Maybe you just opened a Roth IRA. Or perhaps you’re taking an end-of-year look at an account you’ve been working to grow for more than a decade. What can you hold—and not hold—in your Roth IRA? Here we break it down for you.
What Is a Roth IRA?
First, let’s briefly explain what a Roth IRA is.
A Roth IRA is a retirement account that lets you contribute assets at any age if you have taxable compensation and your modified adjusted gross income is below a certain amount. Contributions to a Roth IRA are taxable, but qualified withdrawals (also called distributions) are not taxable.
What are qualified withdrawals? “Any earnings you withdraw are considered ‘qualified distributions’ if you’re 59½ or older, and the account is at least five years old, making them tax- and penalty-free,” Investopedia explains.
Meanwhile, contributions to a traditional IRA are not taxable in most cases, but qualified withdrawals are.
Another critical difference between a traditional and Roth IRA? There are no required minimum distributions (RMD) for a Roth IRA.
What Can You Hold in a Roth IRA?
Through a regular Roth IRA, you can buy an array of traditional assets, such as:
- Individual stocks
- Mutual funds
- Exchange-traded funds (ETFs)
- Certificates of deposit (CDs)
But through what’s known as a self-directed Roth IRA, you can buy a variety of alternative assets. Keep in mind that a self-directed Roth IRA must be opened through an IRS-approved custodian. Here’s a breakdown of some of the assets that can go into a self-directed Roth IRA.
- Real estate. Putting an investment property like an office building or apartment building into a self-directed Roth IRA can help generate healthy cash flow, produce substantial returns, provide tax advantages, and diversify your portfolio.
- Undeveloped land. Land that hasn’t been developed can offer portfolio diversification, supply tax advantages, and potentially deliver attractive asset appreciation, too. On top of that, land is a finite resource (kind of like gold).
- Promissory notes. A promissory note is a lending agreement secured by real estate or other assets, or is unsecured. An unsecured promissory note is not backed by any property. So “if the payor fails to pay, the lender must file a lawsuit and hope that the payor has sufficient assets” that can be taken to satisfy the loan, LegalZoom explains. One of the key benefits of including a promissory note in a self-directed IRA is that it could produce a greater return than if you were to leave your money in a low-interest bank account.
- Tax lien certificates. When you buy a tax lien certificate, you’re purchasing a delinquent tax lien on a property and earning profit as the property owner pays interest on the certificate or from the liquidation of the collateral securing the loan, FortuneBuilders explains. As noted by FortuneBuilders, the potential advantages of buying lien certificates include a low amount of required capital, a decent return rate, and a lump-sum payment once the tax lien is resolved.
- Cryptocurrencies. Cryptocurrency (like bitcoin) is an emerging digital currency. It’s seen as a hedge against market downturns and as a way to capitalize on the future of digital payments.
- Water rights. Investopedia defines water rights as the ability of property owners to access and use bodies of water, such as lakes and rivers, that are adjacent to the land they control. Water rights enable someone to make money from a scarce resource.
- Livestock. Believe it or not, you can hold livestock as an asset in a self-directed IRA. Livestock can include cattle, pigs, chickens, and horses. Having livestock in an IRA could help diversify your portfolio. Plus, you can literally see your livestock (and the inherent asset) grow, and you can see your livestock as a living, breathing “piggy” bank. Just make sure you house the animals at another farm and you do not handle them yourself on a day-to-day basis.
- Start-up companies. This asset type holds the potential for you to enjoy generous rewards from a hot company’s meteoric growth.
- Select gold, silver, palladium, and platinum. Through a self-directed IRA, you can own IRS-approved bullion and coins made of gold, silver, palladium, and platinum. Advantages of holding precious metals in an IRA include portfolio diversification, asset scarcity, liquidity, and inflationary safe-haven status.
What Can You Not Hold in a Roth IRA?
While a self-directed Roth IRA can hold a vast number of alternative assets, it cannot include items such as:
- real estate for personal use (like a vacation home)
- life insurance policies
- fine wine
- comic books
- collectible coins
Holding Assets in a Self-Directed Roth IRA
While you can start a self-directed Roth IRA from scratch, you also can shift funds from another retirement account to a new or existing Roth IRA. Those funds can be transferred from a traditional IRA, SEP IRA, or SIMPLE IRA.
Here’s another idea to consider, too. The SECURE Act recently raised the age for taking required minimum distributions from 70½ to 72.
“If you’re younger than the RMD age, you could take a voluntary distribution and convert it to a Roth IRA,” Kiplinger notes. “It’s a smart estate-planning move.”
Whichever route you choose, a self-directed Roth IRA may be a smart vehicle for diversifying your portfolio and building up retirement savings.
Learn what precious metals could do for your Roth IRA. Download your free Precious Metals IRA Kit today.