Investing in Alternative Assets for Retirement

Investing in Alternative Assets for Retirement

As a member of the Vincent community, we know that you’re interested in investing in alternative assets. But did you know that the reasons why alts are an important part of an investment portfolio - diversification, low correlation to the public markets, tax advantages and the possibility of asymmetric returns to name a few - also make alts a particularly compelling option for investment with retirement funds? The principal downside to many alternative asset classes, such as artwork, real estate or venture capital, is the lack of liquidity. This may become far less of a factor if you are investing with the long-term horizon of retirement in mind.

Institutional and ultra-high-net-worth investors have been employing this strategy for a long time, taking advantage of all of the tax benefits available using retirement accounts called self-directed IRAs. What you might not know is that it is an option available to everyone.

What is a Self-Directed IRA?

A self-directed IRA (SD-IRA) is an individual retirement account (IRA) that is directly managed by the account holder. Unlike most IRAs typically limited by brokerages to holding public securities, SD-IRAs allow holders to invest in many types of alternative assets. A SD-IRA must be opened with a qualified custodian who will administer the account. SD-IRAs are meant for more experienced investors who are familiar with alternative assets and want to invest long-term while minimizing taxes.

Both traditional IRAs - where you pay taxes on distributions - and Roth IRAs - where you pay taxes on contributions - can be self-directed and carry different pros and cons. With traditional IRAs, the contributions are often tax-deductible, and you pay no taxes on investment gains until you take a distribution. With Roth IRAs, you use post-tax money as contributions, but then you can enjoy tax-free gains and distributions (subject to certain holding period requirements) no matter how much your investments grow.

Minimize Taxes Investing in Alts with Alto

What Types of Alternative Assets are Ideal to Invest in for Retirement?

While everyone’s long-term retirement goals and time horizons are different, generally assets and asset classes that may not be as attractive in the short-term can become more desirable over a longer period of time. Assets with low liquidity or limited exit opportunities such as artwork, fine wine, real estate and venture capital can be more suited for patient, long-term investing. It can make sense to devote some of your portfolio to these types of opportunities that can deliver outsized returns - but may require a long hold period to do so - for those investors who can wait for them.

A longer-term asset such as farmland can align with a retirement time horizon. Farmland also generally performs well in high inflationary conditions, offers both cash-flow and appreciation, and has outperformed the market with lower volatility over the past two decades. Avoiding or deferring taxes on these types of investments, which the IRA structure can help an investor do, increase the appeal. As it is historically non-correlated to public markets, it can also diversify existing retirement portfolios while still offering strong long-term returns.

Higher-risk, higher-reward assets can be particularly compelling in a Roth IRA, where investment gains may never get taxed. The possibility of asymmetric returns in an asset class like venture capital offers considerable upside with a downside only as large as the initial investment. While it can be risky, particularly in earlier-stages, the potential of exponential tax-free returns makes venture investing using Roth or traditional IRAs worth considering as a part of an overall portfolio.

Exclusive Alts and Leading Funds with Alto

What Other Factors Should Be Considered?

None of this is to suggest that everyone should put the entirety, or even a substantial portion of their retirement portfolio into alternative assets. For most people, more traditional, lower-risk, lower-reward assets such as index funds and bonds should still comprise the majority of their investments.

IRAs are designed to offer minimal liquidity so contributions and gains should not be relied upon for any type of expected short or medium-term expenses.

Finally, with a SD-IRA, the key words are “self-directed” - meaning that the responsibility for picking the right investments falls to the account holder. You should be willing to take time to do the research, make plans and stay on top of your investments and portfolio.

Conclusion

Self-directed IRAs are a powerful tool that savvy investors can use to optimize their returns, lower the volatility of their portfolio and avoid or defer onerous capital gains taxes. Anyone interested in alternative asset investing for their retirement should be aware that using an SD-IRA is an option.

Private placements are speculative and involve substantial risks. Investors should be prepared to lose some or all of their initial investment.