Funding retirement is one of the most critical saving habits you can practice because it largely determines your quality of life when your career ends. Over the years, you followed the advice of financial professionals and contributed a percentage of your income each paycheck into stock market investments.
You enjoy account growth due to regular contributions, stock market gains, and the magic of compounding.
But now, you have reached a point where stock market volatility is a more significant concern. You watched the value of your retirement accounts plummet and recover during the 2008 recession and the 2020 pandemic. And are ready to reduce volatility by improving diversification.
Fortunately, IRS rules do not restrict tax-preferred investments to stocks, bonds, and mutual funds. You can also opt for a range of alternative investments to improve diversification, reduce volatility, and increase return rates without forfeiting the tax advantages.
Types of Retirement Accounts and the Tax Benefits
Tax-advantaged retirement accounts fall into two general categories, tax-deferred and tax-free.
Tax-deferred accounts allow you to defer taxes on contributions and growth until withdrawing funds in retirement. The result is faster growth and delayed taxation of investment dollars. Contributions also reduce taxable income immediately, lowering taxes in your highest earning years.
Tax-deferred accounts include traditional IRAs, most self-employed retirement options, and company-sponsored accounts such as 401ks and 403bs.
Tax-free accounts do not provide a tax benefit at the time of contribution but offer tax-free growth and withdrawals in retirement. Roth IRAs and Roth 401Ks offer these benefits.
To qualify for tax-preferred treatment, you must follow the IRS rules, which have a range of qualifications and restrictions. The IRS produces publications detailing tax-deferred and Roth account requirements.
How to Use Retirement Funds for Alternative and Non-Traditional Investments
Financial professionals and companies encourage you to invest retirement dollars in the stock market. Employers give you a small number of available mutual funds and manage contributions. You can roll over funds into another employer-based account or an IRA when you switch jobs.
You might not realize that the IRS does not require you to invest in the stock market. In fact, they only have three key restrictions to tax-advantaged accounts. These include the following:
- You cannot engage in a transaction with a disqualified person. For example, you may not use IRA funds to complete a transaction with family members, an S Corporation, or your own business.
- You cannot receive a personal benefit. For instance, you may not purchase a vacation home with IRA dollars and still get the tax benefits.
- And you cannot participate in disallowed investments, which include a short list of prohibited items such as collectible art, antiques, gems, coins, and alcoholic beverages.
You must open a self-directed IRA through a custodian to use retirement funds for alternative investments outside the stock market. Once established, you can move qualified funds into the account and participate in alternative investments such as commercial real estate syndications.
If you want to learn more about using retirement funds to invest in commercial real estate syndications, we have prepared a video presentation providing more details here.
