Investing in AI with a Self-Directed IRA (SDIRA): Opportunities and Risks

Although artificial intelligence (AI) is not new, its accelerated influence and innovative capabilities made big headlines in 2023. People across the globe are learning and leveraging AI’s positive roles within businesses and personal activities. And smart investors are keenly aware of the potential that investing in AI presents.

What Is Artificial Intelligence (AI)?

Artificial intelligence refers to technology that enables machines to mimic human intelligence and capabilities. This includes learning, reasoning, problem-solving, perception, and understanding language. AI technologies are classified into different types or subsets based on their abilities, such as reactive machines, limited memory machines, theory of mind, and self-aware AI. Each type has unique applications.

For example, generative AI falls within the category of limited memory machines and is an excellent example of how AI impacts the world. Generative AI, such as Open AI’s ChatGPT and Adobe’s Content Creation, uses historical data to create new outputs (content, images, videos, music). This has caused great uncertainty for humans who hold creative and content-generating occupations. Journalists and writers, artists and designers, entertainers and musicians, and even professionals like paralegals face challenges because generative AI has the capability to do their work.

Although generative AI tools threaten some occupations, experts agree that human oversight is critical. Additionally, understanding and learning to use these tools creates opportunities for new roles and skills in AI management, oversight, and ethical considerations. Professionals are finding ways to integrate generative AI tools into their work to increase productivity, creativity, and value. Their knowledge and skills in the application of generative AI strengthen their job roles instead of eliminating them.

And as broader AI applications become more understood and widely embraced, investment opportunities continue to grow.

How to Invest in AI

AI enhances efficiency, personalizes services, and identifies growth opportunities for businesses and organizations in every sector. The types of AI consumers are familiar with influences our daily lives through voice search and chatbots. It tailors your Google searches, offerings of movies to you by Netflix, and songs recommended by Spotify. It recognizes faces and is fundamental in apps like Google Maps and Waze to navigate your travel. AI even identifies security issues and safety measures in businesses and is instrumental in detecting fraud within the banking and finance industry.

Technologies in this space are rapidly advancing worldwide within various industries, such as healthcare, finance, and automotive, as well as in private sectors and personal usage. As AI innovation continues to grow, savvy investors can capture the potential for significant gains.

From investing in companies that develop AI technology to investing in those who build the infrastructure that facilitates AI—there are options for every investor.

    • Public stock in big tech companies that develop AI technology (Google, Microsoft, Amazon)
    • Stock in companies that provide the infrastructure, such as hardware, Gradient image with the letters AI representing investing in AI and the vast options this asset class presents.chips, and GPUs, to facilitate AI development and implementation (Google, Amazon, Apple, Nvidia, Intel)
    • Private equity and venture capital to back startups and businesses that create AI and platforms that use AI (OpenAI, Anthropic, Mistral AI)
    • Stock in companies that leverage the use of AI (Mastercard, John Deere, search engine startups like Perplexity AI, other businesses that use AI to grow and profit)
    • Exchange traded funds (ETFs) (pooled investment securities)
    • Mutual funds (mix of stocks, bonds, and other securities)

Investing in AI with a Self-Directed IRA

Investing in AI provides tremendous opportunities for beginner and sophisticated investors.

And there are plenty of diverse options, from company stock to venture capital in startups. All retirement plans have access to stocks. However, only self-directed IRAs can use alternative investments like private equity to build wealth. So, investing in AI with a self-directed account is worthy of consideration.

By using a self-directed IRA or other self-directed plan, you can leverage the earning potential of AI investments to build retirement wealth. There are no immediate tax implications on gains like individuals face when investing with personal funds. Instead, investment income enjoys the tax-sheltered status of your self-directed retirement plan.

Solo 401(k)s and traditional IRAs provide tax-deferred income growth, and Roth IRA income grows tax free. As the account grows, so does your capital to reinvest, increasing the potential to reach your retirement goals.

Due Diligence Before Investing in AI Is Critical

Self-directed investors tailor their investment portfolios to their risk tolerance and financial goals. However, with that control comes the great responsibility of vetting your investments.

Due diligence applies to all investors, not just those who self-direct. As alluring as investing in AI is, it involves layers of risk that all investors must consider. Its rapid integration presents significant challenges in the realm of investor fraud. In fact, AI’s ability to detect fraud and its ability to facilitate fraud are paradoxical.

Careful analysis and understanding of the technology and market dynamics are essential to navigate these risks. For example, the initial excitement about AI capabilities can lead to overvalued companies, making it hard to gauge investment potential.

Also, regulations in some areas lag behind AI’s rapid growth—worldwide. You can expect existing laws to change and new rules to appear. Emerging regulations could affect a company’s operations and profitability.

Additionally, not all AI startups will survive the initial boon of enthusiasm. You must exercise caution when evaluating whether an investment can achieve long-term growth.

Final Words on AI Investments

Investments in AI are abundant now and will continue to emerge as its technology and use increases. Its applications are key elements in various sectors across the globe in facilitating safety, productivity, learning, and growth. While investing in AI can prove significantly fruitful, the risks are notable, including an increase in high-level fraud. Whether you invest with personal funds or with a self-directed IRA, learning the latest developments in AI technology and keeping up with market trends is crucial. Doing so helps you make educated investment decisions and manage risks effectively.

Additional resources on self-directed IRAs:

Do You Pay Taxes on Gains in Roth IRAs?

Solo 401(k) Rules and Benefits: Webinar Recap

What Are Alternative Investments? Here’s a List of 120+ for You & Your SDIRA

If you have questions about this article or wish to learn more about self-directed investing, contact Advanta IRA today.

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.