Self Directed IRA and Direct Participation Programs
Self Directed IRA fans have long been aware of a number of popular alternative asset classes for Self Directed IRA investing, including real estate, precious metals, tax liens.
Recently, however, more and more investors are becoming aware of direct participation programs (DPP) as an income-oriented alternative to stocks and bonds. Some have asked if they are permissible as investments in a Self Directed IRA, and we’re happy to say that yes, indeed, these investments are not prohibited investments when it comes to your IRA. If they meet your criteria for expected return, risk exposure and time horizon, they can be a terrific match. Indeed, adding some of them to your portfolio may help you increase diversification and reduce overall risk without sacrificing returns.
DPP Basics and Self Directed IRAs
Direct participation programs (DPPs) are securities that investors can buy that allow them to participate in future cash flows and taxation benefits. They commonly take the form of limited liability companies, rather than C corporations, or limited partnerships. This allows them to escape the pernicious effects of double taxation of dividends, which is a big problem for C-corporations, which must pay individual income tax before they can release dividends. Outside of retirement accounts, these dividends are taxed again on the investor’s personal income tax return when he or she receives them. That said, some DPPs, such as non-publicly-traded REITs and Business Development Companies (BDCs) may still be organized as corporations (so they can be traded on exchanges) and still qualify for favorable tax treatment if they pass through at least 90 percent of earnings directly to the investors.
DPPs are commonly sold to raise capital for investments in energy projects, real estate developments and equipment leasing programs and private equity opportunities, though they could theoretically go almost anywhere.
DPPs enable retail investors to gain access to asset classes and market segments that would otherwise be the sole province of institutions.