Why You Should Consider Investing in Farmland Using IRA Funds

October 10, 2022
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Have you thought about diversifying your retirement portfolio with farmland? In this guest post, account custodian Alto shares how you can use a self-directed IRA to exercise more agency over your financial future.

It’s no secret that the kinds of assets typically found in retirement accounts are facing tough headwinds. Stocks, which recently suffered their biggest single-day sell off since June 2020, certainly come to mind. However, even “less risky” bonds aren’t looking all that appealing at the moment, as the inflation rate hovers at 8.3%—well above current yields—and the Federal Reserve appears poised to continue raising interest rates.

No wonder so many Americans worry a market crash could wipe out their savings.

All of these factors make alternative assets especially attractive. Particularly those that are only loosely correlated with traditional equities markets—like farmland, timberland, and other land rights-based investments.

What’s more? You can use tax-advantaged retirement dollars to invest in these opportunities. So in this guest post, we’re looking at why you should consider investing in farmland using your IRA.

Farmland in Your IRA … You Can Do That?

If you’re like many Americans, you’ve probably never heard of a self-directed IRA before. It’s not that they’re new. Self-directed IRAs have been around as long as individual retirement accounts. It’s just that for years they were prohibitively complex, often involving mountains of paperwork. On top of that, you had to track down a custodian willing to file the paperwork for you, making a sizable investment necessary to be worth your while.

As a result, self-directed IRAs, like many alternative assets, were largely the domain of the wealthy. Alto set out to change that by streamlining the self-directed IRA investment process and partnering with respected alternative asset platforms like AcreTrader.

Now, accredited individuals can invest in farmland using a self-directed IRA, with as little as $10,000. Here are three reasons that could be a very smart move.

1. Self-Directed IRAs Offer Big Tax Advantages

From a tax standpoint, there is no difference between a self-directed IRA and a conventional IRA. The difference is that conventional IRAs don’t allow you to invest in private market offerings. Rather, the custodian takes your money and invests it in some allocation of public equities, typically based on your intended investment horizon (i.e., when you wish to begin taking withdrawals). With a self-directed IRA, you have agency over your financial future. As such, self-directed IRAs come in many varieties.

Which Self-Directed IRA Is Right for You?

Which self-directed individual retirement account is right for you ultimately depends on a variety of factors.

Traditional IRAs

A traditional IRA lets you invest using pre-tax dollars, or to potentially write the contributions off on your taxes. With these IRAs, you won’t pay any taxes until you’re eligible to take distributions at 59-½, at which point withdrawals will be considered part of your ordinary income. Because you won’t pay taxes until taking distributions, this can be a good investment strategy if you anticipate being in a lower tax bracket when you retire. It can also be a great strategy if you aren't eligible for a Roth IRA.

Roth IRAs

A Roth IRA could be a great option if, on the other hand, you anticipate finding yourself in a higher tax bracket at retirement. That’s because with a Roth IRA, as long as you wait until six months after turning 59 (and have held your account for at least five years), you’ll never pay taxes on gains or distributions.

That said, the IRS sets income restrictions on who can contribute to a Roth IRA, meaning you may not be able to contribute to your Roth. For this reason, it’s likely many accredited investors, which you must be to invest in farmland through AcreTrader, will not be eligible to make Roth contributions. That does not, however, mean you can’t roll over funds from an existing Roth IRA into a self-directed Roth and invest with those funds. Additionally, a backdoor Roth conversion is a viable option for many investors.

The current contribution limit for both traditional and Roth IRAs is $6,000 per year ($7,000 if you’re 50 or older).

Simplified Employee Pension IRAs

SEP IRAs, like traditional IRAs, are tax deferred. Likewise, these funds cannot be withdrawn without penalty until six months after turning 59.

However, they’re designed for small businesses and self-employed individuals, and can be a great alternative to 401(k)s. As such, there are some key differences in how they work. Namely, only the employer can make contributions. Additionally, these accounts offer much higher contribution limits: An employer contribution cannot exceed the lesser of 25% of the employee’s compensation or $61,000.

2. Portfolio Diversification Means More Than Stocks and Bonds

The ultra-wealthy don’t invest like everyday Americans. Most of us were taught that a diversified portfolio means a blend of public equities, often 60% stocks and 40% bonds (hence the term “60/40 portfolio”). And to be fair, stocks and bonds absolutely have their place in a balanced portfolio.

But when we look at the portfolios of institutional investors (like the Yale Endowment Fund) and ultra-wealthy investors (like Bill Gates), we see a variety of asset classes, ranging from public market equities to art, farmland, real estate, venture capital, and more.

For example, the Yale University Endowment Fund is well known for investing in five to six buckets of asset classes, and the results have been something of legends. Last year, the university announced that its endowment generated returns of 40.2% for the 2021 fiscal year, exceeding domestic stock returns thanks in part to its mix of traditional and alternative assets.

The potential for alternative assets to yield outsized returns isn’t the only reason to invest in non-traditional assets, though. Alternatives vary considerably in their degree of correlation to public markets. This makes it far less likely that, say, a stock market crash, will send your entire portfolio spiraling.

One need only look back to the financial crisis of 2008 to see this in reality. Despite the S&P 500 dropping by nearly 40% between 2007 and 2008, farmland grew by more than 15% for that same period.

cumulative returns of major assets

(1) Supplemental information. Please see additional disclosures for further information. Source: NCREIF, Bloomberg, Bankrate, NYU Stern School of Business, Federal Reserve Bank of St. Louis and AcreTrader calculations. All returns are estimates and assume reinvestment of dividends. Updated data published on 12/20/2021 and is for the period 12/31/1990 - 12/31/2020.

3. An IRA Provides Access to Additional Funds

Among the qualifications to become an accredited investor, you need to satisfy one of the following requirements:

  • Earn at least $200,000 a year for two years ($300,000 if combined with a spouse or spousal equivalent).
  • Have a net worth of at least $1 million (alone or combined with a spouse or spousal equivalent).
  • Hold at least one of the following securities licenses: Series 7, 65, or 82.

There are other accreditation requirements that apply to entity investors, family offices, and the like. This Being accredited does not, however, mean you are flush with cash to invest. In fact, a recent report found that of those earning $200,000 a year or more, 36% live paycheck to paycheck.

A self-directed IRA enables everyday Americans to tap what is for many people their largest source of investable assets by rolling over funds from another IRA, 401(k) from a previous job, or other qualified account. These rollover rules can be complex, so please consult with your financial, tax, or legal advisor before commencing a rollover.

Want to Invest in Farmland Using Your IRA?

Alto is on a mission to make investing in alternative assets accessible to everyone, which is why we’re proud to partner with AcreTrader.

If you’re interested in investing in farmland using tax-advantaged retirement funds, open an Alto IRA today, then create your account with AcreTrader, to get started.

Or contact us with questions about how you can add alternative assets like farmland to your portfolio.

Aaron Enneking, Director of Content

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.

Clicking some links in this article will take you to websites independent of and unaffiliated with AcreTrader. The information and services provided on these independent sites are not reviewed, guaranteed, or endorsed by AcreTrader or its affiliates. Please keep in mind that these independent sites' terms and conditions, privacy and security policies, or other legal information may be different.

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