Over the past eight years, traditional Wall Street investments have left many investors delaying their retirement or dramatically changing their retirement plans.
Perhaps this happened to you or someone you know. The Great Recession has shown many nearing retirement that they can no longer blindly put their retirement accounts at the mercy of the volatile whims of Wall Street. Most people simply do not have the luxury of time to recover from a 50 percent reduction in their account value.
In recent years, there has also been a surge of activity around alternative investments. These alternative investments include, but are not limited to: real estate, private mortgages, commodities and private businesses. These investments have been used to diversify retirement account holdings as a hedge against traditional market volatility. Previously, retirement accounts were not allowed to hold these investments.
However, Congress passed the Employee Retirement Income Security Act (ERISA) in 1974, which provides individuals the freedom to choose these various alternative investment options, along with traditional investments, within their retirement account.
The vehicle that allows you to access these alternative investments is called a self-directed Individual Retirement Account. The main difference between a regular retirement account and a self-directed account is that you are responsible for all investment decisions. There are a few simple IRS rules that must be followed to keep the account compliant, but following these unlocks the door to a plethora of new investment options. The most common alternative investment held within a self-directed account is real estate, which can include rental property, land, private mortgages or commercial real estate.
You may be wondering why you have not heard of self-directed IRAs before. The simple answer is that most financial planners and investment advisors are paid off of the investments they sell, which does not include these alternative investments. A self-directed account takes money he or she would be investing away from that advisor. If you are curious about self-directed accounts and would like more information, Kaplan University has produced an on-demand video that can be viewed at: www.kapre.com/resources/career-tips-video-library/kapxperts-be-your-own-bank.
-John Michael Stevens is the founder of Service Financial LLC and managing director of Island View Private Loan Fund LP in Milwaukee.