Often, our clients inspire us to write about topics they want to understand. A common question we receive is how to use Self-Directed IRAs as investment vehicles to invest in farmland offerings with AcreTrader. This article presents an overview of Self-Directed IRAs, crowdfunding, and how various investment structures apply to AcreTrader and its investors. It can serve as a good starting point for those interested in understanding more.
While a traditional investment allocation between stocks, bonds, mutual funds, and cash may be a fairly solid approach, an increasing number of investors are seeking opportunities through nontraditional assets such as agriculture, commercial real estate, precious metals, oil wells, and equity crowdfunding.
Unfortunately, if you are looking for tax-advantaged ways to invest in these alternative asset classes you will quickly run into some limitations. While most investment advisors work with a standard, but more rigid Individual Retirement Account (IRA) or 401(k) offerings, many are beginning to expand their clients’ use of more flexible Self-Directed IRAs.
What is a Self-Directed IRA?
Just like any IRA, a self-directed IRA (SDIRA) is a tax-advantaged investment account that can be used to build wealth for retirement. What sets the self-directed IRA apart is that the IRA custodian can invest in a wider range of assets beyond traditional investment options. A person with a standard IRA, a Roth IRA, a 401(k), or other source of qualified funds can roll them over to make their account self-directed through an SDIRA custodian.
What is an SDIRA Custodian?
In short, the custodian is a passive, non-discretionary entity that holds your funds, executes investments as directed by the IRA owner (you), and performs administrative and custodial duties that are necessary to preserve the tax-deferred status of the IRA.
An SDIRA custodian is NOT a broker or an investment advisor. It does not sell investments, provide advice or recommendations, or provide due diligence on investments for the IRA owner. It only approves the investments as a suitable investment product, and it invests only with the express direction of the IRA owner.
Finding the Right Custodian
Since many traditional brokerage firms don’t offer custodial services for self-directed IRAs, investors must search for companies who specialize in providing them. To select a self-directed custodian or self-directed IRA provider, a careful evaluation of the costs and the level of support is necessary.
Many custodians require a minimum investment ranging anywhere from $10,000 to as much as $50,000. Accompanying service fee costs can range from a few hundred dollars upwards for initial account opening, ongoing maintenance services, tax documents, and more.
Cost/Benefit Analysis of the SDIRA
It is often necessary to take these service fees into account prior to placing specific assets in an SDIRA, to see whether or not they outweigh the cost of ownership in a taxable structure. As a general rule, many advisors suggest reserving your SDIRA funds for more sizeable investments to minimize the impact that custodial fees may otherwise have on your percentage returns.
For example, a $100 account fee would only have a 0.1% performance drag on $100,000 invested, but the same fee would have a 1% drag on $10,000 invested.
Opportunities for Investors with SDIRAs
A self-directed IRA can be a great retirement tool for tax-advantaged investments in start-up ventures, business expansions, and other ground-floor opportunities. Investors may consider including asset classes such as private equity, private debt, and real estate within a self-directed IRA.
Exploring these asset classes in detail can also expand your investing horizon to avenues you may have never before considered. Crowdfunding offers an interesting opportunity for investors seeking such diversification and is particularly well-suited to SDIRA ownership.
What is Crowdfunding?
Crowdfunding is a popular way to raise funds for everything from new business opportunities to non-traditional assets. Investment crowdfunding sites make it easy for investors to participate in a variety of equity or debt offerings for assets that include real estate, lending contracts, startup companies, and more. Most of these online platforms require minimum investments ranging from as low as $1,000 to as high as $50,000 or more to get started.
Investment crowdfunding became possible through the Jumpstart Our Business Startups (JOBS) Act of 2012. This act was later expanded to include some exemptions that would allow companies to sell securities in smaller assets by removing many of the expensive filings and audits previously required.
The JOBS Act made it easier for companies to openly publicize opportunities available to accredited investors (those above a certain liquid net worth), while simultaneously making it easier for non-accredited investors (everyone else!) to participate under certain circumstances as well.
The rise of crowdfunding websites has made it easier for individuals to find private investment opportunities in almost any niche imaginable. Endowments, pension funds, and other large institutional investors have been investing in start-ups and other private investments for decades. Many regular investors can now invest directly in some of these assets as well.
A major benefit is that the valuations of these companies may not be impacted by the same market factors that impact shares of publicly held companies. Many alternative asset investments like farmland are not part of the mainstream financial system and thus have little or no correlation to stocks or bonds, which means they can help you achieve greater diversification from other market movements.
Diversification is one way investors often attempt to accumulate wealth while lowering portfolio risk, especially when the stock market is volatile and bond markets are producing low returns (many think this is happening now).
Crowdfunding platforms can make investing in private deals much less costly than in the past. Prior to the JOBS Act, you had to either find these investment opportunities on your own, join an investing group that would source these types of deals, or invest with a specialized fund. Any one of these would typically include higher fees, large capital requirements, and/or very restricted liquidity.
While crowdfunding platforms are a convenient and easy way to invest in start-ups in a variety of industries, investors still need to perform their due diligence on the crowdfunding platform as well as the company or asset in which they will be investing, as some of these investments may carry risks not justified by the potential reward. Much of this can be accomplished by reading all of the information presented by the platform as well as calling to speak with a company representative.
Crowdfunded Farmland Investing through a Self-Directed IRA is Easy
Investing with an SDIRA on the AcreTrader platform is straightforward, albeit with a few more steps than a standard investment. If you already have an SDIRA, great! Reach out to one of our team members to get started.
If you do not already have an SDIRA, this will require a few additional steps to set up. We have some SDIRA custodians listed below who will work with crowdfunded investments, but recommend you do your own research to find a provider that best suits your needs.
There are several service providers that will act as a custodian on your behalf, making it easy to open an account and to direct IRA assets into a crowdfunding investment opportunity that fits your investment objectives. Again, we are happy to help where we can, so please don’t hesitate to contact us.
Note: The information above is not intended as investment advice. Calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.