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The Alternative Asset Self-Directed IRA Advantage: A Closer Look

Alternative asset classes can potentially offer investors significantly above-average returns, low correlation to traditional assets and enhanced portfolio diversification. But advisors face a key decision: how should they encourage clients to incorporate alternative asset classes in their self-directed IRAs? Multiple factors play into this consideration.

First and foremost: self-directed IRAs can indeed accommodate a range of investments outside the traditional asset realm. Such alternative assets may include real estate holdings, small businesses, hedge funds, private equity investments, precious metals, cryptocurrencies and a host of other investment options. However, each discrete alternative class carries its own inherent risks and behaviors. Therefore, it’s critically important for advisors to cultivate a deep understanding of their clients’ financial goals, risk tolerances and time-horizons, in order to accurately evaluate the suitability of each asset class. And since self-directed IRA custodians do not offer investment advice or conduct such due diligence, it’s vital for advisors to take the lead in this effort.

Choosing the Right Alternative Investment IRA Type

After assembling a slate of alternative assets that best aligns with an investor’s individual profile, drilling down on the most appropriate type of IRA will help maximize the efficacy of these choices. Depending on a client’s situation, advisors can choose retirement plans like traditional IRAs, Roth IRAs, or plans geared to business owners like SEP IRAs or SIMPLE IRAs. Here are the IRS guidelines for individual retirement accounts.

Tax Advantages of Alternative Investment IRAs

Alternative investments parked in self-directed IRAs can provide significant tax-advantages to clients, such as the ability to deduct IRA contributions, which can profoundly benefit retirement portfolios—especially those used for investing. But in addition to generating tax-deferred returns, clients may also combine potential returns with income deductibility, adding a positive inflow to retirement portfolios, while contributing to growth-minded financial plans.

Another important advantage of a Roth IRA, specifically for older taxpayers, is that they don’t have to take a required minimum distribution (RMDs), steering clear of potentially being charged for higher taxes on Social Security benefits or Medicare premium surtax.

Execution Risks of Alternative Investment IRAs

While alternative asset self-directed IRAs offer tremendous return potential and favorable tax treatments, advisors should warn investors of the risks associated with holding unconventional investments in IRAs. Complex IRS regulations create the danger of investors inadvertently engaging in prohibited investment transactions. For example, an IRA may contain real estate investments, but any outstanding mortgages associated with the properties are strictly forbidden–with the exception of debt holdings. In other words, the properties must be owned outright. Furthermore, if a self-directed IRA houses a small business holding, investors may not draw a salary from the operation in question. Doing so would likewise be considered a prohibited transaction. And even if committed unintentionally, the penalties for such improprieties may be costly, with weighty fees handed down. In the worst case, an investor’s entire IRA might be invalidated, triggering immediate taxation of the entire balance.

Understanding Unrelated Business Taxable Income in an IRA

Making investments with funds from a self-directed IRA provides a great tax advantage in that most income is tax-free until distribution. However, there are certain situations in which a self-directed IRA can generate taxable income in the form of unrelated business taxable income (UBTI) or unrelated debt-financed income (UDFI). UBTI is one of the more complicated areas of tax law, but the basic guidelines are fairly straightforward when it comes to UBTI generated by an investment held within an IRA. There are exceptions, and most income generated by passive investments is exempt from paying UBIT, including income from dividends, annuities, royalties, interest from loans and most rent generated from real estate.

Choosing the Right Alternative Investment IRA Custodian

Fortunately, a qualified custodian can help clients navigate the IRS’s transactional complexities when it comes to executing alternative investment self-directed IRAs, and STRATA provides clarity and efficiency in the alternative asset custody space.

Our team of tenured professionals has overseen thousands of transactions, employing a flexible approach that lets you offer your clients a wide breadth of asset classes. Dedicated to delivering fast, streamlined and responsive service, STRATA helps investment professionals fulfill their clients’ financial goals and position them to enjoy long-term success. Because when alternative IRA custody is this easy, the possibilities are endless.


Founded in 2008, STRATA Trust Company has built a reputation delivering streamlined and straightforward custody. Our service-driven team has helped thousands of investors and investment professionals unlock opportunities in self-directed retirement accounts across a wide range of alternative investments. Formerly known as Self Directed IRA Services, Inc., STRATA has strategically realigned to support a broad range of investment professional partners in growing their IRA asset base – always with an eye on the future.

With offices in Austin and Waco, Texas, STRATA operates as a Texas-chartered trust company with direct oversight by the Texas Department of Banking. Led by a seasoned team with over 350 years of combined experience, 35,000+ investors empowered and over $1.8 billion in assets under custody, our customers experience a clear difference in our approach to IRA custody.

Tags: all things retirement, alternative investments, IRA, ira custodian, Roth IRA, taxation, Traditional IRA, UBTI