Stocks, bonds, mutual funds, money market accounts -- these are the usual options for an individual retirement account. However, you don't have to stick with the tried-and-true. By opening a self-directed IRA, you can invest your retirement funds in non-traditional options such as real estate. The Internal Revenue Service prohibits IRA investing in certain assets, although you can invest in the stock of companies that produce those items.
With a self-directed IRA, the account is held by a custodian, such as bank or brokerage company, but the account holder manages the actual investments. Self-direction opens options far beyond conventional investments, but remember that this is your retirement money, not money for gambling. That said, you can invest your self-directed IRA in something as exotic and risky as racehorses. For best results, invest in areas in which you are knowledgeable, such as fields related to your profession or business.
Although opening a self-directed IRA is relatively simple, there are caveats. The trust department at a bank can set up your self-directed IRA, as can firms specializing in such custodial duties. However, while these entities track accounting and collect profits, the IRS prohibits them from giving the self-directed account holder investment advice. Custodial services may charge higher annual fees than the mutual fund or brokerage company handling your traditional IRA, so take that into consideration when opening your self-directed account.
According to the IRS, because of administrative burdens, many IRA trustees don't allow IRA owners to invest funds in real estate. However, "IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option," it states. With a self-directed IRA, you can invest in real estate, but remember that you can't take property tax or other deductions for land or buildings held in your account that you could for non-IRA holdings. You may need annual appraisals for accounting purposes. The real estate in your IRA can't include property for your personal use, such as a vacation home. On the plus side, you can defer capital gains taxes on real estate sold within the IRA.
The IRS doesn't allow IRA investments in life insurance or collectibles. It defines the latter as art, antiques, rugs, gems, stamps, alcoholic beverages and "certain other tangible personal property." Although the IRS doesn't permit IRA investments in metals, exceptions are made for certain types of bullion and some types of coins. You can't use your IRA as security for loans or charge expenses for its management.