A Comprehensive Overview of Investing in Oil and Gas via IRAs

Guide to Oil and Gas Investments Using IRAs

While individual retirement accounts (IRAs) are typically associated with stocks and bonds, they can also hold alternative assets such as precious metals, real estate, or oil and gas royalties. Income from these investments originates from the operation of oil and gas wells. Although the IRS provides a broad range of investment options, most are traditional paper assets. To include unconventional investments like oil and gas royalties, a self-directed IRA must be established.

Investment firms can set up such IRAs, managing compliance with IRS regulations but not guiding the specific investment choices. Once funded, you direct the firm to invest in various assets, including land with minerals, mineral rights, refinery interests, and drilling companies. You can also trade commodities and futures contracts.

However, holding oil and gas royalties in an IRA can eliminate some benefits of the account. Typically, royalty investments held in taxable accounts benefit from a depletion allowance, which can reduce taxable income by accounting for the decreasing resources in a well. For example, if a royalty generates $30,000 gross income, the first $4,500 may be tax-free. Investing in tax-advantaged IRAs means forfeiting this depletion benefit, potentially impacting overall returns.