Alternative Investments Provide Many Options for Self-Directed IRAs

Authored by Tracy Stein – CEO & President of Prime Pinnacle Investments

The world of alternative investments was once a sleepy province populated by institutional investors making modest investments in start-ups and smaller companies. Today, the alternative investment landscape encompasses global markets in a variety of asset classes and thousands of investment firms managing trillions of dollars across the globe.

Self-directed IRAs provide an opportunity for investors to invest in alternative assets, either directly or through managed funds. When the assets are private – that is, not registered with the SEC – ownership might be limited to accredited (i.e., wealthy) investors. Purchasing individual assets or shares in alternative-asset funds offers IRA owners several benefits, including:

  • Available professional advice and/or management of highly specialized asset classes
  • Diversification
  • Reduced volatility
  • Non-correlated returns
  • Tax-deductible contributions
  • Tax-sheltered growth
  • Favorable inheritance rules
  • Creditor protections

Let’s explore several types of alternative assets that fit well into a self-directed IRA investment strategy.

Mortgages/Secured Notes

The general public can invest in registered mortgage-backed securities (and funds thereof), such as Ginnie Mae pass-through certificates. Accredited investors can also buy collateralized private debt secured by real estate and other assets. A private mortgage or secured note can pay a relatively high yield not linked to municipal debt and publicly-traded corporate debt. Secured notes, which are often available at a steep discount, can provide predictable payments stemming from rents, ground leases, option contracts and/or general account funding. Mortgage/secured note income is passive and typically does not generate unrelated business taxable income (UBTI), which makes them a great choice for a self-directed IRA. Unsecured notes are generally unsuitable for IRAs because of their high risk and their exposure to anti-money-laundering scrutiny.

Precious Metals

Generally, IRAs cannot invest in collectibles, such as art, rugs, stamps, etc., but a carveout was created for certain precious metals. A self-directed IRA can purchase bullion coins and bars of gold, silver, platinum and palladium that satisfy certain requirements for purity (typically .999 fine). Precious metals are a low-beta asset with price movements that can diverge greatly from those of the stock and bond markets. Custodial costs can be easily offset by the deferred taxation on capital gains from sales of IRA-held precious metals. For IRA owners who do not wish to hold the physical metal, alternative investments include precious metal mutual funds/ETFs (holding the physical metal and/or financial derivatives), options, futures and mining shares. Derivatives offer potential yield income (such as option premiums or mining share dividends) not available from simply holding the physical metal. However, derivative investors should be aware of potential slippage relative to the metals’ prices, especially in strongly trending markets.

Tax Deeds/Liens

A lien is the legal right to seize property for non-payment of a debt. A tax lien certificate is a claim on a property for non-payment of taxes. States and municipalities may auction tax liens to investors at a discount. Purchasers must immediately settle the lien with the government, and can then collect from the property owner an amount equal to the taxes due, or failing that, foreclose on the property after a suitable waiting period. The discount at purchase, plus any additional penalties and interest due, helps lock in a profit margin on tax liens. Profits of 35 percent or more are feasible. Caution must be taken when buying a lien that the property owner has not already filed for bankruptcy, thereby jeopardizing your investment as other creditors vie for payment. Some states auction off tax deeds rather than tax lien certificate. A deed is title to the property, meaning that deed buyers pay for the underlying property, as opposed to tax lien purchasers who are only buying the tax debt, not the whole property. The homeowner may be able to redeem the auctioned deed by paying the auction amount plus interest and penalties. Returns in the 10 to 25 percent range are not unusual. Lacking redemption, the deed holder can keep the property, sell it, rent it, use if for collateral, or utilize it in any other way.

Private Equity

Private equity is ownership in a private company, i.e., restricted shares that cannot be purchased on the open market. An IRA can hold private equity as long as the IRA owner fulfills certain requirements, such as being an accredited investor. Private companies are not forced to make the same detailed disclosures required of public companies. Because of this additional risk and the shares’ limited liquidity, purchasers usually demand higher returns on private equity than on publicly traded shares. A self-directed IRA can own private equity shares as long as the IRA owner, family members and fiduciaries have no involvement with the private company. The owner of private shares can sell them publicly after a one-year holding period (or sooner if the company goes public). Secondary markets have popped up specialized in the public sale of private equity once the year-long restriction has passed, thereby enhancing liquidity.

Accounts Receivable Investing – Factoring

Factoring is when a company sells off some or all its accounts receivables/invoices for immediate cash rather than waiting to collect. Non-recourse factoring is when the factor assumes all the collection risk, whereas in recourse factoring, the factor and the company share the collection risk. That is, under recourse factoring, the company must return the advance (plus fees) on any invoices that turn out to be noncollectable. Investors and factoring firms buy up A/R invoices at a discount in the hopes of collecting the full amounts due, the difference being the profit margin on the transaction. Companies can turn to factoring to mitigate a cash flow problem without adding debt to the balance sheet. Investors can use self-directed IRAs to purchase receivables/invoices, but due diligence is required to avoid buying items that are not collectible.


We’ve described only five of the many alternative assets available to owners of self-directed IRAs. If you want to diversify your IRA portfolio with a range of alternative assets, be sure to pick a custodian who is set up to handle these kinds of transactions. You can hold an unlimited number of IRAs, both traditional and Roth, as long as your annual contributions don’t exceed the established limits.

tracy stein on investments with self-driected IRAS

Tracy Stein

CEO & President of Prime Pinnacle

Office# 855-387-7463