Using a Self Directed IRA to Invest in Crowdfunded Farmland

June 16, 2022

This article was originally published on July 2, 2019 and updated June 16, 2022.


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 equity crowdfunding.

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.

Contents

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.

Opportunities for Investors with SDIRAs

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.

Crowdfunding offers an interesting opportunity for investors seeking such diversification and can be particularly well-suited to SDIRA ownership.

What Is Crowdfunding?

Crowdfunding is a popular way to raise funds for everything from new business opportunities to non-traditional assets.

Investment crowdfunding sites make it easy for investors to participate in a variety of equity or debt offerings for assets that include real estate, lending contracts, and startup companies. Most of these online platforms require minimum investments ranging from as low as a few thousand dollars to as high as $50,000+ to get started.

Investment crowdfunding became possible through the Jumpstart Our Business Startups (JOBS) Act of 2012. This act was later expanded to include exemptions that would allow companies to sell fractional interests (securities) in smaller assets by removing many of the expensive filings and audits previously required.

Crowdfunding offers several benefits, including:

  • diversification opportunities
  • lower costs
  • the opportunity to perform your own due diligence

Diversification Opportunities through Crowdfunding

The rise of crowdfunding platforms has made it easier for individuals to find private investment opportunities in almost any niche imaginable.

Endowments, pension funds, and other large institutional investors have been investing in start-ups and other private investment vehicles for decades; now many regular investors can invest directly in some of these assets, too.

A major benefit is that these investment opportunities may not be impacted by the same market factors that impact shares of publicly held companies.

Many alternative asset investments like farmland are not part of the mainstream financial system and thus have little or no correlation to the prices of stocks or bonds. This means alternative assets can help you achieve greater diversification from other market movements, lowering portfolio risk in volatile times.

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Lower Costs of Crowdfunding

Crowdfunding platforms can make investing in private deals much less costly than in the past.

Prior to the JOBS Act, you had to find these investment opportunities on your own, join an investing group that would source these types of deals, or invest with a specialized fund, usually accompanied by higher fees, large capital requirements, and/or restricted liquidity.

Due Diligence on Crowdfunding Opportunities

While crowdfunding platforms are a convenient and easy way to invest in start-ups in a variety of industries, investors still need to perform due diligence on the platform, the issuer , and the asset class; some of these investments may carry risks not justified by the potential reward.

Much of this diligence can be accomplished by reading all of the information presented by the platform and calling to speak with a representative of the issuer company.

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.


Note: The information above is not intended as investment advice. Calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.

Michael
Michael Iseman

Director of Operations

Michael leads operations for the AcreTrader platform, focused primarily on educating investors on farmland as an asset class, and what to expect working with AcreTrader. Previously, he served as a consultant supporting entrepreneurs at Startup Junkie Consulting. He holds a degree in Finance from the University of Arkansas.

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