Grow Your Wealth: Invest Your Inheritance Money in a Self-Directed IRA

Receiving an inheritance often comes with some difficult financial decisions to make: You want to recognize the legacy that has been passed on to you, while also making sure you make the most of the gift given to you. It’s an opportunity not to be wasted — inheritance money offers the chance to build and grow your wealth, and can significantly impact not only your future but the future of your loved ones as well. 

Strategically investing your inheritance can help you take full advantage of the money that has been passed on to you, enabling you to focus on wealth accumulation and preservation. As part of a comprehensive financial plan, a self-directed Investment Retirement Account (SDIRA) offers numerous benefits that can help you make the most of your inheritance and position you for long-term financial success.

The Great Wealth Transfer

Inheritance is the transfer of wealth, assets, or properties from an individual to a beneficiary when the individual passes. Suppose you’ve received an inheritance or are planning to receive one. In that case, you are part of the “Great Wealth Transfer” that is occurring, which is the largest transfer of assets in history: recent research projects that $72.6 trillion in assets will be transferred to heirs over the next 20 years.

An inheritance can have a profound impact on your financial situation, affecting your long-term financial planning and influencing the path you take in your financial journey. Inheriting money can present an invaluable opportunity to achieve your financial goals and secure your financial future, perhaps more quickly than you anticipated. 

With an inheritance, you can maximize your retirement planning, to help ensure you’re well-positioned for a comfortable retirement. And as part of your estate planning, an inheritance can also allow you to leave your own financial legacy for your loved ones.

Benefits of Inheritance Investment in a Self-Directed IRA

A self-directed Individual Retirement Account (SDIRA) is a specialized retirement account that provides you with greater control and flexibility over your investment choices compared to a traditional Investment Retirement Account (IRA). Self-directed IRAs have several characteristics that distinguish them from traditional IRAs:

  • Investment Flexibility: One of the primary features of an SDIRA is the freedom to invest in a variety of assets beyond traditional securities. Unlike traditional IRAs, which typically limit investments to stocks, bonds, mutual funds, and similar assets, SDIRAs offer a broader range of investment options such as alternative assets. This can include investments such as real estate, private equity, commodities, tax liens, and private loans. 

  • Control and Autonomy: A self-directed IRA empowers you to make investment decisions based on your own research, knowledge, and risk tolerance. Unlike a traditional IRA, where investment options are typically limited to those offered by the financial institution, an SDIRA gives you the autonomy to choose investments that align with your specific financial goals and values.

  • Administrative Services: An SDIRA is managed by an administrator who facilitates account management, investment transactions, and compliance with IRS regulations, which can often be complex. Your SDIRA administrator plays a critical role in ensuring that your SDIRA investments adhere to the rules and regulations that govern retirement accounts, so that you don’t have to.

The benefits of investing your inheritance in a Self-Directed IRA include:

  • Diversification: An SDIRA allows you to diversify your retirement portfolio across different asset classes. This diversification potential can help you mitigate risk, enhance your overall portfolio resilience, and explore opportunities beyond the traditional market. You can tailor your SDIRA to match your investment goals, risk tolerance, and investment preferences.

  • Potential for Higher Returns: Alternative investments within a self-directed IRA can offer the potential for higher returns compared to traditional assets, contributing to your long-term wealth accumulation. It’s important to balance risk and reward: an SDIRA also comes with additional risk due to the nature of alternative investments, so it’s important to assess risk factors and thoroughly research the investment strategies you’re considering.

  • Tax Advantages: A self-directed IRA can have similar tax advantages to a traditional IRA, such as tax-deferred growth and tax-deferred withdrawals, depending on the account type. The tax implications of certain self-directed IRAs also allow you to pass on your assets to your beneficiaries with minimal tax impact, leaving a lasting legacy for your loved ones.

Self-directed IRAs offer greater investment freedom and flexibility than traditional retirement accounts, enabling you to optimize your retirement savings and explore investment opportunities that are aligned with your financial objectives.

Strategies to Grow Your SDIRA Wealth

With a self-directed IRA, you can pursue different opportunities to invest your inheritance and help build and preserve your wealth. SDIRAs offer a range of investment strategies that you can include in a well-diversified portfolio, to strengthen its resiliency against traditional market fluctuations. Some common investments in SDIRAs include real estate, private equity, and commodities.

Real Estate

Investing in real estate within a self-directed IRA offers several advantages, including the potential for long-term rental income, property appreciation, portfolio diversification, and inflation hedging. SDIRAs can be used to invest in various types of real estate assets:

  • Residential Properties: Residential properties can include single-family homes, condominiums, townhouses, and multi-family units. The rental income generated from tenants can provide a steady cash flow stream within your SDIRA.

  • Commercial Properties: Commercial properties can include office buildings, retail spaces, industrial spaces, and warehouses. Commercial property leases can often offer higher rental yields and longer-term leases, which can enhance your investment stability.

