Alternative Investments for your IRA

by Gerald Townsend, Financial Editor

September 2007

Individual Retirement Accounts (IRAs), fueled by regular contributions plus rollovers from employer retirement plans, have grown from their humble beginnings to become the single largest investment account for many people.

Most IRAs are invested in traditional investments such as certificates of deposit, bonds, stocks, or mutual funds; however, with today’s gyrating markets, some investors are looking beyond the traditional and opting for some alternative investments for their IRA.

What are these alternatives? The IRS doesn’t tell you what IRAs can invest in they only tell you what you can’t invest in which are “collectibles” such as: rare coins or stamps, art, antiques, and similar personal property. Other than that, anything goes, such as: raw land, houses, farms, mortgage notes, tax-lien certificates, stock in private companies, limited partnerships, limited liability companies, etc.

Real estate is probably the most popular alternative investment, so we’ll focus on that. Obviously, investing in real estate requires an IRA to be pretty large, but by combining IRAs held at various institutions or rolling a 401(k) account from a previous employer into an IRA, sufficient funds may become available. If your IRA is not large enough to justify a direct investment in real estate, you can still do it indirectly, by having your IRA invest in partnerships or limited liability companies that own interests in real estate.

Before you get too excited about buying a home at the beach with your IRA money, you have to understand a number of no-no’s that are considered “prohibited transactions.” Neither you, your spouse, parents, nor children can use the property (although your brother or sister could). Likewise, you could not use your IRA to buy an office condo to be used by your business.

If you are investing in real estate, many IRA custodians require that a separate property management firm be retained to actually manage the property, which is another expense you have to consider.

In most cases, the real estate purchased within an IRA needs to be unleveraged, since leveraged real estate that produces a profit may be hit with a tax on its “unrelated business taxable income.”

You will also need to leave enough money in your IRA in cash, so there is money available for repairs, property taxes, insurance, etc. Another consideration is that when you reach age 701/2 and must commence distributions from your IRA, you will need to have enough liquid funds available for the distributions.

Another consideration is the fees charged by the IRA custodian. Investing in alternative assets is a more time-consuming and paper-oriented process for custodians, and therefore their fees are higher than fees charged for investing in traditional investment