Unusual IRA Investments

Updated on September 7, 2007.

MOST FOLKS DON'T get too funky with their IRA investments. A few mutual funds, some stocks — maybe some bonds — that's the typical fare.

But it turns out that you can get a lot more creative with your investments than that. Just about the only things that are flat-out banned are life insurance policies and certain collectibles, such as works of art, rugs, antiques, metals, gems, stamps, coins and alcoholic beverages. You can however, buy certain gold and silver coins minted by the U.S. or by U.S. states. You can also invest in high quality gold, silver, platinum, and palladium bullion, among other things. (However, any such bullion must be kept in the physical possession of your IRA trustee.)

Now, in this article we won't address whether it's a wise decision to allocate your IRA (and we're talking about any type of IRA here: traditional, SEP, SIMPLE and Roths) to any of these alternative investments. But we will cover what you can hold and how to do so, if you feel so inclined. Keep in mind, though, this is pretty tricky stuff. So be sure to talk to your tax pro before pulling the trigger.

Be Prepared to Find the Right Broker
Not every trustee (often a brokerage firm, although it could be a bank or other IRS-approved outfit) will be thrilled about helping you invest your IRA in something other than the mundane. That's because should you invest in something not permitted by the IRS rules (we cover the specifics below), you lose the tax advantages of IRA investing. Unfortunately, what is and isn't allowed by the IRS can get pretty vague, which is why many trustees simply don't want to deal with the potential hassle.

That said, some outfits specialize in functioning as IRA trustees for folks interested alternative investments. The easiest way to locate suitable trustees is by doing an Internet search using the key words "self-directed IRA." Once you have a list of contenders, do some due diligence to find one that's reputable. Then check their fee schedules carefully. Having an IRA with alternative investments inevitably costs more than the garden-variety version.

What's Allowed:
Once you find a trustee that's willing to work with you, suitable alternative investments can potentially include:

This is not an exhaustive list, but as you can see, some of these options are inherently illiquid, which can cause problems. If you have too much of your account balance tied up in illiquid investments, you won't be able to dip into your IRA for cash anytime you please.

At the very least, you want to be sure to maintain enough liquidity to take your annual required minimum distributions after age 70 1/2. Why? Because if you fail to take these minimum distributions, the IRS can penalize you for 50% of the difference between what you should have withdrawn from your account each year and what you actually withdrew (if anything). Thankfully, Roth IRAs are not subject to the required minimum distribution rules until after the account owner dies.