As major U.S. stock indices continue to climb to ever greater record highs, more financial planners are encouraging their clients to direct a portion of their retirement portfolios to self-directed IRA strategies. Why? Diversification. The higher stocks go, the more potentially dangerous the market becomes for risk-sensitive investors. The time has come to take some of these recent stock market gains and spread them around to asset classes that may still be available at a more reasonable price, with better risk-adjusted expected returns.

One advisor, Miami, Florida-based Michael Rose of Rose Capital Advisors, suggests self-directed IRA strategies to some wealthy clients in order to “get exposure to these asset classes they might not be able to hold at traditional custodians,” according to this piece by Financial Planner magazine.

By going through a boutique custodian or third-party administrator that specializes in self-directed IRAs and other retirement accounts, it’s quite easy for investors to diversify their stock-heavy retirement portfolios into a vast array of different investments that may help diversify their holdings and potentially lower exposure to risk if and when equity markets turn sour.

Common asset classes that self-directed IRA investors seek out that aren’t generally available using traditional Wall Street brokerage and investment firms include:

• Hedge funds
• Private equity placements
• Private credit placements and debentures
• Direct ownership of real estate
• Raw land purchase
• Farming and ranching lands
• LLCs
• Partnerships
• Gold and precious metals
• Overseas real estate
• Private lending
• Closely-held corporations (other than S-corps)

…And many others.

Holding some alternative assets within a self-directed IRA or other tax-advantaged retirement account may have especially attractive benefits for investors in higher tax brackets – particularly for income-oriented investments such as real estate, LLCs and lending. If you hold these assets in a taxable account, federal, state and local taxes will eat up a substantial fraction of the investment’s interest or dividend yield. Holding the asset within a self-directed IRA allows income to compound tax-free. There’s no need to send a sizeable fraction of your yield off to the IRS every year. You can reinvest earnings right back into the company, or elsewhere in your IRA as you see fit. You pay income taxes only on the amount you take out, or on income attributable to borrowed money.

The downside is, you lose the right to have your capital gains taxed at lower capital gains tax rates. Taxes on income and capital gains are deferred until the year in which you take the money out of your self-directed IRA. You also don’t get to take depreciation deductions on real property or business capital investments you put to use, because there is no tax on the earnings to deduct against!