There are over $28.7 trillion dollars in US-held retirement accounts. These funds might be in IRAs, 401ks, or pension plans. Unsurprisingly, the overwhelming majority of retirement funds are invested in the stock market and traditional equities. But, did you know you can legally invest your retirement funds in alternative assets like farmland?
Use 401k To Buy Farmland
These IRAs and 401ks are typically called "self-directed" retirement accounts. However, that term can be a bit misleading. Today, almost every major stock brokerage offers some type of "self-directed" retirement plan. What they often mean is that you can simply "direct" where your retirement funds are invested. That is, as long as those funds remain on their platform and are only invested in offerings they provide.
With a checkbook control retirement plan, you literally hold a checkbook for your retirement funds. This account might be a Checkbook IRA or checkbook control Solo 401k plan. As the checkbook holder, you choose where and how your funds are invested. When it comes time to invest, you simply write a check or send a wire to execute your investment. With a Solo 401k, you retain complete checkbook control. You are the plan trustee, which means you get to decide where and how the funds are invested. And yes, the IRS recognizes the Solo 401k as a fully compliant retirement plan, designed for small business owners, freelancers, and independent contractors.
Additionally, investors often flock to assets like real estate because they can offer inflation protection. In times of inflation, property values tend to remain stable or rise. Consequently, investing in real estate can be a way to preserve capital. You can accelerate your growth by making investments using retirement funds. Any time you invest with pre-tax retirement funds, profits and gains are tax-deferred. This yields a higher return on investment because you are not subject to income taxes on distributions, or capital gains on any sale of assets. Understandably, residential and commercial real estate are lauded as powerful tools in an investor portfolio. However, it's worth considering expanding your idea of real estate to encompass a vitally important type of real estate investment...farmland.
Some investors may compare farmland to real estate, and that's a great place to start. Both farmland and conventional real estate are tangible assets. Both assets produce yield and can have an appreciating value of the underlying investment (the land)... And there is a strong need for both types of investments as people will always need housing and food.
Investing in farmland might be a new concept to grasp. However, while it's new to you, farmland is something money managers have shown strong interest in, especially recently. Farmland has historically outperformed stocks and bonds, often producing consistent double-digit returns. In fact, farmland has seen almost exclusively positive returns since the 1990s. Farmland investors tend to make money both in the rent farmers pay, and the continued appreciation of the land.
However, the amount of farmland available is finite. Currently, there are over 900 million acres of farmland in the United States, but the amount of land available to farm is decreasing at almost 3 acres every minute. Therefore, the supply of farmland is shrinking while the demand for food increases. As the world population continues to grow, people continue to need food. As such, farmland becomes an even more attractive investment. Especially when that investment can be made domestically, right in the United States.
Moreover, high profile investors continue to include farmland in their own portfolios. In 2018, Bill Gates spent $171 million on farmland in southern Washington. Warren Buffet began buying farmland in 1996.
Clearly, successful investors understand the value of holding farmland as an asset in your portfolio. When you invest retirement funds in farmland, you gain even more. That's largely because all of your gains are tax-deferred or tax-free. This increases your investment returns exponentially.
By investing retirement funds in farmland, you tap into all 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, such as a Solo 401k or self-directed IRA. This allows the profit and income to grow tax-deferred . If the investment sponsor has an exit and sells the investment, there are no capital gains on your profits, so long as they remain in your retirement account. Ultimately, this means you keep more of your investment and grow your retirement nest egg more aggressively.
If you are a small business owner, freelancer, or independent contractor, the Solo 401k plan may be right for you. Nabers Group brought the Solo 401k to market in 2006, after seeing a need for small business owners to be able to control their retirement account and access alternative investments.
You can fund your Solo 401k plan through rollovers or contributions. Roll in or transfer funds from almost any other retirement account. Contribute funds to your Solo 401k from your business earnings and claim those as a tax deduction. The Solo 401k has incredibly generous contribution amounts. You can tax-shelter up to $63,500 every year.
Enjoy positive returns from your farmland investment in your Solo 401k. Have peace of mind knowing your retirement funds are well diversified and positioned for growth. Be secure in the knowledge that you have a hedge against inflation by holding tangible assets in your portfolio. Finally, know that your investment has longevity as people will always have a strong, unrelenting need for productive farmland.
Having been in the business of selling managed farmland for several years, I can say that well over 50% of my clients hold their land in an SDIRA. I have the majority of my farmland holdings in a self-directed Roth 401(k) with Midland Trust because of their experience in off-shore real estate investments, their great customer service and reasonable management fees.
Just like a solo 401k plan can be invest in family homes, commercial real estate, apartment buildings and rentals, a solo 401k plan may also be invested in farmland provided you open the retirement account with a self-directed solo 401k plan provider.
We have seen an uptick in inquiries for investing solo 401k funds in farmland since 2015. We suspect this is mostly because global demand for food keeps climbing due to the rising human population which is expected to hit 10 billion by 2050.
Unlike fixer uppers, most investors who invest in farmland (whether via their solo 401k retirement account or personal funds) buy land and hold it for extended periods of time to get the most return and because the farm economy goes in cycles.
As far as ongoing expenses, the payment of taxes and insurance will need to be paid using solo 401k funds since the land is owned by the solo 401k plan. Also, the lease payments and when you sell the land, the proceeds will need to flow back to the solo 401k bank account and will grow on a taxed deferred basis until solo 401k distributions commence (usually at retirement).
Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>
Farmland in some areas is highly valuable for leasing out, actively farming, or to be profitably sold in the future. However, not all raw land is suitable for farming. The amount of acreage, type of soil, climate, and local farming infrastructure are a few important considerations. On the positive side, there are special tax advantages available for farmland and all 50 states have some form of favorable property tax rates.
Recreational uses are also a possibility. Keep in mind that your personal use of land owned by your Solo 401k is limited because of prohibited transactions. However, this can be an opportunity to combine generating income with limiting development. Possibilities include businesses for hunting, fishing, horse trails, camping, ATVing, and more.
As the Solo 401k plan owner, you must follow certain rules to avoid prohibited transactions. If your Solo 401k raw property requires development before it can be leased, sold, or for another reason, the use of personal funds, assets, or efforts is limited and restricted. For instance, if your Solo 401k land needs an access road developed, you cannot personally pay for it. Nor can you fire up your personal bulldozer to plow the access road yourself.
Raw land is the most versatile investment you can make. It is also an underutilized real estate investing strategy. Raw land provides endless options and opportunities while being free of utility and infrastructure expenses. Property taxes are among the lowest. Holding raw land in your Solo 401k is an excellent investment to consider for your portfolio.
Daryl Minton, 45, throws chicken feed into a yard where the chickens roam at the Triple J Farm in Windsor, N.Y. Minton lives and works on the farm his grandfather, James Minton, bought it a decade ago. Between lending discrimination and rising costs, many obstacles stand in the way of Black Americans looking to own farmland. Heather Ainsworth for NPR hide caption
Now, nearly 100 years later, people of color are leading a resurgence of interest in farming in the Northeast, and yet for these farmers the barriers to starting a farm remain high. Between lending discrimination and rising costs, many obstacles stand in the way of Black Americans looking to own farmland.
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