On this episode of Adam Talks, tax attorney and IRA Financial’s founder, Adam Bergman, Esq., discusses the Fed’s decision to lower interest rates and how it will impact Self-Directed IRA investors.
Why Lower Interest Rates will be a Boom for Self-Directed IRA Investors
In this episode of Adam Talks, Adam Bergman, a tax attorney and founder of IRA Financial, discusses the impact of lower interest rates on Self-Directed IRA investors. He begins by providing a brief history of the interest rate environment, noting that since March 2020, rates rose to over 5% before the Federal Reserve lowered the benchmark rate by 50 basis points on September 18, 2024. This significant reduction marks only the fourth time since the 1990s that such a large drop has occurred in a single session.
Bergman explains that lower interest rates are beneficial for alternative assets, such as real estate and private company investments. Cheaper borrowing costs lead to more money circulating in the economy, making it easier to complete deals and stimulating demand and investment. As a result, asset values, especially in the alternative sector, are expected to increase. Lower rates also push investors to seek higher returns outside of traditional equities and fixed-income securities, thereby driving interest in alternative investments.
With lower interest rates, there is a greater incentive for diversification. As rates drop, the returns from money market accounts become less attractive, prompting investors to look elsewhere for better returns. This shift is advantageous for Self-Directed IRA investors, who will explore a broader range of investment opportunities, ultimately benefiting from diversified assets and potentially higher returns.
Lower interest rates enhance compounding growth for alternative assets. Investors in Self-Directed IRAs can take advantage of tax-free compounding returns, benefiting from higher cash flow and asset appreciation. This environment encourages diversification and allows investors to maximize the growth potential of their investments by leveraging compounding returns, making alternative assets more attractive.
Bergman also discusses the impact of lower rates on financing options. Cheaper capital costs make it easier to finance business acquisitions and real estate deals, thereby increasing the value of such investments. In the context of IRAs, non-recourse loans can be used to finance real estate, although they may trigger unrelated business income tax (UBIT). However, self-employed individuals with Solo 401(k) plans can avoid UBIT, providing a strategic advantage in leveraging lower interest rates for investment growth.
In conclusion, while Bergman expresses some concerns about the potential for inflation to resurface as a result of lower interest rates, he remains optimistic about the opportunities they present for Self-Directed IRA investors. The expectation is that reduced rates will drive more activity in alternative assets, leading to higher valuations and increased cash flow, thereby creating a favorable environment for investors seeking diversification and growth.
