Using Self-Directed IRAs (SDIRA) to Tap into Alternative Investments
When most people think of retirement accounts like IRAs or 401(k)s, they imagine stocks, bonds, and mutual funds. However, the world of investing is far more diverse. For many individuals, self-directed IRAs (SDIRAs) offer a powerful way to tap into alternative investments like private debt, allowing for more diversified portfolios and potentially greater returns.
This article will guide you through what a self-directed IRA is, why it’s particularly appealing to investors, and how you can take full advantage of the opportunities it presents.
What is a Self-Directed IRA (SDIRA)?
A self-directed IRA resembles a traditional IRA, yet it offers vastly greater freedom in choosing your investment options. Corporate 401ks and many IRA platforms typically limit you to publicly traded assets such as stocks, bonds, and mutual funds, while SDIRAs open the door to a wide variety of alternative investments. SDIRAs give investors the control to seek returns and diversify outside of traditional markets, often reducing portfolio volatility and generating a higher risk adjusted return. Moreover, the assets in the SDIRA continue to grow tax-deferred or even tax-free, depending on whether you hold a Traditional or Roth IRA. This flexibility makes SDIRAs particularly attractive for investors looking to invest on a discretionary basis.
“A self-directed IRA resembles a traditional IRA, yet it offers vastly greater freedom in choosing your investment options.”
Why SDIRAs are Ideal for High-Net-Worth Individuals
Greater Control Over Investment Decisions
One of the primary advantages of an SDIRA is the ability to control where your retirement dollars are invested. For high-net-worth individuals who are already familiar with alternative investments, this level of autonomy is invaluable. You are no longer limited by what your broker or custodial platform offers. Instead, you can choose to invest in assets such as real estate, private debt, startups, and even commodities like gold and silver.Tax Advantages
With an SDIRA, your investments grow either tax-deferred or tax-free. If you opt for a traditional SDIRA, taxes on your gains are deferred until you withdraw funds during retirement. On the other hand, Roth SDIRAs allow for tax-free withdrawals, which is particularly advantageous if you expect your investments to appreciate significantly over time or your tax rate to be higher in the future.Diversification Beyond Traditional Markets
Traditional IRAs expose investors primarily to public investment markets, which are generally subject to events that can create high volatility and drastic swings in the value of your investments. Diversifying with alternative investments can help mitigate these risks. For example, real estate and private debt typically behave differently than equities, providing stability during periods of stock market decline.
“You are no longer limited by what your broker or custodial platform offers. Instead, you can choose to invest in assets such as real estate, private debt, startups, and even commodities like gold and silver.”
Private Debt: A Growing Opportunity
A powerful option for investors with SDIRAs is private debt. This form of alternative investment allows you to lend money to private businesses or real estate projects in exchange for interest payments. Private debt investments are often secured by real estate or other assets, making them a potentially lower-risk option compared to equity investments.
For example, you could lend $500,000 to a real estate developer through your SDIRA. In return, you receive regular interest payments, which accumulate tax-free in your IRA. These steady income streams are particularly appealing for investors looking for predictable returns without the volatility of the stock market. Furthermore, private debt tends to be less correlated with traditional markets, offering further diversification benefits.
Private debt investments can also be structured in a way that aligns with your risk tolerance—ranging from short-term loans to long-term credit facilities, making this a flexible option for retirement accounts. For investors seeking to preserve capital while generating income, private debt in an SDIRA can be a strategic way to tap into alternative assets.
“Private Debt allows you to lend money to private businesses or real estate projects in exchange for interest payments. ”
Market Outlook and Future Trends in Alternative Investments
The alternative investment sector is forecasted to sustain robust growth in the near future, with Preqin estimating an 8% annual increase in alternative assets under management (AUM) from 2023 to 2028. This expansion is primarily fueled by investor demand for private equity, real estate, infrastructure, and private debt, as they pursue returns that are uncorrelated to the stock market.
With the rise in alternative investments, self-directed IRAs are increasingly popular among investors seeking these opportunities. Their flexibility and tax benefits make SDIRAs a key tool for maximizing retirement wealth through alternative investments.
