Asset Location: What Goes Where? Are Self-Directed IRA Clients More Experienced?

Self-Directed IRA ClientsMany Self-Directed IRA clients are more experienced and often navigate this question better than most.

For years, investment advisors have harped on helping investors figure out their optimal asset allocation. That is, what is the theoretical optimal mix of stocks, bonds and cash – and maybe a smattering of other asset classes – that provides for the best expected return for the minimum expected risk?

And still, their clients got clobbered!

The problem is that backward looking analysis tools like Ibbotson asset allocation software and Monte Carlo simulation tools lent a sort of false illusion of precision to their projections. The fact remains that the markets don’t behave like bullets. They are more like knuckleballs. If you’ve ever tried to hit a good knuckleball pitcher you know what I’m talking about: There’s no telling what the ball is going to do, because even the pitcher and the catcher don’t know what the ball is going to do!

Most of Self-Directed IRA clients investing in the form of, say, a Real Estate IRA, a Precious Metals IRA, or who own privately held companies, partnerships and joint ventures understand how to make money in these fields much better than the average financial advisor understands and can predict the markets. The markets are too big for any one person to really understand – but anyone can understand a small portfolio of real estate investments – even more so if it is fully under your control!

That’s why we advocate self-directed retirement investing for many people – especially those with a track record of success in business and investing on their own.

But the problem of what assets to hold within a tax-deferred account, a tax-free account (like a Roth IRA), or a fully taxable account (outside of an IRA) is a common one.

While the specifics are always highly fact-dependent, there are some generalities we can mention:

High-capital gain, low-income assets are often best held outside of retirement accounts. There’s not much current income to worry about paying taxes on, so the idea is to capture the advantage of long-term capital gains rates on these assets, rather than paying ordinary income on them, which you would have to do if you distributed them from an IRA.

Low-capital gain, high-income investments are ideal for retirement accounts, including Self-Directed IRA clients. Often these investments include rental real estate, because despite some wild swings in real estate prices in recent years, the long-term price appreciation rate for residential real estate is quite modest, compared to stocks. By holding them in a retirement account – whether it’s a Roth or traditional tax-deferred IRA or 401(k) doesn’t matter for this scenario. That’s a separate calculation. But because capital gains are modest, giving up the long-term capital gains treatment on these assets is less of a sacrifice.

In both cases, the higher your marginal income tax bracket, the stronger the recommendation, from a pure tax standpoint.

Low-capital gain, low-return assets are usually best sold. But you may hold them as a hedge against market catastrophes. Precious metals may fall into this category, since obviously a hunk of metal doesn’t pay a dividend. These can be held either in or out of retirement accounts to good effect. But holding them within a retirement account qualifies them for substantial asset protection benefits. If you held them personally, they would be fair game for creditors.

High capital gain, high-return assets. If you have lots of these, you have few worries. At least financially. However, we would still steer these rare gems to the retirement account, because if you’re doing that well, you become a target for lawsuits and you’ll want the asset protection Self-Directed IRA clients get with their IRA or 401(k) account. And, of course, congratulations are in order.

Now, in some cases, an asset that is normally a capital gain generator could become an income generator, instead. For example, people who buy and sell houses a lot could fall under IRS dealer rules, under which profits are treated as ordinary income rather than capital gains. So you can’t just assume because it’s a capital asset you would treat it the same way as everyone else does. Personal asset protection planning varies from individual to individual as well.

To learn more, visit us online at, or call us at 866-7500-IRA (472). We are experts in Self-Directed IRA planning, and we look forward to working with you!






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