Why Do Investors Like Self-Directed IRA Tax Lien Investing?
You don’t have to just invest in stocks and bonds. And for the retirement investors who would rather cast a wider net with their investments, a Self-Directed IRA can be a great idea. Investors who have Self-Directed Individual Retirement Accounts have the opportunity to invest in a wide range of alternative assets, such as real estate, private placements, and—as we’ll talk about today—tax liens. Tax lien investing is a popular choice among Self-Directed IRA investors due to its relatively low barrier to entry, high return potential, and the ability to diversify an investment portfolio. Let’s explore.
What is Tax Lien Investing with a Self-Directed IRA?
Before diving into why Self-Directed IRA investors like tax lien investing, let’s first define what it is. Tax lien investing refers to what happens when you buy the rights to collect unpaid property taxes from delinquent property owners. When a property owner fails to pay their taxes, the local government will place a lien on the property. This allows the local government to collect the unpaid taxes, plus interest and penalties. Investors can purchase these liens, and in some cases, foreclose on the property if the owner doesn’t pay the taxes within a specific timeframe.
This means that investors with tax liens can use them to generate passive income (through payments on the lien), or potentially turn them into real estate when the property enters foreclosure.
High Return Potential Self-Directed IRA Tax Lien Investing?
One draw for Self-Directed IRA investors is the high return potential that tax lien investing offers. Interest rates on tax liens can be much higher than interest rates for other investments, such as bonds, for example. However, the returns you can expect will depend on the state and the specific property. The interest is paid to the investor, and if the property owner doesn’t pay their taxes within a specific timeframe, the investor can foreclose on the property, potentially gaining ownership of the property at a fraction of its market value. In that way, tax lien investing can essentially turn into real estate investing, as well.
Portfolio Diversification with Self-Directed IRA Tax Lien Investing?
Investors are always looking for ways to diversify their investment portfolios, and tax lien investing offers an opportunity to do just that. Since tax liens are not correlated with the stock market, they can provide a valuable diversification tool for investors looking to reduce their exposure to market volatility. You don’t have to buy stocks and bonds for a retirement account, after all. And that’s one reason investors like the possibility of using tax liens in conjunction with other asset classes in their retirement portfolio. This diversification can broaden their market exposure and lower the overall risk that one asset ruins their retirement plans.
Investing with a Self-Directed IRA
Investing in tax liens with a Self-Directed IRA offers additional benefits for investors. For one, all earnings generated by the investment can be tax-deferred, meaning the investor doesn’t pay taxes on any gains until they withdraw the funds from the account. Additionally, Self-Directed IRAs allow investors to have greater control over their investment decisions and can provide more flexibility when compared to traditional retirement accounts. The tax protections you get with your IRA will depend on the account you use—for example, you can use either a Traditional IRA or a Roth IRA for tax lien investing when you self-direct.
Tax lien investing is a popular choice among Self-Directed IRA investors due to its relatively low barrier to entry, high return potential, diversification benefits, and the additional advantages that come with investing through a Self-Directed IRA.
Interested in learning more about Self-Directed IRAs and how they can be used to invest in precious metals and other alternative assets? Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation. Download our free guide or visit us online at www.AmericanIRA.com.