Investing in oil is possible with self-directed IRAs. These are alternative assets permitted for investment in a diversified account. In fact, investors may acquire a steady cash flow for several years with successful oil investments. That paints quite a beautiful picture, right? But before considering purchasing shares of oil wells or with oil and gas investment companies, you might want to equip yourself with a bit of information about oil investments.
5 Must-Know Basics About Investing in Oil
1. Oil Investment Opportunities
A sound investment decision can come from understanding your options. That is why it is ideal to first know the different ways you can invest in oil. Your options may include the following:
- Acquiring commodities and futures contracts
- Investing in lands being explored for oil
- Purchasing interests in oil and gas refineries and/or drilling companies
- Investing in mineral rights of land being explored
2. Oil Investments are Quite Complicated
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Investing in oil is quite complicated because of concepts like mineral interests, surface rights, working interests and royalty streams, unlike other alternative assets. Furthermore, oil investments are relatively illiquid, making it especially essential to research these potential investments beforehand. Moreover, self-directed IRA custodians do not usually assess or investigate investments you may want to partake in. Hence, you should do the due diligence of making sure you’re investing in something legitimate and safe. That is why it is important that you fully understand what is entailed in a deal you may be agreeing to.
3. Tax Considerations
Investing in oil comes with tax advantages even with taxable investment accounts. For example, investors can enjoy deductions on tangible and intangible drilling costs. In effect, depending on your situation, goals, and the type of investment you are eyeing, you may want to maximize these tax benefits by investing outside your self-directed IRA account. In any case, you need to consult your accountant to figure out the best route to take.
4. The Income
Oil production is tallied and paid out monthly. This depends on the production of oil wells you have invested in. Although one cannot guarantee it, a well’s lifespan ranges from 10-15 years. Some may get exhausted more quickly than others, but the latest seismic technology today reduces risks in drilling projects.
Investors may enjoy steady cash flow for several years from potential high annual returns paid out monthly when investing in oil if it is carried out carefully and strategically.
5. Other Energy Investment Options
Aside from oil, you can also invest in other energy industry projects. Some of these options are:
- Wind and solar options
- Hydroelectric energy, hydropower, and wave power
- Natural gas and coal
- Geothermal energy
Investing in commodities like oil is one effective way of diversifying your portfolio. Moreover, this kind of investment may also be a good strategy to protect oneself from inflation. Oil, after all, is a human basic necessity.
Do you have any tips investing in oil you want to share? Tell us about it in the comments section below!