What are Illiquid Assets and Why Invest in Them Using SDIRA?

Every investment asset has a level of liquidity, which refers to how easily or quickly an asset can be converted into cash without significantly impacting its current price.

A liquid asset is one that can easily be sold and converted into cash. Conversely, an illiquid asset is more difficult to sell and convert to cash for a variety of potential reasons.

It’s important for you to know the liquidity of your assets so you can make informed decisions about your overall portfolio.

For example, if you have too much money tied up in illiquid assets and need to access cash quickly, you could be forced to sell those assets far below market value. However, illiquid assets can be a great fit for long-term retirement vehicles, as we’ll discuss below.

Assets by Relatively Liquidity Status

Liquid assets include cash, marketable securities such as stocks and mutual funds, unsecured bonds, and precious metals like gold and silver.

Illiquid assets include real estate ownership, startup and private equity ownership, and secured bonds.

Of course, different assets in the same category may have varying degrees of liquidity. An investment in a startup that is struggling to make money or running out of cash may be harder to sell than one that is outperforming expectations. Different precious metals offer differing levels of liquidity, depending on their core propositions and the current status of that marketplace.

What Determines the Liquidity of an Asset?

Several factors determine whether an asset is liquid or illiquid:

Availability of Interested Buyers

Stocks are relatively liquid because there are almost always interested buyers. Houses, on the other hand, are more illiquid because they require a specific buyer willing to purchase at the homeowner’s asking price.

Market Establishment

A well-established marketplace generally makes assets more liquid. For example, treasury bonds are relatively liquid because there’s a well-established market for their sale, making it easy to find buyers.

Ease of Ownership Transfer

Some assets require more steps to transfer ownership. For example, selling a house typically requires an inspection and paperwork, while selling an investment in a startup or private equity might require board approval. Stocks and mutual funds, on the other hand, can be sold almost immediately.

Time to Sell

The more time it takes to sell an asset, the more illiquid it is. The time to sell can reflect other factors, such as ease of ownership transfer, market establishment, and availability of interested buyers.

Why a Self-Directed IRA is Well-Suited for Illiquid Assets

Unlike conventional IRAs, self-directed IRAs (SDIRAs) enable investors greater autonomy to choose their investments. While most SDIRAs only allow traditional, publicly traded assets to be held, some custodians — like Forge Trust — enable investors to access a wide range of alternative assets, including real estate, private equity, secured and unsecured promissory notes, and precious metals.

This includes assets that are more illiquid, such as private equity and real estate, as well as liquid assets like stocks and bonds, offering greater customization and potential diversification of held assets.

Self-directed IRAs can be ideal for illiquid assets because retirement accounts are typically long-term investments. Since investors may not be able to easily withdraw funds without penalty until age 59 ½, illiquid assets have the opportunity to grow in value over time without having to pay taxes until withdrawal.

The Role of Illiquid Assets in a Retirement Portfolio

Illiquid assets may provide long-term benefits, may be less affected by short-term market fluctuations, and may contribute to diversification.

While alternative assets can be more difficult to sell quickly depending on their degree of liquidity, they may play a strategic role in your long-term retirement plan.

Forge Trust specializes in self-directed IRAs and custodying alternative investments, including real estate, private stock, private equity, promissory notes, private placements, precious metals, and more. 

With more than 40 years of alternative asset experience and $13 billion in assets under custody, Forge Trust is a trusted IRA custodian with a deep understanding of alternative asset custody. We are dedicated to providing the attention and care necessary to navigate the complexities of alternative investments.

To learn more about how Forge Trust can help you incorporate illiquid assets into your retirement strategy, click here.