The majority of Americans’ investable assets are in their retirement accounts. However, public markets offer insufficient portfolio diversification, often adding volatility and risk to returns, and this can often lead to financial insecurity. How can an investor offset that risk? Alternative investments.
Alternative investments are assets that are outside of the public markets, such as private equity and hedge funds, gold, real estate, and even farmland. These types of investments can reduce volatility, while often maximizing returns.
So what do alternative assets and self-directed IRAs have to do with one another? Let’s dive into it.
An Individual Retirement Account (IRA) is a tax-advantaged savings account set up and held by a financial institution. With an IRA, an individual’s savings can potentially grow more quickly than that in a taxable account. The tax advantages associated with opening an IRA can lead to maximized retirement savings and, in turn, enable healthier financial futures.
And depending on the type of IRA, this growth can also be tax-free or tax-deferred:
Traditional IRA: Pre-tax contributions yield earnings that can grow tax deferred until funds are withdrawn in retirement.
Roth IRA: After-tax contributions yield earnings that could grow tax free. Withdrawals in retirement can be tax free if certain criteria are met.
An IRA can often lead to greater investment opportunities, as the owner is able to supplement their current savings.
Another type of IRA is self-directed IRA; this IRA allows for more diversification through the inclusion of alternative assets. Investing in alternative assets with a tax-advantaged IRA allows an investor to benefit from both duration matching and compounding returns:
Duration matching: The timeline of saving for retirement (or later years) aligns with the timeline of the investment opportunity (an illiquid alternative asset), meaning an investor has time to let that investment grow. Investors who use their IRAs to invest in alternative assets will enjoy the "illiquidity premium" that those long-term assets pay, while avoiding shorter-term swings of liquid assets that may move with the public market.
Compounding returns: Gains from investments are able to be reinvested fully and without being taxed. This means that alternative investments that generate returns are likely to result in stronger gains if successfully reinvested - and, if funded with a Roth IRA, will be entirely tax free.
While self-directed IRA funds can be invested into alternatives, many custodians do not enable retirement funds to be invested in alternatives. And, the ones that do are incredibly cost prohibitive and time intensive. Our partner, AltoIRA, changes that.
Launched in Nashville in 2018, AltoIRA is a fintech company on a mission to help individuals access and execute investments in alternative assets using their retirement savings. Alto is unique, in that it provides:
Access: Alto’s 2-sided platform makes it easy for investors to access their retirement savings and invest in alternative assets - including Alto’s 21 investment partners, such as FarmTogether.
Value: Alto has no minimums and only 2 fee types: The monthly account admin fee and per transaction fees. The highest monthly account fee is $30, regardless of account size.
Empowerment: Alto is available to both accredited and non-accredited investors. This accessibility helps position individuals to save for the retirements they want.
Investors who open an Alto self-directed IRA can use their IRA funds to invest in farmland through FarmTogether!
Even though farmland is one of the oldest asset classes, historical family ownership and a lack of available infrastructure have made it largely inaccessible to the average investor. The FarmTogether platform is changing this: accredited investors now have access to a once “off-limit” opportunity that is farmland.
What makes farmland so compelling?
Strong returns: In the last 20 years, farmland investments have returned ~10% and a positive return every year.
Stability: Farmland can be a good investment in a recession. In addition to adding diversification to your portfolio, farmland also experiences low volatility compared to stocks or real estate. Plus, farmland hedges against rising inflation
Tangible, far-reaching benefits: As population growth drives demand for food, available farmland will boast a premium. Therefore, owning farmland allows you to own something that meets a fundamental societal need.
Passive Income: In addition to asset appreciation that is realized when the farmland investment is sold, FarmTogether’s investors receive periodic lease payments from farmers and payments from the sale of crops.
Ready to take advantage of the combined benefits of IRA ownership and investing in alternatives, such as farmland? Getting started is easy.
Step 1: Sign up on FarmTogether and begin exploring our farmland offerings.
Step 2: Set up an account with AltoIRA.
Step 3: Once you find an offering you’d like to invest in, simply select “AltoIRA” as the investment payment method within the investment flow, and complete your transaction with an e-signature on Alto’s site.
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.