A structured settlement is a type of legal settlement in which the damages are paid to the individual as an annuity over time rather than as a lump sum. Sometimes, structured settlement recipients choose to sell their settlement to receive a lump sum of money rather than regular payments over a period of time. Investors can purchase these structured settlements at a discount of the full payout amount. In most cases, settlements are purchased by companies who then sell the revenue streams to investors.
If you have a self-directed IRA, you can choose to invest in structured settlements to diversify your retirement savings. Because the payments are made by insurance companies, in most cases, structured settlements offer very low risk. Here’s what you should know about investing in structured settlements with your IRA.
Benefits of Investing in Structured Settlements
Structured settlements offer many unique benefits for investors. This type of investment comes with almost no risk as the payment source is usually an insurance company. Unlike investments in bonds and ETFs, there’s no interest rate risk, either; payments continue according to the agreement no matter what happens to interest rates.
When interest rates are low, the returns from a structured settlement become even more attractive. While structured settlements don’t have much liquidity, they offer higher returns than other fixed-income investment vehicles.
By purchasing a structured settlement annuity with your IRA, you can enjoy a high-yielding revenue stream with an attractive rate.
Tips for Buying Structured Settlement Annuities
Investing in structured settlement annuities within your self-directed IRA works just like other investment vehicles. You must make sure the funds you use to buy the structured settlement come solely from the IRA and all annuity payments must be deposited into the IRA directly.
It’s a good idea to get an amortization schedule that outlines the timing for payments and a court order that assigns future payments to your IRA.
When choosing a structured settlement annuity, it’s a good idea to make sure the insurance company behind the annuity is financially sound and rated highly.
The primary drawback to investing in structured settlements is these investments are considered very illiquid and cash flow can be irregular. This is the trade-off for typically low-risk returns of up to 7%. To be safe and ensure your investment strategy aligns with your retirement goals, structured settlements should be a small share of your IRA portfolio.