It’s certainly natural to think of investing your self-directed IRA in long-term growth investments. After all, most retirement savers have medium to long term investment horizons, and knowing that these investments have decades to grow certainly makes that type of focus very attractive.
But income generating investments also have a place in your self-directed IRA. For example, when you move from the workplace to retirement, you may need to be able to live off the income that’s generated by your self-directed IRA. You may also want to include income generating investments in your self-directed IRA simply as a matter of diversification. And remember that income or dividends that are generated inside the account don’t incur any tax liability when they hit your account.
Here are some of the top income streams for you to consider within your self-directed IRA.
Real Estate. This is the classic income generating investment, and the ways to invest are varied. You can purchase real estate directly with your self-directed IRA, and this is one of the big advantages of a self-directed IRA over a retirement account with a traditional custodian. Your investment can be in a single family unit, a multi-family dwelling, commercial real estate, farmland, as all of these properties can potentially have a tenant or user who is willing to pay you for the right to use that property.
Real Estate Partnerships or Funds. If the prospect of managing and maintaining individual pieces of real estate within your self-directed IRA is too daunting, your account can also invest in real estate partnerships, investment trusts (“REITs”), or other collective investment funds that focus on real estate. These investments often pay out an income stream that far exceeds the return that is available from other income generating investments.
Dividend Paying Stocks. Just because your self-directed IRA allows you great investment flexibility doesn’t mean that you shouldn’t consider investing some of your account assets in more traditional investments such as dividend paying stocks. The key is not just to evaluate what a given stock is paying in dividends now, but what your original investment could eventually yield during retirement if you reinvest those dividends.
For example, let’s consider a hypothetical purchase of $100,000 worth of stock that pays a 3% dividend, and has historically increased its dividend 8% each year. Let’s further assume the stock is currently priced at $100 per share (which means you purchase 1,000 shares), and the price of the stock increases approximately 4% each year. Your first quarterly dividend payment will be $750.
But let’s consider what happens if you reinvest dividends you receive each month. At the end of 20 years, you will own nearly 1,800 shares of stock that will be worth nearly $390,000. And your quarterly dividend payment will have grown to over $2,700.
There are other income generating investments, of course, and they may also be a good fit for your self-directed IRA. The key is to evaluate not just what an income stream can do for you now, but how it can serve you in the future as well.