Step aside, stocks and bonds — alternative investments are becoming an increasingly popular choice for those seeking to invest their retirement plan assets. These non-traditional investment vehicles range from the familiar — for example, limited partnership units — t o the not so common, such as real estate investments. Regardless of the form these investments take, however, certain rules and regulations remain constant. For IRAs, failure to adhere strictly to these rules and regulations could result in loss of tax-deferred status for the IRA assets. Read on for a high-level overview of these rules, as well as some other points you should keep in mind when considering alternative forms of investment for your IRA assets.

What Is It?

Broadly speaking, an alternative investment is any investment other than the traditional investments such as publicly-traded stocks, bonds and mutual funds. The actual definition of alternative investment varies among financial institutions and investors, but it generally includes hedge funds. real estate, venture capital and derivatives. Many financial institutions that facilitate these investments conduct frequent reviews and analyses to determine whether they need to increase their list of alternative investment offerings. Therefore, if your financial institution does not allow the type of investment in which you are interested today, you should check back at a later date because things may change.

Gauging the Risk

Limiting Losses

Investment professionals typically limit their recommendations for alternative investments to accredited investors because these investors tend to have a higher risk tolerance. Even so, professionals usually recommend that investments in such assets be limited to no more than 10% of the investor’s portfolio. This restriction helps to ensure that any losses are limited, while allowing the investor to share in any profits.

Avoiding Prohibited Transactions

This new investing trend has many people looking to invest their retirement assets in their own property, or property in which they have shared ownership. However, the old adage you can’t have your cake and eat it too rings true in most cases involving non-traditional investments for IRAs and other retirement plans, because such practices could result in a prohibited transaction taking place. As such, investors and those who advise them must exercise caution to ensure compliance with applicable rules.

A prohibited transaction occurs when the IRA engages in certain transactions with the IRA owner or another disqualified person. For these purposes, a disqualified person includes the following:

Not all transactions that occur between a disqualified person and the IRA will result in a prohibited transaction. A list is provided in the tax code to ensure that taxpayers are aware of what constitutes a prohibited transaction. The tax code states that a disqualified person is considered to have engaged in a prohibited transaction with an IRA if any of the following occurs:

• a sale or exchange, or leasing, of any property occurs between the IRA and a disqualified person;

If your IRA assets are engaged in a prohibited transaction, it could result in the IRA being treated as a distribution to you, the IRA owner, as of the first day of the year in which the prohibited transaction occurs. Let’s look at an example.