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One of the many alternatives available for self-directed IRA inventors is agriculture. Agriculture investments can help your retirement funds grow in two ways: First, a farm produces crops, and these crops generate income when sold. Second, the value of the land may increase over time, resulting in tax-deferred capital gains. Farmland investments combine diversity and the ever-present need for food with a growing population, making the assets a potentially viable, long-term addition to your retirement portfolio. Let’s discuss a bit more about investing in farmland with your self-directed IRA, and what you can expect from the process. 

To learn more about alternative investments you can take advantage of with your self-directed IRA, contact the team at First Western Federal Savings Bank. Our lenders will walk you through how non-recourse loans can be used in tandem with your self-directed IRA to invest in real estate and more. 

 

Investing in Agriculture Using an IRA

With a self-directed IRA, you have the option of using your retirement funds to invest in horses, cows, small farms, corn and grain fields, apple orchards, and so much more. But, investing in an individual farm, or even a herd of animals, often requires a significant initial capital investment, as well as the continual expense of overseeing agricultural activities, caring for animals, and/or leasing farm equipment.

All expenses related to the investment must be made through the IRA, so the IRA must have sufficient funds to pay these amounts. Having to rely on outside capital to cover expenses can lead to the loss of tax benefits or the incurrence of penalties. Also, all income generated by the investment must be paid into your IRA. 

Owning a farm outright is a great investment, but can take millions of dollars to make it profitable, not to mention a lot of knowledge, experience, and hard work. A better way to create income from a farmland investment in the IRA is to lease the farm out to an agricultural operator. The income from the lease goes right into the self directed IRA, tax free or tax deferred. And the value of the farmland continues to appreciate.  

 

Why Investing in Farmland Makes Sense

Some investors compare farmland to real estate because they are both tangible assets that produce yield and can have an appreciating value on the underlying investment. Investing in farmland, however, means tapping into all of the benefits of the investment without the burdens of capital gains taxes or income taxes on profit distributions. Any profit distributions you receive go right into your retirement account. This allows the profit to grow tax-deferred, which ultimately means you keep more of your investment and grow your retirement nest egg more aggressively.

 

Trustee’s Role

Although you make the decisions concerning your self-directed IRA, it is up to the account trustee to handle the actual management of the account and its holdings, including farmland. The trustee makes the purchase and sale of properties and pays property taxes and other bills out of the IRA funds. When the IRA receives income from the farm, the trustee reinvests it according to your instructions. 

 

Prohibited Transactions

Additionally, an agricultural investment that provides a personal benefit to the investor is considered a prohibited transaction by the IRS. An example of this would be the purchase of a timber stand where the investor wants to hunt. You also cannot purchase a piece of agricultural property you or a family member owns with a self-directed IRA. The IRS considers this self-dealing. Furthermore, you’re also unable to perform any work on the IRA-opened property yourself — your IRA must hire a trustworthy property manager to do so, but you’ll be the one who has to find a good fit. 

Some more prohibited transactions and conflicts of interests include:

• You can’t draw a salary from the farm
• You can’t hire your spouse, children, grandchildren, parents, grandparents, or those of your spouse, nor any entity they control
• You can’t commingle your personal funds with the IRA funds
• You can borrow money, but only a non-recourse loan. You can’t sign a personal guarantee or pledge anything as collateral that is outside the IRA
• You can’t take the livestock depreciation deduction

 

The Bottom Line

Alternative investments with your self-directed IRA allow an abundance of opportunities. Adding farmland assets to your portfolio is an opportunity that can mature and strengthen over time with the proper care, but like many other investments, has to be done with purpose. Due diligence, research, and care can help grow your investment and your portfolio, even if you don’t have a green thumb!

To learn more about what you can invest in with your self-directed IRA, especially when used in tandem with a self-directed IRA, then contact the lenders at First Western Federal Savings Bank. Our lenders would be happy to discuss your current situation and financial goals and assist you in diversifying your portfolio. Give us a call today.