  • Real Estate Investment Trusts (REITs): Real Estate Investment Trusts (REITs) offer a way to invest in real estate in your SDIRA without the direct ownership of properties. REITs invest in income-producing real estate assets and are typically required to pay a minimum of 90% of their taxable income to shareholders as dividends. REITs provide exposure to real estate markets with added liquidity and professional management.

Private Equity

Private equity investing involves investing in private companies or non-publicly traded businesses, providing capital in exchange for an ownership stake. These investments offer the potential for high returns but also come with higher risk and a longer investment horizon. Within an SDIRA, you can consider various private equity opportunities that include:

  • Private Equity Funds: Private equity funds pool investor capital to invest in established companies or industries. These funds may focus on growth, buyouts, or specialized sectors, offering diversification within private equity investments.

  • Venture Capital: Venture capital involves investing in early-stage or startup companies that have high growth potential, through a risk capital company. Venture capital investments can be rewarding, but require careful due diligence and risk assessment.

  • Angel Investments: Angel investing is directly investing in startups or entrepreneurial ventures. Angel investments can provide the potential for significant capital appreciation but also require thorough due diligence and an assessment of risk.

While private equity can be a rewarding investment, be aware of the time horizon of your investment and potential liquidity constraints — make sure you’re comfortable committing your capital for an extended period of time.

Commodities

When you invest in commodities in a self-directed IRA, you invest in raw materials including energy, precious metals, and agriculture. Commodities provide a hedge against inflation and economic volatility, as their prices typically move in the opposite direction of traditional financial markets. There are several ways to invest in commodities in an SDIRA:

  • Futures Contracts: Futures contracts are agreements to buy or sell a commodity at a set price on a specified future date, and allow you to speculate on a commodity’s price direction without actually holding the physical commodity. Futures contracts are the most common way to invest in commodities.

  • Commodity-related Company Stocks: By investing in the stocks of companies involved with commodities, you can also gain exposure to the commodities market. Investing in commodity-related stock involves less risk than trading futures. 

  • Exchange-Traded Funds (ETFs) and Mutual Funds: Commodity exchange-traded funds (ETFs) and mutual funds enable you to participate in the commodities market through professionally managed funds.

It’s important to note that commodities can be a highly volatile asset class, and are susceptible to influence by external factors like global demand or geopolitical tensions. Trading commodities can be complex and have an increased risk exposure compared to other investments.

While real estate, private equity, and commodities offer unique investment opportunities within a self-directed IRA, you need to conduct thorough due diligence, practice active risk assessment and management, and adequately diversify your portfolio to protect against volatility. 

You’re in control of the investment decisions in your SDIRA, and careful research and planning are key to building a strong investment portfolio that will have long-term success. Consider seeking advice and guidance from professionals like Chicago Trust Administration Services, who have knowledge and experience in SDIRA investments, and keep yourself informed about market dynamics and trends. 

Partner with the Right SDIRA Administrator for Success

An inheritance investment in a self-directed IRA begins with choosing the right administrator to establish and manage your account. Your SDIRA administrator plays an essential role in administering your SDIRA, facilitating investment transactions, maintaining records, and ensuring full compliance with IRS regulations.

Carefully evaluate an SDIRA administrator’s experience and reputation, service offerings, fees, security, and customer support before selecting one that aligns with your needs and preferences. 

After you open your self-directed IRA account, you can begin the process of selecting investments based on your individual needs and investment goals. Focus and align your investment strategies with these specific considerations:

  • Diversification: Create a diversified portfolio by investing across different asset classes to help mitigate risk and enhance your long-term returns.

  • Risk Assessment: Assess the risk-reward profile of potential investments, and analyze investment strategies, asset liquidity, market volatility, regulatory environments, and industry-specific risks.

  • Investment Horizon: Define your investment horizon and financial goals, whether it’s income generation, wealth accumulation, capital preservation, or estate and legacy planning.

  • Asset Allocation: Allocate assets strategically within your SDIRA portfolio, and balance higher-risk investments with more conservative options based on your risk tolerance.

  • Review and Monitoring: Regularly review and monitor your SDIRA investments: track performance, review your portfolio diversification, and rebalance as needed. You can adjust your investments whenever necessary to adapt to changing market conditions and your evolving investment objectives.

Investing inheritance money through a self-directed IRA can help pave the way for financial stability, growth, and legacy planning. An SDIRA is a strategic tool that empowers you to make informed investment decisions, maximize tax benefits, and build a diversified portfolio for long-term wealth creation.

At Chicago Trust Administration Services, we have a proven track record in helping clients manage their self-directed IRAs, and we have the necessary experience in handling any regulatory and compliance requirements to provide seamless investment transactions. 

Our knowledge and experience of self-directed investment strategies enable us to help you leverage the flexibility and freedom offered by SDIRAs to achieve your long-term financial objectives with confidence.

If you’d like to explore wealth-building opportunities by investing your inheritance in a self-directed IRA, we welcome you to schedule a meeting with us. Call 312-869-9394 or email steve@ctasira.com to see how we can help. 

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.

Steven Miszkowicz