An Individual Retirement Account (IRA) is a type of savings account that is designed to help you save for retirement and offers many tax advantages. Many employees end up with significant balances in their IRAs funded by roll-overs of their 401k plans after they retire or leave a job. Others build them up slowly with regular contributions. One of the best things about an IRA, as opposed to an employer-sponsored retirement plan like a 401k, is there is a vastly larger selection of investment options available within the account. Traditionally, investors only consider stocks, bonds, mutual funds and exchange-traded funds when choosing investments for an IRA. However, these are not your only options. Agriculture can be a great addition to any portfolio, providing a low-risk option that generates stable income in the form of profit from the farm and capital gains as the land appreciates in value.
Self-Directed IRA
In order to add nontraditional investments to a portfolio, investors must choose a self-directed IRA. This is a type of IRA that allows the account owner to choose their investments instead of having all investment decisions made by the financial institution managing the IRA. Investors should seek counsel from their tax professional and choose a self-directed IRA custodian to set up this structure.
Investing in Agriculture Using an IRA
While investing in agriculture with an IRA may not be the norm, it can provide a great low-risk addition to a portfolio. Agriculture investments can help your IRA grow in two ways. A farm produces crops, and these crops generate income when sold. In addition, the value of the land may increase over time, resulting in a capital gain. Investing in agriculture has become more popular in the past ten years. TIAA, a Fortune 100 financial services organization and the leading retirement investor for the academic community, owned no agricultural land in 2007. Today, they have more than $8 billion dollars worth of farmland, including investments on behalf of itself and other institutional investors.
There are some important things to note when choosing to invest in agriculture with your IRA. 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. Additionally, agricultural investments that provide a personal benefit to the investor are considered prohibited transactions by the Internal Revenue Service. An example of this would be a purchase of a timber stand where the investor wants to hunt. You can also not purchase a piece of agricultural property you or a family member owns with a self-directed IRA. The IRS considers this self-dealing.
That said, investing in agriculture with your IRA has some great tax benefits. There are no taxes on capital gains when the investment is within an IRA. Taxes on income are deferred indefinitely, as you only pay tax when you take assets out in the form of income.
The idea of nontraditional or alternative investments may conjure up images of risky or complicated options that are too difficult for an individual to manage. However, this is not necessarily true. Agriculture can be a relatively low risk investment, and it doesn’t have to be complicated. Alongside traditional investments, agriculture can help balance out any portfolio with inflation-adjusted returns. There are many different agricultural investments to choose from, and KrogerFarms can help you find the right one for you and your self-directed IRA.