There are over $28.7 trillion dollars in US-held retirement accounts. These funds might be in IRAs, 401ks, or pension plans. Unsurprisingly, the overwhelming majority of retirement funds are invested in the stock market and traditional equities. But, did you know you can legally invest your retirement funds in alternative assets like farmland?
It's true. Every day millions of Americans are bringing alternative assets into their retirement portfolio. The inclusion of uncorrelated assets can provide real diversification, offer great investment growth, and help protect against inflation.
Since the 1980s, the IRS has allowed Americans to legally invest their retirement funds outside of Wall Street, and you can do it too.
These IRAs and 401ks are typically called "self-directed" retirement accounts. However, that term can be a bit misleading. Today, almost every major stock brokerage offers some type of "self-directed" retirement plan. What they often mean is that you can simply "direct" where your retirement funds are invested. That is, as long as those funds remain on their platform and are only invested in offerings they provide.
If you want to invest retirement funds in alternative assets and unlock true growth, you need more freedom and flexibility. The real ability to free your retirement funds comes with checkbook control retirement plans.
The term "self-directed" means you choose which assets you invest in. Of course, there are several iterations of self-directed accounts. Some offer more flexibility than others. With a checkbook control retirement plan, you are in complete control. A self-directed checkbook control plan provides you with the most possible options for your retirement growth.
With a checkbook control retirement plan, you literally hold a checkbook for your retirement funds. This account might be a Checkbook IRA or checkbook control Solo 401k plan. As the checkbook holder, you choose where and how your funds are invested. When it comes time to invest, you simply write a check or send a wire to execute your investment. With a Solo 401k, you retain complete checkbook control. You are the plan trustee, which means you get to decide where and how the funds are invested. And yes, the IRS recognizes the Solo 401k as a fully compliant retirement plan, designed for small business owners, freelancers, and independent contractors.
Predictably, when given options on how and where to invest their funds, Solo 401k and retirement investors look for several things:
With a self-directed checkbook control retirement account, you have the freedom to choose the investments to meet your needs.
For over 30 years, real estate has been a popular investment in self-directed retirement plans. Naturally, that's because adding assets to your portfolio that are uncorrelated to the stock market can help to boost your overall investment returns.
When you add uncorrelated assets to your retirement plan, your portfolio diversification increases. This is a result of adding asset classes that when the stock market has a correction, might not be reflected in the real estate market. For example, in March 2020 global stocks were down 25-30% due to the COVID pandemic. In contrast, US real estate saw a decline in available inventory (more buyers) and an increase in median home prices. Therefore, by including uncorrelated assets and increasing diversification, you can have exposure to growth in different areas.
Additionally, investors often flock to assets like real estate because they can offer inflation protection. In times of inflation, property values tend to remain stable or rise. Consequently, investing in real estate can be a way to preserve capital. You can accelerate your growth by making investments using retirement funds. Any time you invest with pre-tax retirement funds, profits and gains are tax-deferred. This yields a higher return on investment because you are not subject to income taxes on distributions, or capital gains on any sale of assets. Understandably, residential and commercial real estate are lauded as powerful tools in an investor portfolio. However, it's worth considering expanding your idea of real estate to encompass a vitally important type of real estate investment...farmland.
Some investors may compare farmland to real estate, and that's a great place to start. Both farmland and conventional real estate are tangible assets. Both assets produce yield and can have an appreciating value of the underlying investment (the land)... And there is a strong need for both types of investments as people will always need housing and food.
Investing in farmland might be a new concept to grasp. However, while it's new to you, farmland is something money managers have shown strong interest in, especially recently. Farmland has historically outperformed stocks and bonds, often producing consistent double-digit returns. In fact, farmland has seen almost exclusively positive returns since the 1990s. Farmland investors tend to make money both in the rent farmers pay, and the continued appreciation of the land.
“Buy land, they're not making it anymore.” - Mark Twain
However, the amount of farmland available is finite. Currently, there are over 900 million acres of farmland in the United States, but the amount of land available to farm is decreasing at almost 3 acres every minute. Therefore, the supply of farmland is shrinking while the demand for food increases. As the world population continues to grow, people continue to need food. As such, farmland becomes an even more attractive investment. Especially when that investment can be made domestically, right in the United States.
Moreover, high profile investors continue to include farmland in their own portfolios. In 2018, Bill Gates spent $171 million on farmland in southern Washington. Warren Buffet began buying farmland in 1996.
Clearly, successful investors understand the value of holding farmland as an asset in your portfolio. When you invest retirement funds in farmland, you gain even more. That's largely because all of your gains are tax-deferred or tax-free. This increases your investment returns exponentially.
By investing retirement funds in farmland, you tap into all the benefits of the investment without the burdens of capital gains taxes or income taxes on profit distributions. Any profit distributions you receive go right into your retirement account, such as a Solo 401k or self-directed IRA. This allows the profit and income to grow tax-deferred . If the investment sponsor has an exit and sells the investment, there are no capital gains on your profits, so long as they remain in your retirement account. Ultimately, this means you keep more of your investment and grow your retirement nest egg more aggressively.
If you are a small business owner, freelancer, or independent contractor, the Solo 401k plan may be right for you. Nabers Group brought the Solo 401k to market in 2006, after seeing a need for small business owners to be able to control their retirement account and access alternative investments.
Using your retirement funds to invest in farmland is easy with a Solo 401k. Just follow these simple steps:
You can fund your Solo 401k plan through rollovers or contributions. Roll in or transfer funds from almost any other retirement account. Contribute funds to your Solo 401k from your business earnings and claim those as a tax deduction. The Solo 401k has incredibly generous contribution amounts. You can tax-shelter up to $63,500 every year.
Enjoy positive returns from your farmland investment in your Solo 401k. Have peace of mind knowing your retirement funds are well diversified and positioned for growth. Be secure in the knowledge that you have a hedge against inflation by holding tangible assets in your portfolio. Finally, know that your investment has longevity as people will always have a strong, unrelenting need for productive farmland.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.