Using a Self Directed IRA to Invest in Farmland
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Originally published on July 2, 2019 . This article was edited to meet broker-dealer compliance guidelines in April of 2023.
While a traditional investment allocation between stocks, bonds, mutual funds, and cash may be a solid approach to building a portfolio, an increasing number of investors are seeking opportunities through nontraditional assets such as agriculture, commercial real estate, precious metals, oil wells, and farmland.
Unfortunately, if you’re looking for tax-advantaged ways to invest in these alternative asset classes, you will quickly run into some limitations.
While most investment advisers work with standard (but more rigid) Individual Retirement Accounts (IRAs) or 401(k) offerings, many are expanding their clients’ use of more flexible Self-Directed IRAs. This article explains how you can use an SDIRA to invest in alternative assets like farmland.
What Is a Self-Directed IRA?
Just like any Roth or Traditional IRA, a self-directed IRA (SDIRA) is a tax-advantaged investment account managed by a custodian that may be used as a vehicle to build wealth for retirement.
What sets the self-directed IRA apart is that, at the direction of the account holder, an IRA custodian can invest in a wider range of assets beyond traditional investment options. A person with a standard IRA, Roth IRA, 401(k), or other source of qualified funds can roll over funds to make their account self-directed through an SDIRA custodian.
What Is an SDIRA Custodian?
In short, the custodian is a passive, non-discretionary entity that
- holds your funds
- executes investments as directed by the IRA owner (you)
- performs administrative and custodial duties necessary to preserve the tax-deferred status of the IRA
An SDIRA custodian is NOT a broker or investment adviser. It does not sell investments, provide advice or recommendations, or provide due diligence on investments for the IRA owner.
It only reviews and approves possible investments as a suitable investment product, adhering to all IRA and government regulations, and it invests only with the express direction of the IRA owner.
Finding the Right Custodian
Since many traditional brokerage firms don’t offer custodial services for self-directed IRAs, investors must search for companies that specialize in providing SDIRA plans. It’s also a good idea to perform a careful evaluation of the costs and the level of support provided by an SDIRA provider/custodian.
Many custodians require a minimum investment ranging anywhere from $10,000 to as much as $50,000. Accompanying service fee costs can range from a few hundred to a few thousand dollars for initial account opening, ongoing maintenance services, rollovers, tax documents, and more.
Investors considering this type of plan should always consult with their legal and financial advisers before opening an account.
Cost/Benefit Analysis of the SDIRA
It is often necessary to take these service fees into account prior to placing specific assets in an SDIRA, to see whether or not they outweigh the cost of ownership in a taxable structure.
As a general rule, many advisers suggest reserving your SDIRA funds for more sizable investments to minimize the impact that custodial fees may otherwise have on your percentage returns.
For example, a $100 account fee would only have a 0.1% performance drag on $100,000 invested, but the same fee would have a 1% drag on $10,000 invested.
A self-directed IRA can be a great retirement tool for tax-advantaged investments in start-up ventures, business expansions, and other ground-floor opportunities. Investors may consider including a diversification of asset classes such as private equity, private debt, or real estate within a self-directed IRA. Speak to a financial adviser to see what type of assets suit your investment goals.
Investing in Farmland Through Your SDIRA
Investing with an SDIRA on the AcreTrader platform is straightforward, albeit with a few more steps than a standard investment. We are currently able to facilitate investments through many pre-approved SDIRA custodians, listed in our FAQ.
If your custodian isn’t included, talk with us about how we can facilitate future investments for you.
If you don't already have an SDIRA account, we work with a number of providers, including the two below. (We are not paid a referral fee with any provider.)
- Alto helps anyone use their IRA or 401(k) savings to invest in non-registered, alternative assets like private equity, real estate, early-stage companies, and cryptocurrency. Alto uses technology to bring IRAs into the 21st century -- quick, straightforward and cost-effective. Finally, your IRA has options outside of the public markets.
- Rocket Dollar makes it quick and easy to sign up online, backed by the simple and transparent price of $15 per month (regardless of the amount of assets or number of transactions) and a one time set up of $360. Enter referral code ACRETRADER to take advantage of $50 off. If you want to learn more, visit Rocket Dollar's Knowledge Base.
Contact us to get started investing in farmland through your SDIRA today.
The above content is not intended to be a comparison between products, but is intended for general, educational and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors and objectives. Investments are considered speculative, involve a high degree of risk and therefore are not suitable for all investors.
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