Alternative IRA Investments with a Roth IRA

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We posted a blog a few months ago about a hypothetical investor who rolled funds from an old 401(k) and purchased real estate with a Traditional IRA. Every stage of the investor’s life provided new opportunities and considerations for adjusting the investment or taking distributions. Let’s review a parallel scenario in which our intrepid self-directed investor opens a Roth IRA for private equity investments instead of a Traditional IRA for real estate:

  • Age 42 – Your Roth IRA has achieved some interesting tax-free gains in the stock market, but volatility resulting from geopolitical turmoil has caused you to question the long-term viability of publicly traded equities. The closer you get to retirement, the sharper the effects of a 10% stock market correction. As such, you elect to transfer your account to an IRA custodian that allows alternative investment options in tax-advantaged accounts. You’ve made a bit of money through personal investments in private equity and decide to steer your Roth IRA in a similar direction.

You’re intrigued by the concept of equity crowdfunding, which allows you acquire partial shares in a start-up company without having to win the trust of an unknown go-between. As luck would have it, your preferred online crowdfunding platform has on-boarded with New Direction IRA. This means you’ll be able to browse offerings, choose to pay with your IRA funds, and log into your myDirection® page without ever leaving the investment portal. Once you find the investment opportunity that meets your criteria, you can put your retirement dollars to work from the comfort of your living room.

  • Age 50 – Your IRA positions acquired via crowdfunding have performed nicely, but a new bit of intrigue has come down the pike. A co-worker of yours has a brother that recently founded a promising new company and he’s looking to raise capital by selling private shares at $10.00 apiece. You have the inside line and elect to take advantage with your IRA funds.

  • Age 55 – Your co-worker’s brother has built an innovative and profitable company over the last five years, so much so that bigger players in the industry begin to take notice. An offer to buy the company for $25.00 per share comes across the table, and your co-worker’s brother accepts the deal. Your Roth IRA just earned a 150% profit in five years by selling stocks, all without the uncertainty and brokerage expenses of Wall Street.

  • Age 60 – Another half-decade has passed since your private equity investment yielded those impressive earnings. You decide that it’s time to cash out and enjoy them. You recently reached age 59 ½ and those earnings have remained untouched in the Roth IRA for five years, meaning you can distribute them whenever you want without any tax consequences. Comparable distributions from a Traditional IRA would have been taxed as income, but you needn’t worry about that with your Roth. The IRS will claim no part of the 150% profit you enjoyed five years ago.

In a general sense, Traditional IRAs allow you to defer taxes on contributions for an immediate benefit. Roth IRAs task you with paying taxes on contributions but your qualified distributions can be completely tax-free. All self-directed retirement accounts offer a unique suite of benefits, so it’s certainly worth reviewing each one to determine which will suit your needs and goals. For a more in-depth discussion of these distinctions, please don’t hesitate to contact our office.

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