We’re not the first to make the analogy: Inflation is a cancer that eats away at any kind of long-term saving. And since the long-term inflation rate is historically substantially greater than zero – and has reached double digits easily within living memory – we know that any solid retirement portfolio needs to include some mechanisms for countering or defending against the menace of inflation.
That’s one of the key attractions for self-directed IRAs and other retirement accounts, in our view. Inflation can only ravage paper assets: Bonds, which are particularly vulnerable to inflation, cash and cash equivalents (which are almost always sitting ducks) and equities.
The equities that are particularly vulnerable to inflation include preferred stock, and stock in companies that own relatively little in the way of hard assets such as real estate, commodities and manufacturing facilities.
Choosing to self-direct some or all of your retirement portfolio gives investors a much wider array of inflation-resistant options to choose from. Here are some of the most useful, all of which are available within a properly-set up self-directed retirement account:
Gold and precious metals. Gold, silver, plutonium and palladium, of course, are time-honored hedges against inflation and effective long-term stores of value – especially during periods of significant economic uncertainty and crisis. And they are all perfectly fine to hold within a self-directed IRA, provided you comply with a few requirements:
- You must not have direct possession of the assets. Instead, the physical metal itself must be held by a qualified custodian. If you take personal possession for the metal, you risk disqualifying your IRA and incurring immediate income tax liability and possible penalties.
- You can only own the metal in bullion form or as one of a number of approved minted coins of sufficient purity. Not every gold or silver minted coin qualifies. Call or write us if you’re not certain.
- You cannot own jewelry, gems or collectibles in an IRA – except for the approved coins.
[tweetthis twitter_handles=”@iraexpert” hidden_hashtags=”#SelfDirectedIRA”]Key attractions for self-directed IRAs and other retirement accounts…[/tweetthis]
Real Estate. Like gold and silver, real estate is a proven safeguard against inflation, and for the same reasons: It is a tangible asset that retains value in all kinds of economic conditions. Real estate has an additional advantage: Unlike gold, real estate is normally easily rented. You can also further sell mineral rights, oil and gas rights and lumber rights on the land, if applicable, to generate extra revenue. So in addition to the long-term potential for capital appreciation, real estate also provides for a current income that can be reinvested in any opportunity you like, or you can use your rental income for immediate living expenses, depending on the situation.
Those who own real estate should be mindful of conflict of interest rules that apply to retirement accounts: You can’t use the property for your own convenience and enjoyment, nor can you allow it to be used by your spouse, descendants or ascendants, nor any entity the control. You can’t rent that property to them, nor sell or buy from them, or you will likely forfeit the tax status of your IRA. For the most part, however, these rules are easily grasped, and with a little discipline and attention, most of our clients who own real estate within an IRA find the conflict of interest rules to be no problem.
Is inflation increasing? Chances are good the value of the property in your Real Estate IRA, denominated in dollars, is going up too. Furthermore, if inflation is going up, you may well be able to increase rents to compensate, and preserve the purchasing power of current income.
TIPS. TIPS are Treasury Inflation-Protected Securities. These are federal bonds that receive a periodic adjustment to interest payments to keep up with inflation. They sell at lower yields than normal treasury bonds, but if inflation increases, you come out ahead.
United States Gasoline Fund (UGA). Concerned about increasing gasoline prices? UGA is an exchange traded fund (ETF) that pegs itself to the price of gas at the pump. You can own UGA in or out of a self-directed IRA account. Devoting a small portion of your IRA to UGA, or a number of similar ETFs pegged to the price of various forms of energy can help you hedge against the impact of increasing energy prices.
Private Businesses, LLCs, Privately Held Corporations and Partnerships. There is no limit to the kinds of activities you can engage in with a self-directed IRA. You aren’t limited to publicly-traded stocks. A self-directed IRA is flexible enough to hold any of the above structures, in any industry you can imagine. These businesses can be any size from one-person consultancies up to large master limited partnerships, pipeline and mining companies, and LLCs with international operations and thousands of employees. The choice is entirely yours.
Commodities. Nearly any commodity can be a useful hedge against inflation, though individual commodity prices can be quite bumpy indeed. However, since commodities are tangible assets, all other things being equal, they will tend to hold their value even as the buying power of currency declines.
Need more information? Want to get started? American IRA, LLC is one of the leading third party administrators in the country. We work with thousands of successful self-directed IRA owners coast to coast, who invest in all manner of unconventional IRA assets. Call us today at 866-7500-IRA(472), or visit our site at www.americanira.com.
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