Earning Oil & Gas Royalties with a Self-Directed IRA

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You may be aware that you can invest in the oil and gas industry, but did you know you have options beyond exchange-traded funds that track crude or stocks in specific oil companies? Investment positions like ETFs can provide exposure to the energy industry, but they can also subject one’s retirement portfolio to the wild price swings that sometimes result from geopolitical turmoil and similar catalysts.

What if there was a way to invest directly in the development of domestic and tangible energy interests? As it turns out, you can, and you can do so with your self-directed IRA, 401(k), and Health Savings Account.

How It Works

The purchase of oil and gas rights is very similar to a real estate investment. An oil company leases a plot of land from a “surface owner” (a farmer, rancher, or another such property owner) and the investor purchases, on a per-acre basis, rights to the oil and gas resources below the surface of that land. The oil and gas rights are then leased to the oil company, which conducts the business of drilling for, extracting, and selling the natural resources. The oil company retains its share of the revenue but also distributes monthly royalty payments to the true owners of those mineral rights – The investors!

Like those who invest in real estate, mineral right holders may encounter an opportunity to sell their rights for a considerable profit. Upon doing so, the investor—which, again, can be your self-directed retirement account—will retain 100% of the profits generated from the sale. As with other investments in a self-directed IRA, any capital gains would be completely tax-deferred.

Other Considerations

Understanding the full scope of possibilities with an interesting yet unfamiliar investment vehicle can help you make informed decisions. Please keep the following in mind:

  • Very little (if any) expertise related to the oil and gas industry is required to get involved in and profit from these royalties.
  • The lease of mineral rights to an oil company is not a manual process on the part of the investor. The investor simply purchases mineral rights and collects royalties; the investment providers who help execute these transactions take care of the rest!
  • Investing in mineral rights does not involve the ongoing costs that typically characterize residential or commercial real estate investments (maintenance expenses, a mortgage, etc.). The oil companies that work and manage the land bear these costs, not the investors.
  • Your self-directed IRA can collect royalties from multiple oil and gas fields at the same time. You could allocate $100,000 to one investment, $25,000 to four separate investments, etc. Therein presents the chance to further diversify your portfolio.

Ready to Learn More?

Has this alternative investment strategy piqued your interest? Click here to sign up for our upcoming webinar, Investing in Oil & Gas Royalties, to learn more about this fascinating tangible asset class.

To pose other questions about your self-directed account, please don’t hesitate to give us a call at 877-742-1270 or send us an e-mail at info@ndtco.com.