How do Investments in Oil and Gas Work in Self-Directed IRAs?

Self-directed IRAsThe sun is setting over gas wells, illustrating investments in oil and gas for IRAs. are becoming more widely recognized as viable tools to use in building wealth for retirement. Investments in oil and gas are examples of alternative assets for IRAs. These accounts differ from the average IRA or 401(k) because they allow account owners to control their own funds and choose alternative investments other than the typical stock, bond or mutual fund. Those who self-direct enjoy the freedom to choose from a wide variety of investments that can potentially build wealth at a greater pace than traditional assets may.

While real estate is the most popular investment in a self-directed account, this is not the only available alternative asset. Precious metals, foreign exchange and futures trading, accounts receivable, livestock, timber, convertible notes—as well as oil and gas options—are just a few examples of other investments allowed in these plans.

Those interested in oil options should pay attention to current news reports regarding the market. According to a recent article published by USA Today, “Right now the oil market is totally focused on finding a bottom for oil prices. However, according to OPEC’s Secretary-General Abdulla al-Badri we’ve already hit bottom. Not only that, but he sees a real possibility that oil prices could explode higher to upwards of $200 per barrel in the future. He’s far from the only one that sees a return of triple-digit oil prices.” Currently, the price per barrel of oil is around $45 to $55, making the time seem ripe for investors to consider adding oil and gas options to their portfolios.

What does this mean to you? Do you feel oil and gas options may be beneficial to add diversity to your portfolio? Are you well versed in the potential success or failure acquiring these assets presents? Clearly, no investment is ever guaranteed. You must choose wisely, armed with as much knowledge you can gather.

Different investments in oil and gas for a self-directed IRA:

  • Invest in the land or mineral rights of a property being (or to be) explored
  • Acquire interests in refineries and/or drilling companies
  • Commodities and futures contracts

These assets, if successful, build tax-free or tax-deferred retirement income in the self-directed account. The point here is that when you self-direct, you choose assets you know and understand at a pace that falls within your own comfort zone. You control your own funds and acquisitions—a third-party does not. However, keep in mind that if your IRA incurs a debt in order to acquire an asset, such as a loan from a bank, the percentage of the income that is derived by that leverage may be subject to unrelated business income tax (UBIT).
Advanta IRA neither sells investments nor gives investment advice. We do commit to educating clients and other investors on the potential benefits—and risks—involved in self-directing retirement accounts. The cost of oil right now is a hot topic among investors. However, the key to self-direction is to invest in what you know best.

Being familiar with the available assets and performing extreme due diligence when choosing your own investments is critical to the success of your retirement plan. If you are knowledgeable in the oil and gas industry, you may very well decide to make maneuvers within your portfolio to add these assets. If you are unsure, you can still consult professionals in that field to educate and better direct you through the decision-making process.

As with any investment, Advanta IRA strongly encourages clients and other investors to consult with attorneys, tax professionals, and other experts familiar not only with investments in a self-directed IRA, but also with the types of assets you are considering.

If you have questions about this article or about alternative assets permissible in a self-directed account and wish to learn more, please contact us.

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About Jack Callahan

Jack proudly earned his bachelor’s degree in finance and multinational business from Florida State University and his law degree from the University of Florida College of Law. He established Advanta IRA in 2003 and has steadily nurtured and grown the company and the team every year since. Prior to founding Advanta IRA, Jack delivered specialized counsel to real estate investors, small business owners, and real estate professionals on tax, legal and financial matters. As an industry expert, Jack is a frequent speaker on self-directed retirement plans. He is an accredited continuing education instructor for the Florida and Georgia Bar Associations, Florida and Georgia Real Estate Commissions, and The American Institute of Certified Public Accountants.