Self-Directed IRA – What Assets Work Best?

There are a lot of great things about holding assets using a Self-Directed IRA: Tax deferral is a valuable benefit – and the tax-free growth that a Roth IRA provides is even more valuable. There are terrific asset protection benefits to using IRAs and other retirement accounts, as well. The problem: There’s only so much you can contribute.

For many people, their contribution limits in their Self-Directed IRAs and other retirement accounts are not high enough for them to shelter everything they’d like from taxes. So what assets work best within the Self-Directed IRA?

Compare income and long-term capital gains rates.

Long-term capital gains rates are lower than ordinary income tax rates. Ultimately, you (or your heirs) will have to pay ordinary income rates on traditional IRA, SIMPLE, SEP or 401(k) assets when distributions begin. But IRAs, Self-Directed IRAs and similar accounts have a huge advantage over taxable accounts:

There are no taxes until you take the money out.[1]

That means that all income you get from investments within the Self-Directed IRA or any other retirement account gets to compound, unmolested.

  • There are no current taxes on dividends.
  • No current taxes on operating income.
  • No current taxes on rental income.
  • No current taxes on capital gains. You can buy and sell as much as you like – it’s not a taxable event until you actually take money out of the account.

Anything that generates current cash flow (income or capital gains) that is normally taxed gets much better treatment within the Self-Directed IRA than it gets if you hold it in a taxable account. The longer your holding period, and the more significant the income portion of the total return is compared to the capital gains portion, the more powerful the Self-Directed IRA becomes.

So what are the best assets to hold in a Self-Directed IRA? Anything that kicks off a lot of income:

  • Bonds
  • Private lending
  • Mortgages
  • Debentures
  • Private loan placements
  • High-dividend-paying stocks
  • Rental real estate
  • Preferred stock

Also excellent candidates:

  • Brokerage accounts for active traders
  • High-turnover mutual funds
  • Mutual funds with substantial embedded capital gains

Roth IRAs are great choices for more aggressive investments, where there is potential for a substantial eventual payoff. For example, a venture capital or private equity holding that is very risky – but there is a chance it could pay off tenfold over time. In that case, the sacrifice of foregoing a tax-deduction in the year in which you made the contribution is relatively small. But if the investment works out as you hope, then the benefits of the Roth IRA – unlimited tax-free growth for as long as you live, and no required minimum distributions – are very valuable indeed.

American IRA, LLC is a leading expert in the administration of Self-Directed IRA accounts nationwide. With offices in Charlotte and Asheville, North Carolina, we work with successful Self-Directed IRA investors all over the country.

To get started with self-directed investing, or to learn more, visit us online at, or call us today at 866-7500-IRA(472). We look forward to working with you.

[1] We are ignoring, for the time being, the effects of unrelated debt-financed income tax (UDIT)