDIRA asset classes, offering tangible value and potential income. Investors can hold:
- Residential rental properties
- Commercial buildings
- Raw land
- Multifamily units
- Real estate investment partnerships
- Agricultural land
- Tax liens and deeds
All rental income and gains must flow back into the IRA, and investors cannot personally use the properties or pay expenses outside the IRA.
Private equity and venture capital
Investors can participate in private companies through:
- Direct private company investments
- Limited partnership interests in private equity funds
- Venture capital fund allocations
- Startup equity
These assets often have longer investment horizons but also the potential for meaningful returns.
Debt instruments and lending
Self-directed IRAs can hold a variety of debt-based investments, including:
- Secured and unsecured promissory notes
- Hard money lending
- Mortgage notes
- Convertible debt deals
These options can provide predictable income streams, although they require careful evaluation of borrower creditworthiness.
Precious metals
Self-directed IRAs can hold certain gold, silver, platinum and palladium products, but they must meet IRS fineness standards and be stored by an approved depository. Examples include:
- Gold American Eagle coins
- Certain gold and silver bars
- IRS-approved bullion coins
Investors cannot personally store the metals.
Cryptocurrency and digital assets
Some self-directed IRAs allow investments in digital currencies such as Bitcoin and Ethereum. These assets can introduce volatility but also offer diversification into emerging technologies.
Commodities and natural resources
Certain commodity related investments are permissible, including:
- Oil and gas partnerships
- Mineral rights
- Timberland investments
These can provide exposures that behave differently from traditional financial assets.
IRS restrictions and prohibited assets to know
Although SDIRAs are flexible, IRS rules impose clear restrictions.
Prohibited assets include:
- Life insurance contracts
- Most collectibles such as art, rugs, antiques, stamps and certain coins
Prohibited transactions include:
- Using IRA assets for personal benefit
- Transacting with disqualified persons such as the investor, spouse, parents, children and entities they control
- Receiving compensation or performing services related to an IRA owned asset
Violations can lead to loss of the IRA’s tax advantages, so understanding these rules is essential.
Conclusion
Self-directed IRAs can allow investors to take their portfolios beyond the limits of public markets and embrace a broader universe of private market opportunities. From real estate to startup equity to private lending, SDIRAs offer a level of diversification and customization that other IRAs are largely unable to match.
For investors seeking a retirement portfolio that more closely reflects their interests, expertise and long-term goals, self-directed IRAs provide a compelling path. When used responsibly and with careful adherence to IRS rules, they can help create portfolios with potentially stronger diversification and resilience.