Getting Started with SDIRAs
To start investing with an SDIRA, you’ll first need to set up with qualified custodian specialized in handling these types of accounts. The custodian does not offer investment advice but will manage the necessary paperwork and regulatory filings to ensure compliance with IRS regulations.
You'll also need to decide how to fund your SDIRA. This can be done through a transfer from an existing IRA or through a direct rollover from a 401(k). From there, the world of alternative investments is at your fingertips.
Understanding the Fees Associated with SDIRAs
While all retirement accounts, including traditional IRAs and 401ks, come with associated fees—often embedded within management fees and returns—self-directed IRAs (SDIRAs) show these fees more transparently to investors on their websites and share them during the customer onboarding process.. These fees vary depending on the custodian you choose and the complexity of your investments. Understanding the types of fees associated with SDIRAs can help you plan accordingly and avoid any surprises. Two of the most common:
Setup Fees
The first cost you'll encounter when opening an SDIRA is the account setup fee. This fee can range from $50 to $300, depending on the custodian. It covers the cost of setting up your IRA and any initial paperwork required to establish your account.Annual Maintenance Fees
Most custodians charge an annual maintenance fee to cover the administrative work of keeping your account in good standing. This fee can be structured in several ways:Flat Rate: Some custodians charge a flat fee, typically ranging from $200 to $600 annually, regardless of your account balance.
Asset-Based Fee: Other custodians charge a fee based on the value of the assets in your account. For instance, this might be 0.5% to 1% of your total assets under custody.
Per-Asset Fee: In some cases, custodians charge per asset or per transaction fees, which could add up if you hold multiple investments like real estate, private debt, or private equity. These per-asset fees might range from $50 to $200 per asset.
Other potential fees, many of which are charged on a traditional IRA as well, include transaction fees, wire transfer fees, distribution fees, or fees for expedited services.
“While all retirement accounts, including traditional IRAs and 401ks, come with associated fees—often embedded within management fees and returns—self-directed IRAs (SDIRAs) show these fees more transparently to investors. ”
Are SDIRA Fees Worth It?
Although SDIRAs may have higher disclosed fees compared to traditional IRAs or brokerage accounts, investors often conclude that the advantages surpass these costs. This is particularly accurate for individuals looking to diversify into alternative assets like real estate, private debt, and private equity—investments that generally offer returns well worth the associated fees.
Final Thoughts
Self-directed IRAs allow investors to diversify their portfolios with alternative investments like real estate, private debt, private equity, and cryptocurrencies, while maximizing wealth tax-efficiently. SDIRAs provide the control and flexibility needed to pursue investments that match your financial goals.
SDIRAs aren't suitable for everyone. They demand careful planning, compliance with IRS rules, and a solid grasp of the risks. Working with knowledgeable custodians or advisors can simplify the complexities and help you maximize your retirement funds.
Investing in the Kirkland Income Fund with Your SDIRA
About 35% of current investors in the Kirkland Income Fund are using self-directed IRA accounts to invest, showing the trust experienced investors place in this strategy. Imagine investing alongside of them in the Kirkland Income Fund using one of the same custodian partners they have chosen.
By using your SDIRA to invest in the Kirkland Income Fund, you can benefit from:
Steady Income Streams: The fund provides regular interest payments from the micro-balance commercial real estate loans it facilitates, offering a reliable income stream for investors.
Asset-Backed Security: The loans are secured by real estate, helping to mitigate risk and provide greater security compared to some other alternative investments.
Tax Advantages: As with all SDIRA investments, the income generated within the fund are tax-deferred (or tax-free in the case of a Roth SDIRA), allowing you to maximize the growth of your retirement assets.
If you are seeking a diversified, real estate-backed investment with the potential for regular income and lower volatility, the Kirkland Income Fund is worth considering as part of your SDIRA portfolio. You may download our term sheet below that includes an overview of the fund strategy, performance portfolio highlights and team or set up a call with so we can answer your questions.
